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Explained: 2 billion phones and India's quest for higher local value addition

Tarun Pathak, research director at Counterpoint Technology Market Research, unpacks India's efforts to boost local manufacturing

Published: Aug 22, 2023 12:38:39 PM IST
Updated: Aug 22, 2023 12:53:21 PM IST

Explained: 2 billion phones and India's quest for higher local value additionThe quest to move beyond entry-level phones in the assembly process led to a milestone when Apple decided to assemble iPhones in India in 2017-2018 Image: Sajjad Hussain / AFP

India's consumption of semiconductor components is projected to hit $300 billion in 2026. Smartphones will continue to account for the largest share of that. Therefore, raising the level of local value addition is critical.

Tarun Pathak, research director at Counterpoint Technology Market Research, tracks devices and ecosystems, and explains how India has more than doubled this metric in recent years and how it could do it again.

A 10X increase in phones assembled in India

Over the past decade, there has been a significant technological transition from 3G to 4G networks, catalysing global changes in electronics and data consumption. Around 2014-2016, this shift prompted countries to change their economic focus from oil to electronics, marking a pivotal moment. The rise of data rates and increased data consumption drove smartphone penetration rates to around 80-85 percent, primarily led by China.

In India, initially, only Nokia and Samsung were assembling phones. Then came the ‘Make in India’ initiative. By 2016, there were around 150 manufacturers, with over 200 assembling companies operating in the country. Annual phone assembly numbers soared from 35-50 million to 200 million within just two years, achieving a 90-95 percent local assembly rate by 2018-2019.

The quest to move beyond entry-level phones in the assembly process led to a milestone when Apple decided to assemble iPhones in India in 2017-2018, leading to almost complete assembly within the country. India’s overall annual assembly volume reached 300 million units, culminating in over 2 billion units assembled in the past five to six years.

China's role in the electronics industry serves as an interesting benchmark. As the world transitioned through the 4G era, China played a pivotal role. While the original context was focussed on the growth of local electronics manufacturing in India, this narrative echoes the broader trends shaping the electronics industry on a global scale.

Also read: iPhone manufacturer Foxconn ready to cash in on India's expanding economy

Higher levels of local value addition: What it will take

The concept of value addition in the context of local electronics manufacturing in India is defined by the true local value added, which represents the value of components sourced locally. Key components like processors, displays, memory, and camera modules constitute over 90 percent of a phone's cost; these are all currently imported.

To achieve higher local value addition, India adopted a phased approach, starting with sourcing simpler components like chargers, battery packs, cables, and packaging locally. This gradually expanded to encompass more complex parts, like housing, and eventually moved towards the assembly of subcomponents within major components.

Surface mount technology (SMT), a critical process, exemplifies this approach. Instead of importing fully assembled printed circuit board assemblies (PCBAs), India began importing individual components and assembling them domestically using SMT. This shift required upskilling workers and raised their wages. This transition from basic assembly to more intricate processes contributed to a 5 percent increase in value addition in the local market.

However, despite these efforts, the overall local value addition remains at around 15 percent, trailing behind countries like Brazil (20-22 percent), Vietnam (30-33 percent), and China (50-52 percent). A substantial leap in value addition can only be achieved by localising semiconductor production in India. Semiconductor manufacturing is pivotal as it involves chipsets, ICs, memory, displays, and camera modules—high-value components crucial for achieving significant value addition.

Therefore, India's current emphasis on semiconductor manufacturing is a response to this necessity. Focusing on producing these core components domestically will elevate the overall value addition percentage. By adopting a strategic approach, similar to what has been implemented for simpler components, India can close the gap and potentially match the levels of value addition achieved by other manufacturing powerhouses like China.

This semiconductor push is critical to realising India's ambition of becoming a major player in the global electronics manufacturing landscape.

The role of Apple and geopolitical factors

In the evolution of electronics manufacturing, the historical success stories of countries like China and Japan involved anchor customers that drove their industries forward. Similarly, India requires a prominent brand to anchor its Make in India initiative, and Apple serves this role effectively.

Apple's involvement brings credibility to the initiative due to its extensive partnerships across the industry, even though its volume contribution might not be the primary focus. The valuable ecosystem contributions of Apple enhance the initiative's overall value.

Geopolitical dynamics have shifted over the past decade, leading to a focus on reducing dependence on China in global supply chains. The ‘China plus one’ strategy is being adopted by many companies to diversify their manufacturing locations. India stands to benefit from this shift due to its abundant resources, young and skilled workforce, English proficiency, and favourable policies.

This enables India to compete for electronics manufacturing on both the national and international stages.

Apple's presence in India, particularly with its high-value devices like iPhones, can catalyse significant advancements in the local electronics industry. This impact extends beyond mere volumes; it influences the entire supply chain positively. As India competes for a stronger foothold in electronics manufacturing, Apple's participation reinforces the progress made so far and the potential for India to become a key player in the global electronics landscape.

Also read: Can India truly become a global semiconductor hub?

Can India narrow the gap with global semiconductor industry leaders?

The semiconductor market is dominated by a small number of powerful companies, such as TSMC and ASML, with a complex and concentrated value chain. The semiconductor industry presents substantial entry barriers, including high capital expenditures, specialised labour, IP protection, and a network of smaller suppliers to achieve economies of scale.

This challenging landscape has historically taken countries like Taiwan, South Korea, Japan, and China over two decades to establish their semiconductor prowess.

India is following a similar trajectory in its journey towards semiconductor localisation, acknowledging the critical nature of self-sufficiency. With an anticipated $300 billion semiconductor consumption in the next five years, it becomes imperative to localise production to prevent significant economic value from flowing to foreign countries, particularly in an era of geopolitical uncertainty.

Security considerations further underscore the importance of domestic semiconductor manufacturing, as these components are integrated into nearly every facet of daily life. From household appliances to critical infrastructure, the deep penetration of semiconductors necessitates a secure and self-reliant supply chain.

India's evolving efforts are promising. Ongoing dialogues and growing interest from supply chain partners demonstrate India's emergence as a key player in these discussions.

The country's role is increasingly central in conversations about semiconductor manufacturing, indicating the seriousness with which companies are approaching India's potential.

Also watch: Explained: The unbelievably complex process of making semiconductor chips

India’s recent restrictions on laptop and tablet imports

This move aligns with India's efforts to localise the semiconductor supply chain. It is the second biggest segment contributing to the semiconductor market share.

Assembling locally might require some brands to localise operations instead of relying on imports with a basic customs duty of zero percent, which could result in temporary price hikes. However, it is essential to note that this move is aimed at boosting domestic production and reducing dependence on imports.

Over time, as the industry becomes more self-reliant, it is expected that localised manufacturing will lead to cost efficiencies and make products more affordable in the long term.

With the total Indian laptop/PC market size close to $8 billion annually and approximately 65 percent of units being imported, the government's move is aimed at promoting domestic production and reducing dependence on imports. The industry comprises around 12 million units, and this restriction may lead to some short-term supply disruptions, especially for brands like Apple, HP, and Lenovo.

India has made remarkable progress in achieving almost 100 percent local assembly for smartphones and TVs, but the IT hardware segment has lagged, with only 30-35 percent of products currently being made in India. This move signals a strong push to bridge that gap and enhance the local production of laptops, tablets, and personal computers.

Most of these OEMs [original equipment manufacturers] are assembling locally but a lot needs to be done especially at Apple as their presence will also attract other component players to enter or expand in India. HP (28 percent in 2022) leads the India PC market followed by Dell (20 percent) and Lenovo (19 percent).

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