India emerging as alternative to China in electronics manufacturing- study

chipIndia’s attractiveness for manufacturers is growing due to availability of low-cost labor, said an ASSOCHAM-EY joint study.

¨Rising manufacturing costs in China and Taiwan are compelling manufacturers to shift their manufacturing base to alternate markets. In 2014, the average manufacturing labor cost per hour in India was US$0.92 as compared to US$3.52 of China,¨ said the study.

Electronics is one of the biggest items of import for India. Most of this comes from China which is the world´s top producer of electronic hardware. It is estimated that electronics will replace oil as the biggest item of India´s import.

The Indian manufacturing ecosystem for electronics and hardware industry is still at a nascent stage and faces various demand side as well as supply side challenges are limited scale of operations and local component demand due to the nascent product manufacturing in India, the report said.

´Component demand in India is muted due to very limited value addition as primarily last-mile assembly takes place. Norms such as safety regulations for automotive, medical and industrial sectors have driven the uptake of electronic content globally.´

The Indian electronic products industry in India is expected to grow at a CAGR of 10.1% to reach US$ 75 billion by 2017 from US$ 61.8 billion in 2015, the study said.

The electronic components industry in India was valued at US$13.5 billion in 2015, growing from US$10.8 billion in 2013 at a CAGR of 11%.

The market is dominated by electromechanical components (such as PCB and connectors) which form 30% of the total demand, followed by passive components (such as resistors and capacitors) at 27% , according to an ASSOCHAM-EY study titled ‘Turning the Make in India dream into a reality for electronics and hardware industry’.

However, manufacturers in India do not add high electronic content in the products due to limited industry-specific standards. The current market is dominated by secondary sales and primary sales are limited due to reduced disposable income in semi-urban and rural markets. The market penetration for most of the consumer appliances and electronics is currently lagging behind global average by up to 60% in certain categories and there lies huge untapped potential in rural markets (approximately 69% of India’s households).

Although global markets are witnessing rapid consumer uptake as electronic content increases across verticals (e.g., automotive with applications around safety, connectivity, infotainment, consumer electronics, smart homes, etc.); India has a slower adoption as consumers remain highly sensitive to even a marginal increase in product prices.

Due to nascent stage of electronics manufacturing in India, scale of operations is low, resulting in reduced cost competitiveness. Traditional electronics manufacturing destinations such as China, Taiwan and South Korea have built significant capacities across manufacturing value chain (SKD assembly, CKD assembly, Semiconductor Assembly & Testing Services). In addition, emerging (Malaysia, Vietnam) destinations have also built capacities. Although labor cost is low in India, labor productivity is lower than traditional destinations, the study added.

The basic infrastructure for any industry comprises good roads, power, water, telecommunications, ports and logistics. In India, availability of these facilities is not up to the mark, even in established industrial estates. While the Government has notified Greenfield Electronic Manufacturing Clusters, they still remain un-operational due to infrastructure issues.

The lack of proper roads and sales infrastructure results in distribution challenges for companies catering to markets in small semi-urban cities, rural areas and remote villages. Additionally, from both import and export perspective, there is port congestion due to unavailability of containers and long documentation process.

Availability of relevant manpower is crucial to the development of any industry. Since the electronics manufacturing industry has high dependence on skilled manpower, especially for highly specialized activities such as electronics system design, IC design and manufacturing etc., the availability of talent with relevant skill sets assumes considerable importance.

Both SKD and CKD are labor intensive and require delicate handling and process adherence during the manufacturing process. With changing technology, the labor needs to be constantly trained. However, the current labor scenario in India poses certain challenges.

According to National Skill Development Corporation (NSDC), the incremental human resource requirement in the electronics and IT hardware sector will be 8.9 million by 2022. The lack of training centers that administer courses relevant to the job functions in electronics sector is also a concern. Moreover, the country has strict labor laws including restrictions on overtime work, employee headcount and work timings for women employees, which act as a barrier for growth in the sector.

The high cost of working capital and capex-related financing (receivables and payables) due to high interest rates is a major challenge faced by domestic manufacturers, since it increases the overall cost of finance. Additionally, there is an increase in the cost of manufacturing (conversion costs) due to inadequate availability/reliability of power, high cost of real estate, etc. The cost of borrowed capital is 12%–14% in India as compared with ~5%–7% global average. Moreover, with the frequently changing energy efficiency norms, manufacturers need to make significant investments for products with a high rating.

India’s taxation system is complex, especially where indirect taxes are concerned. Currently, the base direct tax incidence in India stands at around 30%, whereas the corresponding tariff in other Asian countries is between 16% and 25%. Although, the Government has proposed the implementation of Goods and Services Tax (GST) for a state-of the-art indirect tax system, there are concerns that the industry faces in terms of the clarity on the revenue-neutral rate, non-creditable tax on inter-state movement of goods, status of existing state incentives granted and transition from existing taxation system to GST regime.

Procedural and regulatory clearances are time consuming and complex. According to industry sources, it takes up to a year to set up a manufacturing plant in the country and a new production line could take up to six months to become fully operational.

Additionally, the refund processes and clearances to avail benefits under tax are highly cumbersome and time-consuming. Procedure to claim concessional duty on many raw materials/ parts/components used in manufacturing of electronics products has been recently simplified in the Union Budget 2016-17 by introducing the concept of self-assessment.