Can India’s Emerging Electronics Industry Compete with China?

By Bharat Kapoor and Mike Hales, Kearney; Rudraksh Gupta, Invest India

 

The pandemic, last year’s global supply chain challenges, and this year’s conflict in Eastern Europe make the case for why it’s important for a country to diversify the sources of its imports. Now, with a China-Taiwan situation brewing, the U.S. needs more than ever to loosen China’s grip on its electronics market. This move isn’t political, it’s purely practical. It’s about minimizing risk. And it makes sense right now because there is a new emerging market vying to meet American consumer demand: India.

American importers have been cautious about forming long-term deals with Indian electronics manufacturers, and rightfully so. In the past, political instability as well as a complex set of tariff laws made trade with India difficult.

So what has changed? For the past several years, India’s government has been stable, with a focus on luring foreign countries to invest in their growing manufacturing base.

America looks to India’s recent domestic success as a roadmap for what it may be capable of on an international scale. Being the youngest and second most populous county in the world—with a growing population of 1.4 billion—India has no shortage of consumer demand, and that demand is being satisfied on home soil. Many sectors of India’s economy are self-sufficient, for example, a vast majority of cars bought in India are manufactured domestically.

 

Mobile Phones, a Case Study

Due to India’s bold 2014 “Make in India” initiative, 95 percent of Indian smartphones were manufactured within the country in 2019, up from 19.9 percent in early 2014.

The first step to bolstering the Indian mobile phone industry was to create financial incentives for Samsung and Apple to relocate their factories to Indian soil. Only after Indian consumers were satisfied purchasing their nationally made products did the foreign manufacturers feel comfortable exporting. 70 to 100 million Indian phones have been exported in the past two years alone. Samsung aims to have Indian factories comprise 29 percent of imports by the end of 2022.

 

Following the Mobile Phone Roadmap

With the goal of producing $300 billion in electronics by 2026, up more than 3.5 times last year’s output, India is using its successful mobile phone model on a much larger scale. This includes doling out over $10 billion in subsidies to semiconductor manufacturing companies. Aside from financial incentives, the Indian government is enticing foreign manufacturers with more straightforward tariff laws and faster business applications. So far, these initiatives have been lucrative; the Indian Semiconductor Mission (ISM) has already received five applications from foreign companies for a total investment of $20.5 billion.

 

A Holistic Approach

India hasn’t had the same success with laptop and television manufacturing. In order to round out their electronics portfolio, India needs to build infrastructure that supports all three steps of electronics manufacturing: final assembly, submodule, and components. India is already proficient at final assembly; however, it accounts for only 10 to 20 percent of the electronics market. Examples of submodule manufacturing are the assembly of phone or TV displays. ‘Components’ refers to the creation of microprocessors, memory, storage, GPUs, ancillary chips, and power management chips—none of which India is currently capable of manufacturing. Only a handful of companies control this sector—Intel, TSMC, GlobalFoundries, Infineon Renaissance, TI—and breaking into components manufacturing would mean convincing one of these companies to relocate to India.

 

Competition with Southeast Asia

India isn’t the only market vying to replace China—countries such as Vietnam, Thailand, and the Philippines are becoming increasingly attractive alternatives. India has the edge when it comes to population and youth of its workforce; however, in an industry where labor is constantly being automated away, this advantage might shrink over the next decade. India and Vietnam run neck and neck when it comes to labor costs. Where India shines is in its consumer demand and wealth of raw materials.

 

Growing Pains

Despite the recent rush of optimism, India still has many speed-bumps ahead on its road to dominating the electronics market. As mentioned above, India has the labor but not the infrastructure. Unlike China, India is a democracy, which means structural change comes slowly. Another challenge is carbon emissions—India needs to figure out a way to build electronics manufacturing infrastructure using renewable energy. A young population also has its downsides—yes, this means increased consumer demand for electronics, but it also means an inexperienced workforce that will need advanced training if India wants to break into components and submodule manufacturing.

India’s biggest challenge is still China. India has to be not only proficient in electronics manufacturing, but cheaper and more efficient than its competitors in China and Korea. For example, China has a near monopoly on printed circuit boards. “Passive components”—the nuts and bolts of electronics, such as inductors, resistors, and capacitors—are still almost entirely produced in China and Taiwan.

While component manufacturing is difficult to break into, a robust submodule manufacturing ecosystem seems on the horizon for India. Nokia, known for submodule manufacturing, has recently increased its investment in its Indian branch.

 

Economic Rebirth in the Post-Pandemic Era

While Covid-19, inflation, and supply chain disruptions may have shaken up the global economy, optimists—such as the Indian electronics sector—see this as an opportunity for rebirth. Only the most cost efficient, reliable, and self-sufficient companies survive a bear market. When the economy does recover, India hopes to be at the forefront of this new global landscape.

 

About the Authors

Bharat Kapoor is a partner global strategy and management consultant Kearney’s Communication Media & Technology (CMT) practice and leads the firm’s Product Excellence and Renewal Lab (PERLab). Mike Hales is a partner in Kearney’s Strategic Operations and CMT practices. They can be reached respectively at at Bharat.Kapoor@kearney.com and Mike.Hales@Kearney.com.

Rudraksh Gupta is an investment specialist with Invest India, the National Investment Promotion and Facilitation Agency of the Government of India. He works closely with Ministry of Electronics and IT (MeitY) on plans for the development of India’s semiconductor and electronics industries and can be reached at rudrakshgupta.1998@gmail.com