cii_icte panel report

Creating Roadmap for Developing Value Chains in ICTE industry

A report on the CII-EY event held on 27th July 2016 at New Delhi

Creating Roadmap for Developing Value Chains

in ICTE industry


in ICTE industry


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Foreword

Foreword by Mr Vinod Sharma, Chairman, CII National Committee on ICTE Manufacturing

For countries like India having large potential market and consumption levels Information Communication Technology and Electronics (ICTE) manufacturing has special significance in terms of contributing to the Manufacturing component of GDP, job creation, reaching out to masses, empowerment and inclusive growth. ICTE is thus not just a major part of a better future, but more importantly, is the key instrument in realizing it.

The share of ICTE production which presently accounts for about 10% of the manufacturing GDP is amongst the verticals which could significantly contribute in meeting the national objective of raising the share of manufacturing sector to 25% of the National GDP by 2022.

With global major investors looking out for setting up production bases closer to the markets and at the same time seeking alternatives to China, ICTE manufacturing presents a huge investment opportunity.

Following the Make in India initiative and the ambitious vision of Net Zero Electronics Import by 2020, Government has introduced several provisions in the Union Budget 2015-16 and of 2016-17 for making the domestic manufacturing industry competitive with respect to imports .The industry has been enthused with the initiatives and number of investments have been announced by both domestic and overseas investors for growth driving products like Mobile phones, LED lighting, PCB Assemblies (EMS), Set Top Boxes, Displays.

Initially the production would be based on imported inputs due to limited availability of domestically manufactured components. The growth in volumes of end product production is a pre-requisite for investments in the component sector. Development of domestic supply chain is important for sustaining the competitive advantage of domestic manufacturing. In the present day intensely competitive global scenario rather than the companies the competition is between their supply chains.

As the gestation periods for components manufacturing are longer than the finished/box build products and stabilization of the process and yields takes time, it is opportune to create a Roadmap for attracting investments in the raw material/parts /components and share with stakeholders in advance.

In the above context the CII National Committee on ICTE Manufacturing organized a Brainstorming Session on Creating Roadmap for Developing Value Chain on the 27 July 2016 for the three product categories namely, Mobile phones, LED lighting, PCB & PCB Assemblies (EMS). Session for each product was moderated by representative from E&Y.

These three product categories have been identified amongst the Champion Sub-sectors, in the CII Study on Manufacturing Champions, which have the potential to contribute significantly to manufacturing.

The Brainstorming Session was well represented by participants from manufacturing companies from the key industry sectors as well as the component manufacturers.

This report captures the deliberations and recommendations of the Session.


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Index

Executive summary

LED Lighting

1

3

Electronic Manufacturing Services4

Mobile Phones2

References5

Appendix – CII FSI Survey6


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Executive Summary

Over past 4 years, Indian electronics manufacturing has seen a upsurge. From 2012 to 2015 production of electronics hardware as % of GDP has increased from 1.6% to 1.8%1, cumulative FDI inflows have increased from $1.16 bn to $1.49 bn2, and projects comprising investments of more than $450 mn have been approved and are under progress3,9.

However, most of the local production is low value add and is based upon imported subsystems and components. Components have a heavy reliance on imports with import share being 76% of domestic demand in 20154. As a result, the value add in Indian manufacturing remains minimal, as low as <20% in product segments like mobile phones which remains to be largest electronic product segment in India5.

Therefore, development of domestic supply chain is critical to increase domestic value add in order to decrease the pressure on exchequer, and for domestic manufacturing to sustain a long term competitive advantage. However, to build a sustainable domestic supply chain India must overcome a few key challenges:

1. High cost of finance : The effective interest rate in India remains to be 14-16% as compared to 2-7% in developed countries like China, Japan6

2. Low ease of doing business : India is ranked a dismal 142 among 189 countries in World Bank’s Doing Business 2015 rankings as compared to Korea (Rank 5) and China (Rank 90) 7

3. Lack of clarity on taxation : Component players cite lack of clarity on taxation to be a major hurdle to set up manufacturing in India. 8 Lack of clarity also exists on extension of existing tax incentives post implementation of GST amongst domestic manufacturers8

4. Infrastructure inefficiencies : Logistics cost as % of GDP in India may go as high as 13%–14% as compared to 7%-10% globally18.

5. Limited Op-Ex subsidies : Although government of India provides Cap-Ex subsidies to manufacturers through M-SIPS3, Op-Ex subsidies are limited. As Indian players strive to be more competitive, resulting pricing pressure is expected to be passed on backwards in supply chain

Apart from the challenges daunting the sector listed above, manufacturers across the supply chain also face challenges specific to each product category. Challenges specific to each of the 3 key segments are listed below

• Mobile Phones

• Lack of clarity on extension of existing incentives and duty differentials for mobile phone manufacturing post GST implementation

• LED Lighting

• Falling prices : The LED prices have reduced by 30-40% in past year, EESL Tenders in 2016 saw prices as low as INR 5510,8

• Lack of national standards to curb low quality imports

• EMS

• Inverted duty structure for multiple end products (e.g. solar products) 8

• Lack of component supply chain in India. Majority of component consumption (>75%) is from imports4


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Recommendations emerging from the Brainstorming Session to address these issues are as follows:

Key recommendations for central and state governments

1. Extend all existing tax incentives and duty differential to domestic manufacturers postimplementation of GST

2. Declare PCB as a focus product and design a policy for development of PCB ecosystem inIndia. Promote investment by global component manufacturers with a focus on PCBs andpassive components to set up facilities in India. Provide a helpdesk for global and domesticinvestors.

3. Improve Ease of Doing Business (EoDB) by reducing the documentation required especiallyfor the incentive schemes.

4. Provide ‘Op-Ex’ subsidies to manufacturers to reduce backward margin pressures on supplychain. Production subsidy to be extended to other focus products

5. Support housing and development projects near Electronics Manufacturing Clusters (Green& Brown field).

6. Create a 5-10 year plan for a committed tax regime (duties, income tax, VAT etc.) to addresslack of clarity amongst foreign component suppliers

7. Set up industrial estates in the identified focus states and provide plug-and-playmanufacturing facilities

8. Provide capital incentives to both new and existing domestic manufacturers

9. Formation of coastal eco-zones mooted by the NITI Aayog to be supported in the nature ofextended EMCs in order to make Indian manufacturing competitive

10. Create a common set of national standards for LED lighting industry

11. Provide additional incentives to Joint Ventures(JVs) formed by foreign players, which involvetransfer of technology.

12. Provide export incentives under MEIS (FTP for growth driving products be raised to 5%)

Mr. Vinod Sharma and Mr. Sunil Vachani


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Key recommendations for the industry

1. Collaborate with universities to promote innovation in the sector

2. Explore possibility of shared design houses to make technology more affordable

3. Mobile phone manufacturers should implement a ‘Phased manufacturing program under the domestic input-content of products is increased over next 3 years

4. Set up shared LED R&D centers

5. Focus on JVs involving transfer of technology

In spite of structural challenges, the manufacturing opportunity in India remains to be highly lucrative. With efforts from government and industry together towards developing value chains, India can become a leading manufacturing and export hub for ICTE by 2020.

Panel for mobile phones session

Panel for LED lighting session

Panel for EMS session


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Mobile Phones


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Although Indian mobile phone market is growing rapidly, domestic manufacturing value add remains low

Key challenges

Declining average selling price (ASP) of smartphones is driving large scale replacement in the Indian mobile phone market. The ASP of smartphones declined from INR 9500+ in 2011 to INR 8350 in 20154.

In volume terms, mobile phones market (TM) grew from 245 million units to 280 million units between 2013-2015. Although the domestic demand of this market is growing rapidly, but almost 63% of this demand was met via imports in 20155. Domestic manufacturing (TDM) witnessed de-growth in 2014 however gained traction in 2015 with various OEMs setting up manufacturing facilities in India.

However, most of these manufacturing facilities perform final assembly and hence the effective value addition in India remains low (approx. <20%) 8

High Cost of Finance

Lack of robust component ecosystem

Infrastructure inefficiencies

GST

► The effective interest rate in India remains to be 14-16% whereas it is approx. 2-7% in developed countries like China, Japan etc. 6

► The added cost of capital makes the domestic products non-competitive against imports by at least 10%6

► Although GST is expected to increase ease of doing business, there is limited clarity on its impact on the existing taxation incentives provided to local manufacturers

► Uncertainty also remains to exists on how GST will affect differential duty structure, and whether the duty advantage will continue to exist for domestic mobile phone manufacturing post GST regime

► The logistics/transport in the country have significant scope for improvement. A longer supply chain of components results in high inventory-carrying and freight costs.

► These inefficiencies are estimated to cost the economy USD 45 billion or 4.3% of GDP every year9.

► Local sourcing of components remains to be low as almost 80% of the Bill of Materials (BOM) of mobile phones are imported

► The local sourcing takes place only for a few components such as chargers, mechanical parts and data cables

► Small domestic component suppliers (e.g. plastic moulding, mechanical parts) find it difficult to scale up; hence the supplier market in India is heavily fragmented


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Drawing on parallels from leading mobile phone industries of the world, a 4 step roadmap is suggested to achieve our vision to meet 100% local demand domestically and become a export hub for mobile phones

Promote and encourage local production

Following recommendations need immediate consideration by the central and state governments to continue the growth of domestic mobile phone manufacturing

Extend all existing tax incentives and duty differential to domestic manufacturers post implementation of GST

Support housing and development projects near mobile phone manufacturing zones to ensure talent availability

Mobile phone manufacturers should implement a ‘Phased manufacturing program’ under which they will be required to increase the domestic input-content of their products in a specified time period

Recommendations

1


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Development of Value ChainThe next logical step for India would be to move to the higher end of the value addition spectrum. This will in turn groom the component supplier base, that this industry is currently lacking in. Key recommendations for the government are:

Provide extensive policy support towards bringing tier-1 and tier-2 vendors into the domestic market

Central government should identify focus states for mobile phone manufacturing (e.g. Andhra Pradesh, Maharashtra, UP & Tamil Nadu) and work closely with central government to create conducive policies for component suppliers

Create a 5-10 year plan for a committed tax regime which focuses on duties, income tax, VAT etc. to address lack of clarity amongst foreign component suppliers

Set up industrial estates in the identified focus states and provide plug-and-play manufacturing facilities

Ramp up exportsIndia has potential to become one of the leading mobile phone exporters by 2020. To ensure the same, following recommendations may be considered

Consider the formation of ‘Coastal Eco-zones’ as suggested by NITI Aayog

Provide ‘Op-Ex’ subsidies to make domestic manufacturing cheaper with respect to competition

Focus on R&D/InnovationR&D and innovation remain to be the key win enablers in mobile phone segment. To fuel R&D further:

Government should focus on developing design capabilities; This can be achieved by setting up JVs with established foreign players in India to aid technology transfer

Provide tax incentives to outsourced R&D, similar to incentives given for in-house R&D

Develop mechanisms to ensure IP produced as result of outsourced R&D is vested with the Indian company

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LED

Lighting


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The Indian LED market is emerging as one of the fastest growing industries over last few years. Retail demand for LED lights has gradually increased in India driven by the increased awareness around long term savings. In the last one year, the price of LED bulbs has declined by 30-40% and is expected to reduce further in coming years12.

Government has also revised investment estimate for energy efficient electrical equipment to INR1.5 trillion, of which INR350 billion has been allocated to efficient lighting and street lighting13.

LED manufacturing in India is gaining traction with increasing demand from consumer and the capacity build up by the industrial players. However, majority of manufacturing in India is limited to final assembly.

Need for standards

Limited testing infrastructure

Margin pressure

across the value chain

► Indigenous sourcing of component is limited to as low as <20%. Domestic suppliers also face challenges in scaling up. 8

► Even though globally Indian products can be competitive in terms of prices, the lack of supply chain for PCBs, wires, packaging is a major hurdle for India becoming a manufacturing hub.

► The price of LED bulbs has drastically declined by 30-40 % in the past year. (e.g. EESL Tenders in 2016 saw prices as low as INR 55 10)

► As OEMs look to reduce costs, the cost pressures are passed down the value chain onto the component suppliers

► India also lacks in testing facilities and protocols necessary to ensure quality products.

► There were only three major accredited labs with LED testing capacity currently operating in India in 201514.

Dependence on imported components

Indian LED lighting market is amongst one of the fastest growing product segments

Key challenges

► The absence of national standards for LEDs makes the industry prone to the import of sub-standard products from other countries


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Drawing on parallels from leading LED lighting industries of the world, the above roadmap is the suggested to achieve our vision to become one of the leading destinations for LED manufacturing and exports by 2020.

Increase Penetration of LED‘The increasing penetration of LED in the country is primarily because of the

government focus on efficient lighting both in the industrial and consumer segments.

Government has launched DELP, a program for LED-based home and street lighting, which focuses on replacing the 350 million conventional streetlights 15

The central financial assistance given to CFL-based solar lighting system would be stopped and the same would be provided to LED-based systems19

The government is steadily progressing towards their target of phasing out incandescent bulbs by 202012

Sustained buying by Government and subsidizing final product could lead to distortions in the market. For a sustainable business environment, it is suggested that the government shall do away with the Demand Aggregation model in a phased manner

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Recommendations


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Ensure market for domestic playersEnsuring a market for domestic players has been the focus and through an extension of Preferential market access (PMA). At policy level, the Government of India provides 50% access to tendered LED products quantity to

companies which do at least 50% value addition domestically16. This needs to be implemented both at the Centre & State level.

Develop manufacturing capabilitiesTo develop manufacturing capacity in India, the government has announced a grant of 20 – 25% capital subsidy under M-SIPS to companies that set up LED fab/ATMP unit in India17. Further recommendations include

Ensure sustainability of available incentives like MSIPS and duty benefits in future via stable long term policies

Make domestic players competitive

Domestic players are already becoming competitive with their global

counterparts on the aspects of pricing and quality.

Create a common set of national standards for industry

Standardize components specifications to reduce cost of imported components

Ensure sufficient advocacy for anti-dumping duties

Promote investment by global component manufacturers to set up facilities in India

Reduce pressure on domestic value chain due to falling prices of end product

Encourage InnovationThe industry in undergoing rapid design changes, and hence R&D remains key to winning in the global market over long term . To fuel R&D further:

A plan should be put together to pursue the protection of innovation and design in the industry

Government should actively invest in LED R&D

Facilitate shared LED R&D centres

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3

4

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EMS


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Increasing cost of manufacturing in China is largely driven by rising labour costs (the labour costs in China are almost 2.5X that of in India4) and growth in mobile handset domestic manufacturing are driving immediate EMS demand in the country.

Domestic manufacturing growth in other verticals such as consumer electronics, industrial, automotive, medical, defence, aerospace is also expected to drive steady EMS demand.

However, India is still facing challenges in terms of under developed supplier base, infrastructure/logistics (roads, airports) and ease of doing business.

Cost of Finance

Absence of closely knit Supply chain

Lack of Technology /Design

► Cost of finance in India is higher than some of the manufacturing destinations such as Taiwan, which affects the cost-competitiveness of EMS providers in India

► Indian firms suffer a major disadvantage in terms of high interest rates on electrical equipment and other capital goods which adds to the cost of Indian capital

► Complexity of Indian tax laws has become a barrier for many foreign players to set up business in the country

► There is limited clarity on duty structure and incentives post GST

► Although availability of quality talent is not an issue in India, but not enough Intellectual property is being developed by the Indian players.

► High R&D investments are required for technology upgradation

► India has very limited component supplier base. EMS players in other countries such as China, Taiwan are able to offer high cost savings and quality by leveraging their strong supplier base

► Huge amounts of component import leads to increased turn-around time affecting the competitiveness of EMS providers in India

Lack of clarity on Tax laws

Lack of focus on subsidies

► Although M-SIPS provides CAPEX subsidy, the margins in EMS are very low, and there is a lack of focus on Op-Ex subsidies

► Subsidies are made available only to new investments, and the existing players are devoid of these incentives

► Lack of awareness about government subsidies and required documentation amongst smaller EMS players

India is emerging an as attractive destination for the EMS industry

Key challenges


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Based on strategies of countries with leading global EMS ecosystems, above roadmap is suggested to achieve our vision to become one of the leading destinations for EMS manufacturing and amount to more than 5% of global production by 2020”.

Focus on PCB and High value additionIndia is in the nascent stage as far as EMS industry is concerned and the first step would be set up clear goals for the industry backed by a strong policy. However, following recommendations need consideration by the government to focus the efforts towards creating an EMS roadmap

PCBs have a unique position among the product components of the EMS industry. Therefore, it should be declared as a focus product to develop the PCB & PCB assembly ecosystem

Industry focus should shift to high value add activities like software development, design, packaging and brand (OEM), where high scope for domestic value addition exists.

Provide Easy Access to Financing The government has introduced M-SIPS and Electronics Development Fund to

empower the accessibility levels of domestic players. Further recommendations to ease the access of finance are

Provide capital incentives to both new and existing players.

Provide dedicated helpdesk to facilitate investments from existing as well as new players

Extend same benefits to SME as being extended to large companies that are committing significant investments. The huge employment generation potential of SMEs can be a key criterion for extending such benefits to SMEs

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Recommendations

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Technology transferThe government should support local players to form JVs with foreign entities to

facilitate transfer of technology.

Government should provide additional incentives to Joint Ventures(JVs) formed by foreign players, which involve transfer of technology.

All EMS players may not have capability to buy design services/technology individually, however they can pool in together to buy design/technology. Shared designed houses for EMS should be explored.

Make domestic players competitiveGovernment should make efforts towards making domestic players competitive

in terms of cost, quality and Turn around time. To ensure this following measures are recommended:

Inverted duty structure needs to be corrected for more products

More OPEX subsidies should be provided to empower the domestic production

The industry is facing lack of supply chain in EMS. Incentives should be provided for those players to set up facilities in India so as to strengthen the backward supply chain

Encourage InnovationR&D is the key factor in EMS to increase value addition. Therefore, long term focus should be to encourage innovation in EMS:

Government should create funded industry-university collaborations for the development of shared design houses

Indian firms should invest in design and explore the ODM opportunity

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References

1. D&B sectoral risk outlook 2015

2. http://www.ibef.org/industry/electronics-presentation

3. http://www.msips.in/MSIPS/ ; conversion @ 67.21 Indian rupees to 1 US dollar

4. EY Research

5. http://www.business-standard.com/article/companies/indian-handset-companies-import-most-of-their-devices-114042800022_1.html

6. http://www.dsir.gov.in/reports/isr1/Capital%20Goods/5_9.pdf

7. World Bank’s Doing Business 2015 rankings

8. Primary research - Interviews with CII panelists for the ICTE panel discussion

9. Conversion @ 67.21 Indian rupees to 1 US dollar

10. http://articles.economictimes.indiatimes.com/2016-04-5/news/72598714_1_20-crore-eesl-bulbs

11. http://www.dqindia.com/lava-started-making-in-india-in-2015-with-1-mn-phones-a-month/

12. http://bizled.co.in/india-phasing-out-edison-bulbs-led-bulbs-prices-falling-sharply/

13. http://articles.economictimes.indiatimes.com/2015-11-16/news/68326208_1_rs-500-crore-90-crore-surya-roshni

14. “ELCOMA VISION 2020,” ELCOMA India, September 2014

15. http://bizled.co.in/led-lighting-projects-open-up-huge-business-opportunity-in-india/

16. http://www.ledinside.com/interview/2014/1/led_market_in_india

17. http://deity.gov.in/sites/upload_files/dit/files/MSIPS%20Notification.pdf

18. http://timesofindia.indiatimes.com/business/india-business/Indias-logistic-costs-higher-than-BRIC-nations/articleshow/14151707.cms

19. http://articles.economictimes.indiatimes.com/2015-12-01/news/68688400_1_led-bulbs-cfl-new-and-renewable-energy

http://www.business-standard.com/article/companies/indian-handset-companies-import-most-of-their-devices-114042800022_1.html

http://www.dsir.gov.in/reports/isr1/Capital Goods/5_9.pdf

http://articles.economictimes.indiatimes.com/2016-04-5/news/72598714_1_20-crore-eesl-bulbs

http://www.dqindia.com/lava-started-making-in-india-in-2015-with-1-mn-phones-a-month/

http://bizled.co.in/india-phasing-out-edison-bulbs-led-bulbs-prices-falling-sharply/

http://articles.economictimes.indiatimes.com/2015-11-16/news/68326208_1_rs-500-crore-90-crore-surya-roshni

http://bizled.co.in/led-lighting-projects-open-up-huge-business-opportunity-in-india/

http://www.ledinside.com/interview/2014/1/led_market_in_india

http://deity.gov.in/sites/upload_files/dit/files/MSIPS Notification.pdf

http://timesofindia.indiatimes.com/business/india-business/Indias-logistic-costs-higher-than-BRIC-nations/articleshow/14151707.cms

http://articles.economictimes.indiatimes.com/2015-12-01/news/68688400_1_led-bulbs-cfl-new-and-renewable-energy


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Appendix

541

450

423

378

354

333

320

268

256

Differential duty

Inverted Duty abolished

Production Subsidy

Integrated Policy framework - SEZ+SBIT+Phy

Status for DTA sales

Direct Tax - Weighted exemption on account of

High cost of Finance + Power + Logistics

10 year tax holiday

Interest Subvention

Deferred 7 year duty retention

Coastal Eco Zones

About the CII FSI survey

The survey was conducted by CII during the Brainstorming Session on Creating Roadmap for Developing Value Chain held in New Delhi on 27th July 2016.

The survey captures opinions of 30 participants from the industry on multiple recommendations discussed during the session. Each recommendation was scored on a scale of 1-10 on Feasibility, Speed of implementation and expected Impact. A consolidated FSI score was hence calculated by multiplying the scores across each of the 3 parameters.

Average FSI Score

Differential duty

Inverted Duty abolished

Integrated Policy

framework -…

Direct Tax - Weighted

exemption on account…

Production Subsidy

Interest Subvention

10 year tax holiday

Deferred 7 year duty

retention

Coastal Eco Zones

Average Speed Score

Differential Duty

Inverted duty abolished

Integrated Policy

framework -…

Production subsidy


exemption…

10 year tax holiday

interest subvention

Coastal eco zones


retention

Average Impact Score

Differential Duty

Integrated Policy

framework -…

Inverted duty abolished

Production subsidy


exemption…

10 year tax holiday

interest subvention

Coastal eco zones


retention

Average Feasibility Score


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Creating Roadmap for Developing Value Chains in ICTE industry

A report on the CII-EY event held on 27th July 2016 at New Delhi

cii_icte panel report

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