Daybreak - Foreign phone makers are capitalising on "Make in India" but Indian firms are lagging behind

Episode Date: March 29, 2023

The Indian government has set an ambitious goal with the Production Linked Incentive (PLI) program for mobile-phone manufacturing. By 2026, it aims to push the country's annual exports to a whopping $300 billion.The idea is to boost large-scale manufacturing and to support domestic phone makers to become globally competitive.  But of the six companies that made the cut to claim the scheme's incentives, only two are Indian.Why is “Make in India” attracting more foreign phone makers than Indian ones?Tune in to find out.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Three years ago, the Indian government launched a project

that aimed to make the country the hub of mobile phone manufacturing. The production linked incentive or PLI scheme is designed to provide incentives on increment sales of goods manufactured in the sector. It basically extends a 4 to 6% cash benefit on incremental sales of electronic goods manufactured in the country to eligible companies for five years. For this, 2019 to 20 are taken as the base year. The scheme has an outlay of $4.7 billion and is expected to boost the mobile phone exports

at scale. Now, the scheme has set quite an ambitious target. It wants to boost the country's annual exports in the sector from $0.7 billion, which was the average until 2017 to $300 billion by 2026. And there are two main goals that it has. One is to boost large-scale domestic manufacturing in the sector that was suffering from a host of disabilities. According to the Electronics Ministry, these included a lack of adequate infrastructure, domestic supply chains and logistics, high cost of finance, inadequate availability of power and limited design capabilities. And the second goal of the scheme is to support domestic manufacturers to become globally

competitive. So far, it seems to be doing pretty well. Phone exports are expected to almost double in 2023. And this is despite the fall that was seen in the country's key markets of Europe and the US. But there is a bit of a catch here. The Ken reporter, Anushka Jain, did a bit of digging. around. It was in October 2020 when 10 companies received government approval for the program. Five of them were Indian and the other five were global firms. Out of these 10, six made the cut and have been able to claim the incentives. Okay, so far so good, right? But guess what? Out of these six, only two are Indian companies. In three years, it seems like foreign companies

have progressed towards meeting the scheme's targets. But domestic-classes, companies have fallen short significantly. So why is make in India attracting more foreign phone makers than Indian ones? Welcome to Daybreak, a business podcast from the Ken. I'm your host Nick Dha Sharma and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 29th of March.

The government's PLI scheme offers incentives to two categories of companies, one for international ones like Wistron, Pegatron, Foxcon, its subsidiary Rising Star and Samsung, which have revenues over 1,000 crore rupees or $121 million. The other category is for domestic companies with revenues over 100 crore rupees or $12 million. Now, despite this significantly lower cutoff, only two Indian countries, companies have managed to receive the incentives from the government under the scheme. They are Dixon Technologies and United Telilinks Neolinks, also known as UTNPL. And four out of the six phone companies are international corporations that are manufacturing

in India. They are Samsung, Foxcon, Wistron, Infocom manufacturing and Pegatron. Clearly, something important is not being acknowledged that a huge chunk of India's mobile phone exports has come from contract manufacturers of global giants like Samsung and Apple. The scheme, combined with tax incentives and a favorable geopolitical environment so far, has attracted many international manufacturers to the country. Industry insiders estimate that their contribution is as high as 70 to 80% of the total exports. That leaves domestic manufacturing companies like Lava International Paget Electronics,

which is a subsidiary of Dixon technology and Bhavati products with a very tiny share. For example, Dixon has exported a mere $79 million worth of mobile phones in the year that ended in March 2022. But even the small number is respectable considering other Indian companies didn't even come close. Finance Minister Nirmala Sita Raman, while presenting the budget this year, had said that mobile phone production in India stood at 310 million. units valued at over $33 billion in the year that ended in March 2022. But Rajesh Sharma, the executive director of the industry body called India Cellular and

Electronics Association, told again that of that, domestic manufacturers are estimated to have a share of 5%. That is all. Yes, the government wants to promote India as a manufacturing destination and ensure that the local ecosystem becomes globally competitive. But global companies have had a lot to gain under the scheme, while the benefits to local companies are yet to be seen. But why is that? Stay tuned to find out. Lava International, which is an Indian electronics company,

Bhagwati products and Optimist Electronics, did not meet the targets in the year that ended in March 22. And they are expected to miss them this year as well. This obviously casts a huge shadow on the goal of encouraging domestic manufacturers, under the PLI scheme. Especially when 14 other sectors are also part of similar programs and the government plans to extend them even more. The government's plan is kind of like a double-edged sword.

When choosing an electronic manufacturing service or EMS provider, a phone company typically evaluates its prior experience. It includes a host of factors like how much experience it has in mobile manufacturing. Can the manufacturer's workforce assemble complex device? supply chain, capacity, and a lot more. But an executive at a major smartphone brand that considered but ultimately rejected partnerships with Lava, Bhagwati and Optimus Electronics in 2022 said that these companies have been unable to scale up due to the focus on their own brands.

For example, Lava has its own brand of smart and feature phones called Zylo and Lava. Bhagwati meanwhile is partly owned by the promoters of Micromax and Manufacturing. phone for the company as well. Optimist from 2015 to 19 dabbled in smartphone manufacturing for Blackberry, HTC, and its in-house brand Zen mobiles, which did not have any significant sales.

Now, Lawa has partnered with Finnish mobile maker HMD Global to manufacture smartphones and Motorola for feature phones. But many smartphone brands are reluctant to work with it due to intellectual property theft concerns. The companies, however, blame the base here on which incremental sales are applicable. A senior executive at Lava told us,

and I quote, even before the PLI scheme started, Lava had been manufacturing smartphones in large quantities. Its volumes would have been even larger than Dixon's today, so it was hard for them to scale up further. End quote. Now, this reason kind of makes sense, because I told you about the two domestic companies

that did manage to get incentives under the scheme. If you remember, one of them was UTNPL. UTNPL makes geophones for conglomerate reliance industries. And here is what the executive from Lava told us. And I'm quoting again, UTNPL was a new joint venture. And with geophones volumes, it obviously managed to scale up. End quote. The goal was to integrate these Indian manufacturers into the global value chain.

So the most effective approach would have been to get partnerships with domestic smartphone market leaders like Opo, Vivo and Xiaomi. But these companies have not shown any signs of expanding their manufacturing contracts to Indian phone makers. Coming up next, what then will happen to Indian phone manufacturers? Companies that miss the PLI targets can still apply for incentives for the following year. But the targets rise by 500 crore rupees or 60 million dollars annually. Also, they must ensure CAPEX investments of at least 50 crore rupees or $6 million every year. Industry executives say that to assist the firms, the government may ease restrictions on FDI and allow companies to partner with Chinese firms and gain access to export markets.

When it comes to FDI, Indian manufacturers have been demanding the easing of restrictions that were implemented after the border conflicts in 2020. The Lava executive also told us that government may be considering reviving Indian brands by imposing limitations on Chinese smartphone brands. And they might do this by preventing them from selling phones priced below $12,000. But all said and done, in just three years, the PLI scheme has exposed the harsh reality of the Indian manufacturer's struggle to keep up with international rivals. And the government is unlikely to offer more help. According to a former Ministry of Electronics official,

the ministry will only step in for broader industry issues and it will not make individual exceptions. Daybreak is produced from the newsroom of the Ken India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website.

I am Snigda Sharma, your host and today's episode was edited by my colleague Rajiv Sien.