Can mobile phone exports be sustained?

The recent news of mobile phone exports reaching a record $5.6 billion in FY22 from $3.1 billion in the pandemic FY21, is welcome. The increase in exports is the result of two successive policies: Phased Manufacturing Program (PMP) (FY17 to FY20): Mobile phone exports increased from $0.17 billion in FY17 to $3.84 billion in FY20. And the performance-linked incentive scheme (PLI), which offers an incentive subject to incremental investment thresholds and sales of manufactured products.

With exports rising dramatically, the time may be right to understand if the industry can sustain it.

nature of the industry

Mobile telephony is a capital intensive industry. To focus on value-added activities and benefit from economies of scale, global brands outsource assembly to contract manufacturers. Many of the phone’s components are proprietary and manufactured in select countries such as South Korea, Japan, and Taiwan.

In response to the incentives offered, global brands generally set up only final assembly plants where mobile phones are assembled from semi-knocked down or fully knocked-down imported kits. Compared to assembly, value added is higher in branding or marketing activities and in the manufacturing of components such as baseband processors and displays. Now that India has multiple assembly plants, the goal must be to add greater value, and for that we must recognize the following:

Low added value

In response to the PMP, the mobile telephony units invested more in plant and machinery. In addition, the government in September 2018 exempted capital goods from tariffs, which strongly increased its imports. The government followed this up with the PLI, which encourages the value of national production and not national value added.

The huge mobile phone exports that will be seen during the PLI period may not be sustained if the focus is not on increasing domestic value added. In 2017-18, the average value added in mobile phone assembly units alone was 5.4 percent ( https://bit.ly/3xfZKV3). The latest export and import data confirm that this trend of low added value continues.

The value of imported moving parts in the first three quarters of FY22 reached $6.4 billion, while exports of the same languished at about $0.28 billion. A likely bright spot here is the encouraging trend of increasing exports and decreasing imports of loaded printed circuit boards (PCBs). This trend may be due to investments in PCB assembly in recent years; however, this inference can be confirmed only after a couple of years.

Configuration of manufacturing units.

While setting up assembly plants in growth markets, global brands rarely set up production facilities for their entire supply chain. PLI in its current form subsidizes global brands to maximize economies of scale in assembly, resulting in huge savings for them.

It is well known that modularization, the Information Technology Agreement (ITA-1), and lower transportation costs have hampered the development of internal backward linkages. PLI does not incentivize global brands to bring their supply chain to the country, therefore there will be no automatic investment in backlinks from these PLI facilities.

The options

Incremental production and sales under the PLI will have to be for the export market ( https://bit.ly/3DPLnYP). Now that India has launched the PLI, we need to get the most out of it. There are at least three lessons the country can benefit from: one Vietnamese and the other two Chinese. Regarding mobile phones, Vietnam’s exports increased from $3.4 billion in 2010 to $49 billion in 2018; Impressed by this, India seems to be following the Vietnamese example.

In Vietnam, although the supply chain has been relocated, the impact on national industrialization has not been much. A likely reason for this could be the lower availability of qualified engineers and technicians. India, on the other hand, has a higher supply of skilled personnel and can therefore benefit from co-locating supply chains. The indirect effects of supply chain manufacturing facilities will be much larger than those of final assembly plants.

The first Chinese lesson is to enter the supply chain of global brands. It should be noted that not many Chinese companies have been able to enter the supply chain of global brands. In the case of the iPhone X, for example, all the successful ones were able to add just 10 per cent of the retail price in 2019. Whether Indian companies have the capacity to take this path needs to be explored.

The second lesson comes from the Chinese company Xiaomi, which has shown that there is room to increase added value by focusing on downstream activities such as branding, marketing, etc. Indian companies identified by the PLI and, if necessary, portable can be encouraged to capture downstream value. Here, it is worth taking a closer look at the loss of dominance by national brands like Lava and Micromax; can help identified Indian companies fine-tune their strategy. These local brands must introduce the best-selling products in the market taking advantage of the strengths of our software.

In short, the increase in mobile telephony exports is due to the design of the PLI scheme. However, the added value remains low. Policymakers must now create the conditions for these PLI investments to take root in the country. Given the unpleasant experience with the Nokia plant near Chennai, unless the government encourages PLI recipients to locate their entire supply chain within the country, final assembly plants may close as soon as the subsidies end. of PLI.

The policy should also encourage local producers to excel in branding and marketing. If India is to succeed and benefit from the mobile phone manufacturing space, continued political engagement with industry stakeholders and feedback from the ground is imperative.

The writer is at the faculty of CDS, Thiruvananthapuram. views are personal

Published in

April 19, 2022

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