As India bans computer imports, Dixon Tech smells multi-billion opportunity

Homegrown electronics manufacturing services company Dixon Technologies is betting big on domestic IT hardware production under the government’s production-linked incentive (PLI) scheme. With approvals in place, Dixon is poised to manufacture laptops, tablets, all-in-one PCs and servers in India.

Dixon started operations in 1993, commencing with the assembly of colour televisions. Over the years, the company gradually added more lines of business like lighting, home appliances, mobile phones etc. leveraging its competitive strengths – manufacturing excellence, strong client relationships and high cash generation ability.

Dixon’s blueprint has served it well so far, making it the largest homegrown EMS player commanding 7% industry market share. The company delivered a stellar 42% earnings CAGR over FY18-22, outpacing domestic and global peers.

The government’s recently revised PLI scheme for IT hardware has significantly increased incentives with a pool of Rs169 billion spread over six years through FY2029. For the first year, the total incentive stands at Rs3.2 billion. This is a massive jump from the earlier version that offered Rs73 billion over four years.

Slowing Growth

However, Dixon’s growth outlook faces both structural and cyclical headwinds across its mainstay categories which comprised almost 80% of FY22’s Rs 107 billion revenues.

In LED TVs, the market witnessed explosive growth driven by transition from CRT to LCD/LED models earlier. However, the market has now matured. Sales have reduced from the peak levels seen during the CRT era due to multiple factors – high GST rates of 28% on large screen sizes, emerging technologies like OTT platforms affecting demand and affordability issues.

In its second area of strength, lighting products, the transition to LED led to temporary market expansion, but here too, the market is also showing signs of maturity now. Moreover, with longer replacement cycles compared to incandescent bulbs and reducing electronic component costs, the overall lighting products industry is experiencing declining growth.

In its third major market, washing machines, the company is witnessing broadly stable demand growth. However, the semi-automatic segment, which accounts for over 50% of volumes, is not growing rapidly. Fully automatic washing machines are gaining adoption, but Dixon is relatively small in this space currently.

Moreover, cheap imports from FTA countries and lack of open cell manufacturing hamper exports prospects despite Dixon’s location advantage being closer to ports.

IT Focus

With the government banning free import of IT hardware such as servers and laptops from November, Dixon is eyeing much of its future growth to come from this and component manufacturing segments.

The government’s move to put quantitative restrictions on import of laptops, tablets and PCs is a clear signal for companies like Dixon to build domestic capacity. India’s market for these products is large at over $7 billion annually and largely served through imports presently. Market leader Lenovo has a 20% share amounting to $1.4 billion, presenting a feasible target market for Dixon in the next few years.

Dixon already has a relationship with global brands like Acer and Motorola (owned by Lenovo) for whom it manufactures other products.

Leveraging these relationships, Dixon is engaged in advanced talks for making tablets with a leading brand, expected to start production soon. With committed investment and sales targets under PLI, Dixon sees IT hardware emerging as a significant growth contributor going forward.

According to the company, Dixon is targeting Rs10 billion in incremental sales in the second year of the telecom PLI scheme through its JV with Bharti Airtel for manufacturing routers, modems and other networking products. A similar growth trajectory is expected in laptops and tablets over the next 3-5 years. Dixon has already achieved PLI thresholds for investment and sales in IT hardware for FY2022.

Advantages for Dixon

Dixon enjoys certain key advantages that make it well-positioned to capitalize on the IT hardware opportunity.

First is its highly diversified portfolio. It already manufactures LED TVs, home appliances, lighting products, mobile phones, CCTV cameras, etc. for leading brands. IT hardware will nicely complement the portfolio and reduce client concentration risks.

Secondly, it has strong client relationships with consumer tech brands like Samsung, Xiaomi, Panasonic and Motorola, which lend credibility with more clients likely to partner Dixon for contract manufacturing.

The company also has the ability to generate high cash flows even in challenging times provides financial muscle to undertake large investments required in PLI schemes. Dixon has consistently maintained high return ratios even as it diversified into new products.

Finally, it also has shown a lot of agility and nimbleness. By moving quickly to secure PLI approvals, Dixon has a head start over competition in segments like IT hardware, telecom equipment and LED lighting. It also deploys global standards of automation, quality control and process optimization at its state-of-the-art facilities. This provides comfort to global brands looking for competent manufacturing partners in India.

Dixon’s weaknesses

However, Dixon also faces some weaknesses that need to be addressed.

The first is the margin pressure. Categories like IT hardware and mobile phone manufacturing operate on thin margins and limited pricing power. Maintaining profitability will require high asset turns and lean operations.

Unlike in washing machines, Dixon lacks deep indigenous R&D and product development abilities in IT, relying heavily on technology partnerships and JV arrangements. Developing in-house capabilities is vital for higher value-addition.

It also faces tough competition from global players like Flex, Jabil Circuit and Celestica, who may focus on India.

Finally, unlike TV or appliance assembly, IT hardware requires much higher levels of product customization and after-sales service integration – areas where Dixon has limited experience currently.