The recent Covid crisis has exposed India’s vulnerability to the dependence on global electronics supply chains.
The Indian economy has been on a roller coaster ride by the Covid waves impact which is certainly not helping. The electronics industry is no exception and has faced the turbulence in equal measure. The one silver lining has been the growing applications and scope of electronics technology which is expanding its potential markets. Work from Home, wireless technologies, IoT, Artificial Intelligence, massive growth in Data Storage, medical electronics, all are adding to the opportunities for electronics sector. Electronics permeates all sectors of the economy, from mobile phones to ISRO’s satellites making it not only important economically but also of great strategic significance. Thus it has become a great enabler for our economy and for life itself.
To be on a firm footing and establish a sustainable and competitive electronics sector, India should have a strong eco-system of electronic components manufacturing and preferably the raw materials that are required for the same. Unfortunately, we have lagged behind in this area. As per a study by ELCINA, the demand for components was $ 32 billion for a $ 70 billion industry in the year 2019. Of this, barely $ 10 billion was manufactured locally, and that too majorly with imported raw materials. In case of active components, largely comprised of semiconductors and for PCBs, domestic share is below 12 per cent. This remains the steepest challenge for the electronics sector in achieving its strategic and economic goals set to reach the domestic manufacturing target of $ 400 billion.
The Electronic Systems Design & Manufacturing (ESDM) Sector faces three key cost disadvantages which include high finance cost, quality and cost issues with respect to power supply and finally, the high cost of logistics (including procedural delays). These ‘disabilities’ faced by manufacturers are in direct proportion to value addition. Higher the value addition, higher is the disability cost suffered by the manufacturer impacting competitiveness in the global market. These disabilities get compounded with duty exemptions which expose the fragile component industry to the onslaught of zero duty imports from the much stronger Asian competitors.
While customs duties for over 217 tariff lines of Information & Communication Technology (ICT) products and their inputs (read components) have been brought down to zero under Information Technology Agreement (ITA) of WTO from 2005 onwards, and these disability costs are yet to be mitigated fully. This is causing a competitive disadvantage for domestic manufacturers and has choked fresh investments in value added manufacturing, keeping them severely dependent on imports. This dependence is particularly marked in high investment segments such as Multilayer PCBs, Passive Chip Components, Semiconductors and several products built on semiconductor technology such as Sensors, Memory Modules, Power Management Modules and Displays.
We are a leader in IT Outsourcing and software development, however, we have a long way to go to reach global standards in IT products. .
Hit by import dependence
The example of Display screens provides an apt case where India’s dependence on imports is causing a serious roadblock in our aspirations to achieve “atmanirbhar bharat” in electronics manufacturing. “Displays account for over 25 per cent of the BoM (bill of materials) in case of smartphones and over 50 per cent in case of LCD / LED TVs,”. This market alone in India is estimated at $7 billion and is expected to grow to $15 billion by 2025. Current requirements are met exclusively through imports. A recent report by Feedback Consulting prepared for ICEA reveals that the volumes for display units would grow from 250 million currently to over 900 million in 2025 and their value would soar from $ 5.4 billion to almost $ 19 billion.
Another fact to note is that major share of Displays and most other electronics is sourced from China, and our stress points with our neighbour are well known. If China decides to switch off the tap, or even restrict supplies, we would face severe challenges in sustaining our supply chains. .
The Covid crisis has further exposed our vulnerability to the dependence on the global electronics supply chains. The most glaring example is that of the shortage of chips which in recent months has brought the automotive and consumer electronics industries to their knees. Plants are lying idle as they did not plan their requirements in advance and failed to assess the rebound in the market after the deep recession caused by Covid. ICs popularly known as Chips, impact all industries and a recent analysis by Goldman Sachs reveals that their shortage is impacting “169 industries in some way”. The impact is far severe on the electronics sector because their share in the BoM of electronic equipment can be as high as 50-60 per cent and even a single chip missing can bring the assembly line to a complete stop. ICs have no substitute, not being exactly easy to make and requiring up to six months to produce.
Looking at the size of the opportunity that is available will give us an idea of the relevance of Atmanirbhar Bharat and how critical it is for our strategic and economic future. As per the government’s report, ‘India’s Trillion Dollar Digital Economy’ by McKinsey & Company, “by 2025, India could create a digital economy of $800 billion to $1 trillion (or value equivalent to 18 to 23 per cent of the country’s potential nominal GDP). India’s digital economy in 2016 was about $170 billion (or 8 per cent of nominal GDP) and mainly comprised IT-BPM, telecom, electronics manufacturing, e-commerce, and digital payments. The digital economy of the future will span all sectors of the economy”.
The report says that about half of this $1 trillion digital economy would comprise of the existing sectors such as IT, IT-BPM, telecom, electronics manufacturing, e-commerce, and digital payments, the rest would be generated by new digital platforms for varied sectors including agriculture, education, financial services, energy, health care, manufacturing, and more.
India has set an ambitious share of $ 400 billion for the ESDM (Electronic Systems Design & Manufacturing) sector. It is a moot point whether we can do it without value added design and manufacturing and components, semiconductors, sensors, and displays..
Of the $ 2.2 trillion plus global ESDM industry, India has a small share of less than 3.5 per cent. The government is well aware of all the challenges stated. All stakeholders know that the road to a successful electronics hardware sector is rough and cannot traverse it without strong policy support. The Ministry of Electronics and Information Technology and DPIIT brought out Scheme for Promotion of Electronic Components & Semiconductors (SPECS) and Production Linked Incentives (PLI) to support each key segment of ESDM sector. However big investments require something more as the stakes are high. Investors have to be convinced that they will not face unforeseen hurdles and will have a smooth road ahead. The Hindubusiness Line