Daybreak - Why domestic phone makers aren't making the most of "Make in India"

Episode Date: December 11, 2023

On Thursday last week,  the Telecom Minister of India, Ashwini Vaishnaw, declared during a press briefing that mobile phone manufacturing worth $50 billion will take place in India in the current financial year. He also said that the total exports from the category will reach $15 billion.A significant portion of this growth has to do with what the govt did three years ago. It launched a PLI scheme that aimed to make India the hub of mobile phone manufacturing. The idea was 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?Also, there's a surprise for you at the end of the episode.Tune in!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

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 Raman 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 alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast 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. Before I begin today's episode, I want to share some happiness with you. Daybreak is officially one year old today. So say happy birthday. And on behalf of everybody at the Ken, thank you, dear listeners, for showing us your love and for tuning in.

To mark the occasion, I have a surprise for you, for which you will have to stay till the end of the podcast. So don't go anywhere. And now, without further ado, let me start with today's big story. On Thursday last week, the Telecom Minister of India, Mr. Ashwini Weishnep, declared during a press briefing that mobile phone manufacturing worth $50 billion will take place in India in the current financial year. He said that the total exports from the category will reach $15 billion.

And just about two weeks ago, the minister, while talking at a press conference in Tamil Nad, had said this. There are some big leaders in the opposition side who still believe that mobile phones are imported. They forget that today in 99.9.2. 2% of the mobile phones used in India are made in India. He added that just a decade ago, 98% of mobile phones in India were imported. Now, without doubt, this turnaround is very impressive. And a lot of it has to do with what the government did three years ago.

It launched a project that aimed to make India the hub of mobile phone manufacturing. And this was supposed to be through a production linked incentive or PLI scheme that is designed to provide incentives on incremental sales of goods that are manufactured in the sector. This scheme 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 2020 were taken as the base year. Now, the scheme has set quite an ambitious target. It wants to boost the country's annual exports in the sector to $300 billion by 2026. And the scheme has two main goals. One is to boost large-scale domestic manufacturing in the sector that was suffering from

a whole bunch of disabilities. According to the Electronics Ministry, these included a lack of adequate infrastructure, domestic supply chain 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 champions to become globally competitive. So far, it seems to be doing pretty well. But there's a bit of a catch. In October 2020, 10 companies received government's approval to apply for the scheme. Five of them were Indian and the other five were global companies.

Now, out of these 10, 6 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 companies have fallen significantly short. 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 Das Sharma, and I'm a I don't chase the news cycle. Instead, thrice a week on Monday's, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 11th of December.

The government's PLI scheme offers incentives to two categories of companies. One for international ones like Vistron, Pegatron, Foxconn, its subsidiary Rising Star and Samsung, which have revenues over 1,000 crore rupees or 120, $21 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 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 favourable 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 Optimus 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 devices, supply chain, capacity and a lot more? But an executive at a major smartphone brand that considered but ultimately rejected partnership with Lava, Bhavati 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. Bhagvati, meanwhile, is partly owned by the promoters of MicroMax and manufacturer's 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, Lava 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 Dixons 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 Sharma.

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 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 the government may be considering reviving Indian brands by imposing limited 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.

Now finally for the daybreak birthday surprise. It's been a whole year since daybreak launched. Sometimes I can't believe it. And sometimes I feel like I have grown along with this podcast, you know. Coming to you with all these fascinating stories three times a week since last December has helped me understand the world of business so much better. And I'm so glad to see how far we've come. Now, obviously, just like all birthdays, day breaks,

birthday too is a time for reckoning. So I've been thinking a lot about how to make daybreak more interesting and more valuable for you and for me as well. So I thought, why not tell you about some of the more thought-provoking developments in business and technology, not just here in India, but from around the world? Also, because I think it is such a great way for me to engage with you and get to know you better. So here's presenting a brand new segment called In Unabst. other news. On one hand, there's AI that is helping us develop life-saving drugs so much faster than we could have ever done on our own. In fact, big pharma companies are actually betting on it. And then, on the other hand, there is AI also helping creeps on the internet undress women.

Now, if you're well-wurst with the advances in AI, you will know that this is not really a new development. But over the years, the technology has advanced so much that it is a very. It's hard to tell the difference between real and fake. And the scary part is how accessible all of this is. Anybody can download these apps or go to these websites and basically upload a picture of anybody that they know could be a celebrity or neighbor or colleague, anybody basically, and the app will quote-unquote nudify them.

These undressing apps are a part of what we call deep fake pornography, which is more often than not non-consensual. Recently, Graphica, which is a social network analysis company, found that just in September this year, as many as 24 million people visited these websites. And you know what? These people are paying as much as $10 a month for these apps. That is more than what a Netflix subscription costs in the US. You can use this AI to strip your photos.

Before introducing this AI, be sure to like the video, and if you still like to see these types of videos, Be sure to subscribe to my channel because I make a lot of these videos. There are thousands of videos and ads like this on YouTube with the most crass titles you could ever imagine teaching people how to use these apps. Even on Twitter, someone posted an ad for an undressing apps with words indirectly telling customers that they can create these nude images and then send them to the person whose image was digitally undressed.

You tell me what is this if not encouraging harassment? Another such app paid for sponsored content on Google's YouTube. Bloomberg actually asked Google about it and the company's spokesperson told them that Google does not allow ads that contain sexually explicit content. Twitter, meanwhile, did not bother to respond. But these apps and websites are only gaining popularity because look at how AI is developing. Graphica says that there are so many open source AI models that can create images that are far superior to those that were created just a few years ago.

And because they are open source, the models that the app developers use are available for free. And ultimately, this is what it all boils down to. AI or artificial intelligence predominantly reflects the male perspective. And that has got a lot to do with the fact that women's voices are muted when it comes to the development of AI, whether it is as developers or experts who are allowed a say on the decision table. Women are mostly absent

from the conversation. Dear listener, I would love to know your thoughts on this. Please do write to me at Snigda at the ken.com, S-N-I-G-D-H-A at the rate the-h-K-E-N dot com. I'm really looking forward to hearing from you. That's all for today. Catch you again on Wednesday.