Indian Electronics Industry >> EMS

Electronic Manufacturing Services - Can India be the new China ?
Rajoo Goel. Secretary General
ELCINA ELECTRIONIC INDUSTRIES ASSOCIATION OF INDIA

Comparisons between India and China are inevitable. Maybe Indians are envious of the scorching rate of growth achieved by the dragon, specially in electronics manufacturing. India however, can be proud of the fact that our software footprint has spread across the globe and this sector continues to achieve new milestones every other day.

Thankfully, the activity in the hardware segment is picking up, and it appears that India is coming out of the shadows of the Information Technology Agreement (ITA-1) which brought 217 tariff lines of electronic components and IT/Telecom products to zero customs duty. Free Trade Agreements (FTA's) with our major business partner countries, are having the same impact on the rest of the electronic products, particularly Consumer Electronics. These developments contributed to uncertainty about the future of electronics hardware in India and discouraged investments during the last 10 years.

India is still a small player in the global electronics hardware industry. In a global industry size of over US$ 1.3 Trillion, India's output is only ~US$12 Billion which is less than one percent. Compared to this China boasts of an output in the range of US$ 200 Billion ! As reported by Technology Forecasters Incorporated in 2005, "the scale of electronics outsourcing in China may have exceeded $150 billion in 2004. This number would include $30 to $40 billion in EMS, dominated by the global players, and perhaps another $50 billion by Original Design Manufacturers." The rest would be accounted for by Chinese EMS companies and State Owned Enterprises.

Keeping the above in view, it would be foolhardy to suggest that India is well on its way to overtaking China, but we can certainly look forward to a significant share of the EMS pie coming to locally based Global as well as Indian manufacturers - subject to the fact that we play our cards right !

The reasons why brand owners are outsourcing their manufacturing needs follows from the criteria given below :

• Onus of flexibility in production is transferred to the EMS provider
• Coping with shortened product life cycles by reducing time to market
• Efficient use of capital enhancing ROI and reducing manufacturing costs
• Brand owners are generally large corporates with high cost structure and EMS enables them to focus on their core competence and developing Intellectual Property
• Expand into new products without investing in manufacturing

Factors Driving Growth of EMS
The recent acceleration in EMS activity in India is due to rapid growth in all segments of the market for electronic hardware products. The market is expected to expand quickly from an estimated US$24-25 Billion at present to US$ 150 Billion by 2015 at a CAGR of 22-23% per annum. This growth is a result of a number of growth drivers which have emerged globally as well as in India.

• Increased use of electronics in all spheres of life to make products and services intelligent and efficient
• Strong and growing domestic demand for mobile phones, personal computers, consumer, medical, strategic and automotive electronics.
• Increasing demand for telecom infrastructure equipment -teledensity to increase from the present 100 per 1000 to 220 by 2007.
• Highly talented workforce, especially for design and engineering services with good communication skills.
• Rising labor costs in western countries and now also in Asia.
• Presence of global EMS majors in India and their plans for increased investments in India to diversify risks and access the Indian market.
• More outsourcing of manufacturing by both Indian and global OEMs

Apart from the above factors, the robust and consistent growth in Electronic Hardware market is due to a buoyant economy growing at 7-8% per annum, a large and aspiring middle class of 350 million and spread of telecom services to rural areas. Within next 5 years penetration of telephone users (both landline & mobile) is projected to increase from 100 to 500 per thousand while for PC's it will increase from 10 to 30 plus per thousand. As market penetration levels are low for all electronic products in India, this growth is expected to sustain for the next 10 years and beyond.

Recent trends show that an increasing number of engineering and design activities are also being outsourced to EMS companies and they are becoming ODMs (Original Design manufacturers) and also provide final system integration and logistical support. With India's strengths in electronic design, this is a favourable trend for us.

OEMs and EMS Companies - Roles

Source: Flextronics

U.S. technology researcher iSuppli Inc. estimates the value of Indian electronic contract manufacturing output will increase by 21% per annum to touch $2.03 billion in 2009 from an estimated $935 million in 2005. iSuppli, predicts that "many more EMS providers and OEMs will be heading to India over the next five years because of India's low cost workforce and to gain access to India's lucrative market. India has the potential to become the next China". However the report also says that India has a long way to go but recent trends in improvement in infrastructure, setting up of special economic zones and opening up its doors to foreign investment would definitely enable India to become a significant player.

The EMS industry is a sub-set of the domestic electronics industry and thus will grow as demand and production of electronics goods grows. Computers and consumer electronics equipment represent about 60% of India's electronics market and these are like to grow as demand for these products outstrips other segments. However Cellphones are today a major driver of the market as they have crossed demand levels of 4 million per month, a figure which could not be imagined even as recently as a year ago.

Kothari of iSuppli predicts that, "more EMS companies will move to India and by 2010 electronics contract manufacturers will handle about 30% of India's electronics manufacturing." On a projected manufacturing base of US$ 35 to 40 Billion, this could mean that EMS may account for an output over US$10 Billion.

One of the factors in favour of India is that it offers an alternate location to China and global players do not want to put all their eggs in one basket. Though it is a moot point whether, China provides a better environment or India, political stability is always an important consideration for MNCs.

Some of the concerns of EMS providers relate to the still underdeveloped road infrastructure and the inadequate electronics supply chain. Due to a limited supply base of components, particularly semi-conductors, EMS providers have to import virtually all components and manufacturing inputs. However, we are optimistic that as large EMS companies move in their supply chain will follow to cater to the captive market. Such a positive development is presently taking place as Nokia sets up its manufacturing base in Tamil Nadu along with a large number of its global suppliers.

Challenges for India
It is important to understand that low unit costs of labour or components or for that matter of any input for manufacturing is not a sufficient reason for an EMS company to invest in India. Says Kevin Sacks, vice president, strategic marketing and alliances, Solectron, an EMS provider which has facilities in China and India. "low manufacturing cost is important, but is not the only factor involved when making outsourcing decisions. What we really need to do is make sure our supply networks are optimized for overall performance, so the issue is lowest total cost of ownership and not just lowest unit cost". Total cost would include inventory cost and risk, and transportation costs as well as unit costs.

Schemes such as Electronic Hardware Technology Parks (EHTP) which allow import of all inputs free of duty and also allow sale of 50% of FOB value of exports to DTA markets are encouraging investments. However there still remain serious challenges such as anomalies in the tax regime which add to costs, a bureaucratic mindset inherited from our socialist past, an inadequate infrastructure struggling to keep pace with growth and an underdeveloped component supply base, all need to be tackled to realize the potential of electronics hardware.

"India's infrastructure, though developing, still lags far behind China and other Southeast Asian economies", India has the potential to become a sourcing hub to feed global demand. But "we have to wait and see how the supply chain evolves," says Pick of iSuppli.

Key EMS Players in IndiaGrowth of EMS in India is a recent phenomenon and is dominated by global companies, most of whom have set up base here during the past 5-6 years.

Flextronics ventured into India in 2001 when they purchased a Motorola facility and offer printed circuit board assembly, box builds and testing services in India. Over the past 2 years, Flextronics has expanded by acquiring three design-centric companies located there: Hughes Software Systems, DeccaNet and FutureSoft. Flextronics is expanding its manufacturing facility into Chennai.

Jabil Circuits has a 50,000 square foot plant in Pimpri, near Bombay. The plant is used for board assembly, system assembly and direct fulfillment activities. In December 2004 they announced the opening of a new 175,000-square-foot facility (which is expandable to 400,000 sq ft) located in Ranjangaon, near Pune which is now fully operational and offers printed circuit board, enclosure integration, distribution and repair services with design services support. This site will serve the consumer, instrumentation, networking, peripherals and telecommunications industries.

Solectron Centum is another major player in EMS and has a manufacturing unit and design center in Bangalore and a post manufacturing center in Mumbai. Elcoteq Network Corp., a Finnish EMS company specializing in manufacture of Cellphones, has set up base in Bangalore recently. Elcoteq's plant will initially manufacture 4 to 6 million handsets per year and has plans to expand rapidly depending on growth in the Indian market.

Other major players in EMS are Celetronix, India's largest EMS supplier and provides a full range of manufacturing and design services. It manufactures printed circuit boards and performs box builds and systems test. Tata Infotech manufactures board assemblies and backplanes and mechanical and electro-mechanical assemblies, desktop document processing systems and ATMs and cash dispensers.

With major global players like Philips, Samsung, LG, and new entrants like Haier bullish on the Indian market, opportunities for EMS providers are bound to expand and we can look forward to rapid double digit growth.

With a little patience and focus, a few years down the line there would definitely be significant opportunities for electronic equipment manufacturers and they would reap the benefits of developments and expansion of the Indian market, and maybe also use India as manufacturing hub for global markets.

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