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ASIA: "India Automotive Monthly: Executive Summary November 2010"

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back to index backASIAtalk October,  2005

India Takes First Steps in Electronics

In some ways, India is like China was 10 years ago.

Back then, many electronics companies began to set up operations in China to take advantage of low-cost labor and to gain access to a huge market. Many in the supply chain say the situation in India is similar. The electronics industry in India is in its infancy, with many electronics companies locating there to take advantage of low labor rates and to gain access to a huge domestic market.

However, whether India grows up to be an electronics powerhouse to rival China remains to be seen. If it happens at all, it will take 10 to 15 years because many obstacles need to be overcome, including poor infrastructure in the country, a less-than-adequate power grid and the lack of a robust electronics supply base.

Despite these significant shortcomings, electronics buyers at OEMs need to keep a close eye on developments in India, especially if their companies plan to sell products in that market. Many electronics manufacturing services (EMS) companies have opened or will soon open facilities there and the cost to manufacture products in India is less than importing those products for the Indian market.

But the parts for those products still have to be imported—at least for now. Analysts and industry watchers say that the supply base will develop as more manufacturing takes place. Buyers can expect more global multinational companies to locate there and the indigenous supply base to grow. However, in the short term the supply base will likely be confined to passives and electromechanical devices. Significant semiconductor production won't occur for years.

Opportunity knocks

While it will take a long time for the supply base to develop, many OEMs, EMS companies and analysts say India is a new opportunity for growth for the electronics industry.

"The potential for India is great because the interest in developing electronics is there and competency within the country is fantastic," says Eric Miscoll, chief operating officer for EMS industry researcher Technology Forecasters. "There is a large middle class and an educated workforce. There is a well established industry base with software development and many IT call centers."

But there is also extreme poverty and very poor infrastructure which will need to improve if the supply chain and the electronics industry is to grow.

India has a middle class that is larger than the population of the United States. It is a booming market," says Miscoll.

Although there is a large middle class, there is also widespread poverty. "The difference between the haves and have nots is very extreme, much more extreme than in China," he says.

There are also "language difficulties." "The languages within India are vast. Fortunately they have English as a common language," says Miscoll.

Most analysts say that while the Indian electronics industry is where the Chinese supply base was 10 to 15 years ago, they doubt it can develop as quickly and as extensively as the Chinese supply base has. "Our clients often ask, 'is India the next China?' Odds are it probably isn't," says Adam Pick, an analyst with researcher iSuppli.

"We are at the beginning stage," says Pick. He asserts that companies are just now becoming aware of the market growth in India and the manufacturing opportunity there. "They are starting to put in the infrastructure and building out a supply line in India," he says. And, he adds, the activity will include the building of fabs in India. iSuppli predicts that the EMS industry will grow 21% per year from $774 billion in 2004 to $2 billion in 2009.

Many of the EMS companies setting up shop or expanding in India are building telecommunications and consumer electronic equipment for OEMs for the Indian market. Indeed, about 30% of the EMS business in India is for consumer electronics equipment, including televisions and set top boxes, while 27% is for telecommunications equipment. Those percentages will reverse by 2009 when about 37% of the EMS market will be for telecommunications manufacturing and 27% will be for consumer electronics equipment.

EMS revenue from telecommunications is growing because of growing demand for mobile communications and from the rising number of broadband Internet users, says Pick. Mobile phone subscribers have grown from 1.9 million in March of 2000 to 53 million in March of this year for a compound annual growth rate of 38%. The number of broadband subscribers has increased from 80,000 in 2003 to 190,000 in 2004, according to an iSuppli report.

India's total telecommunications industry was valued at about $5 billion in 2003. It grew to $6.2 billion in 2004 and by 2008 it will balloon to $14 billion.

That projected growth is why EMS providers such as Flextronics and Elcoteq are manufacturing in India and plan to expand.

Flextronics acquired a 37,000 sq ft Motorola facility in Bangalore in 1999 and builds networking equipment that Motorola makes for the Indian market. Elcoteq recently moved into India and is building cell-phone handsets. Celestica recently announced it would purchase Indian EMS provider Ramnish Electronics and build products for automotive, white goods and power electronics customers. Celetronix, which entered the Indian market more than 20 years ago, builds floppy drives, CD drives and memory modules. Other companies expanding operations include Solectron, Jabil and TVS Electronics.

While there will be significant growth in the electronics industry it will be years before India will seriously compete with China.

India vs. China

Going forward, there is nothing unique about India to give it a competitive edge over China, according to Pick. India has low labor rates, but so does China. India is a huge market and so is China. China has a growing electronics supply base, while India's supply base is just beginning. Manufacturing in India requires most electronic parts to be imported.

"The other question is whether the overall market is growing fast enough to warrant another China," says Pick. "Right now global capacity is about 70%. The electronics industry is maturing and we don't see it going gangbusters again," says Pick.

While it remains to be seen how important India will become to the electronics supply chain, the electronics industry will continue to grow as more products are manufactured there primarily for domestic consumption and eventually for export. In fact, some OEMs are bullish about India. Case in point: cell-phone manufacturer Nokia of Espoo, Finland.

"Nokia has stated they will invest $150 million in India over the next four years and that its facility there will be the second largest Nokia production facility in Asia" for cell phones and other telecom equipment, says Pick. "It will be second to its facility in China, which exported $3 billion of equipment in 2004."

Buyers can expect more OEMs and EMS providers to enter India or expand their operations. The Indian government is encouraging that growth, and is trying to make it easier to do business

in India, according to Henry Gilchrist, director of business development and marketing for Elcoteq. Elcoteq is an EMS provider based in Helsinki, Finland that focuses on telecommunications equipment. It builds cell phones, personal digital assistants and networking equipment globally. Most of what it builds in India is cell-phone handsets, although it plans to build other telecom equipment in India as well.

"The Indian government put together a series of programs to support localized electronics manufacturing," says Gilchrist. The incentives include five-year tax holidays, duty-free importation of capital equipment and excise benefits, not only for OEMs, but for EMS companies and other suppliers who provide components for telecom products, handsets or networking equipment, he says.

"For example the Indian government introduced a 4% special additional duty on all imported handsets, thereby giving locally manufactured handsets a 4% advantage because all components used in the manufacture of handsets can be imported duty free," he says.

He adds that while a lot of components need to be imported there are some electronics suppliers already in India.

"We studied India and found there were global suppliers already in India, not necessarily supplying components to the telecom industry," says Gilchrist.

He says there are suppliers of electromechanical devices, bare circuit boards, passives, plastics, and telecom accessories such as headsets and adapters. "With a typical handset bill of materials, we have a supply base in India that can supply 25-30% of the bill of materials' value."

Things that are not available are semiconductors, liquid crystal display panels, chipsets, camera modules and other complex assemblies.

Chips to lag

How soon semiconductors and other more sophisticated parts are built in India remains to be seen. Semiconductor industry research analysts are far from bullish about chip companies building fabs in India anytime soon.

"I can't imagine it, really," says Brian Matas, an analyst for semiconductor researcher IC Insights.

While low-cost labor is attractive to the EMS industry and OEMs, it is not as important for semiconductor manufacturers. "You may have a cheap workforce, but for chip manufacturers, cheap labor isn't the biggest draw because so much of chip production is automated," says Matas. He says some semiconductor makers have design centers in India, and that will continue.

"India is a hard sell from a chip-manufacturing point of view," says Len Jelinek, director and principal analyst of semiconductor manufacturing for iSuppli. "First and foremost is the infrastructure. It is not up to global standards, especially the power grid. They also don't have adequate water facilitization," he says.

In addition, India wants new equipment moved into the country instead of used equipment. "If that strategy doesn't change, a semiconductor company would have to bring in leading-edge equipment and processes," says Jelinek. Few companies would want to do that. Most would want to bring in older equipment and make more mature trailing-edge chips.

If semiconductor production does not move into India, the country could still grow as a force in the electronics industry, but growth would be limited. Its business model could end up being more like Mexico's than China's.

"Mexico was the first region developed by the electronics manufacturing services industry," says Miscoll of Technology Forecasters. "Mexico still imports more than 90% of the electronics components for use in equipment in Mexico. A lot of the components come from Asia. Mexico can get it by importing, but it comes at a higher cost for the OEM," he says.

The higher cost resulted in many OEMs and EMS companies shifting production of equipment to China.

Miscoll says that India has a lot of commonality with China and will try to learn from China's success. Both have large populations with huge market potential and both offer low labor costs, he says. "India will look to China as it develops and follow China."

To a certain degree, that is already happening. China's manufacturing developed along the coastal regions and the same is happening in India, notes Miscoll.

"India might even be more of a client to China than a competitor. I think as India's development grows, it will be a good story," he says.

Source: Purchasing magazine - GAI

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