Electronic manufacturing in India needs rapid charging - The Financial Express

By Ashish Dhawan and Pankaj Mohindroo

Electronics is the largest manufactured and traded category globally, valued at over $2 trillion, of which China supplies almost over 50%. However, the wage cost in China is rising fast and buyers are looking to diversify and de-risk their supply chains. This presents a unique opportunity for India to make a meaningful progress towards the 200 million jobs it needs to create urgently. However, India is not the only option or a standout just yet.

India has taken the first step to change with the PLI scheme, resulting in electronics exports crossing $23 billion in FY23. While this is heartening, it is just over 1% of the global electronics trade. Currently, even small countries like Singapore, Vietnam, and Malaysia cumulatively export over $100 billion of electronics annually. The government has already set a short-term exports target of $120 billion, but we can think bigger. With 20% of global workforce, taking fair share of electronics market will mean an exports target of at least $400bn which is equal to all our merchandise exports put together and can create over 20Mn direct jobs.

Achieving this ambitious target will require a complete overhaul in our thinking, especially for taxation, labour laws and worker housing. There are five key areas where India needs a radical change in mindset to capitalise on this opportunity.

Small in not beautiful: Electronics manufacturing prospers in large clusters which provide requisite economies of scale. India has had two schemes for promoting electronics clusters, EMC 1.0 and EMC 2.0, in 2012 and 2020 respectively, but they have met with limited success. One key issue is we haven’t envisaged our manufacturing clusters at requisite scale. India currently has almost 400 SEZs across the country to drive exports. In comparison, the Shenzen SEZ in China alone is same size as all SEZs in India put together and is responsible for twice the exports. India must double down on creating mega, global scale electronics clusters in just a couple of locations across the country. UP (Noida), Tamil Nadu, and Telangana are already emerging as front runners and time has come to bet big to create electronics clusters of global scale.

Duties are a double-edged sword: High import duties and strict localisation norms have been two of the most overused policy tools to promote local manufacturing. While these do succeed to an extent in ensuring local manufacturing/ assembly for domestic consumption, they also harm any drive towards achieving global competitiveness. This is particularly true in electronics where supply chains are globally intertwined.

Given India represents only 3% of world market in electronics by value, missing out on 97% of the opportunity to secure this small share is a poor trade-off. Moreover, India is now shifting from being an import-substitution electronics economy to an export-led economy.

Electronics exports climbed to the sixth-highest spot this year registering a growth of over 50% to reach $23.5 billion. Complex duty structure with high and constantly changing rates serve as major barriers to making India an assembly hub for global OEMs.

China can be a frenemy: Some of the biggest electronics companies globally today are Chinese including Lenovo, Oppo, Vivo, Huawei, and Xiaomi. In addition, thousands of suppliers of electronics components are Chinese. Many of these have had a difficult time operating in India against the backdrop of border tensions between the two countries. This severely limits our ability to attract large scale manufacturing investment and also risks issues with availability of critical components. We must learn from China and Taiwan in this respect. While the countries have been on the verge of war for years, over 4,000 Taiwanese companies operate in China without any difficulty, including Foxconn, one of the biggest employers in China. Finding a way to do business with China in India’s enlightened self-interest despite political tensions will be critical for success in electronics manufacturing.

Level the playing field: Manufacturing in India is challenging due to a complexity of regulations and compliances which divert management attention and kill competitiveness. While improving ease of doing business is a long-term project, we need to move much more radically and faster to be able to capitalise on this window of opportunity in electronics exports. Fortunately, GIFT City provides somewhat just the right model for this problem where the powers of all key departments including RBI, Sebi, and PFRDA have been vested locally to make required modifications to attract target investments. A similar approach is needed with large electronics clusters where powers to make decisions on key issues like land, construction, environment, labour and especially taxation are devolved locally to ensure required flexibility and responsiveness. The new DESH bill aims to make progress on this to a large extent. Unfortunately, it is getting delayed and needs to be strengthened as well as prioritised.

Labour can be treated as adults: India’s labour laws may be well-intentioned but they only end up protecting labour from getting formal sector jobs. It is heartening to see attempts at changing this ranging from new labour codes passed in 2020 to recent moves by governments in Tamil Nadu and Karnataka to provide flexibility in working and overtime hours. Flexibility should be provided to manufacturers to utilise the workforce in line with practices in competing countries. For example, currently there are excessive restrictions on when and where women can work. By removing these restrictions, we can allow them to make an informed choice for themselves.

In 2008, Vietnam removed local content requirements on FDI. This encouraged Samsung to move its manufacturing base from South Korea to Vietnam, and today, 60% of all Samsung smartphones are manufactured in Vietnam. Other tech giants like LG, Apple, Nintendo, and several others have also transferred large part of manufacturing to Vietnam. As a result, Vietnam has climbed from the 47th position in global electronics exports ranking in 2001 to the 7th position in 2021.

The window of opportunity for India in electronics manufacturing will not last. Sooner or later, other alternatives will start gaining momentum, like Bangladesh for garments. The time to go all in is now to make this truly a transformative moment for Indian manufacturing, which can help the country take a giant leap towards prosperity for all.

The author is respectively, co-founder, Chrys Capital, and chairman, India Cellular & Electronics Association (ICEA)

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