With the deal between the Tatas and Wistron awaiting regulatory clearance — a formality at this stage — the salt-to-software conglomerate is set to become the first domestic company to assemble Apple iPhones, marking a significant moment in the beginning of the rise of India’s contract manufacturing.
There are a few key factors that have given an impetus to contract manufacturing in India, propelling a number of other domestic companies aside from the Tatas to kickstart domestic production. These include the government’s production-linked incentive (PLI) scheme for smartphone production, a worsening relationship between the US and China which has forced companies to diversify and Beijing’s tough Covid-19 curbs.
While India touts itself as the world’s second biggest smartphone manufacturer, it has a long way to go. It is still early days for India’s contract manufacturing journey, with the country having a small stake in the electronics components supply chains.
ADVERTISEMENT
Contract manufacturing is when a company outsources production to a third-party. The industry has been the bedrock of China’s economic success over the last two-three decades.
Taking iPhones as an example, a Bloomberg study from last year estimated that it would take about eight years to move just 10 per cent of Apple’s production capacity out of China, where more than 90 per cent of the company’s iPhones are made.
But even then, from a nearly dormant manufacturing sector up until a few years ago, there has been a surge in other Indian companies assembling phones and other electronics for global giants. These include Haryana-based VVDN Technologies which recently bagged a contract to manufacture high-end servers for Hewlett Packard Enterprise, and Noida-based Dixon Technologies which announced it will manufacture smartphones for Xiaomi, marking its entry into large-scale mass manufacturing of mobile phones. In the last six months, Dixon’s stock price has increased by over 84 per cent.
Contract manufacturing in ancillary industries too is taking shape. Display glass maker Corning recently said it will begin display glass finishing in India by next year with an initial capacity of 30 million pieces as part of a joint venture with Optiemus Infracom. The company already makes phones for LG, Blackberry, HTC, Oppo, and OnePlus. Both Dixon and Optiemus are beneficiaries under the smartphone PLI scheme.
ADVERTISEMENT
Minister of State for Electronics and IT Rajeev Chandrasekhar told The Indian Express that while building iPhones and other gadgets in India is important, the real value is created by the contract manufacturers who produce those devices. “They set up the plant, employ people, contribute to the economy and will ultimately help us in achieving the scale which will attract other suppliers to India as well,” he said.
“As the contract manufacturers scale up for volumes, the components that go into those products will naturally start attracting suppliers to India, who could set up ancillary factories in the country,” Chandrasekhar said.
Amid US-China tensions, India is potentially the only country which provides a big internal market and a massive, educated labour force to produce devices for export. But, experts say there are a few concerns that investors, and especially supply chain entities could have about entering India.
ADVERTISEMENT
First, India has among the world’s highest import tariffs on some electronics components — something a number of domestic firms had lobbied for to discourage Chinese imports. But with more Indian companies now setting up manufacturing facilities, they will face the heat of the high tariff rates. According to a recent study by industry body India Cellular & Electronics Association, India’s MFN tariff average for a number of electronic components is 9.7 per cent, compared to an average of 3.2 per cent in China.
The IT Ministry has recommended to the Finance Ministry to lower input costs on some components, but a formal decision is yet to be taken.
Then, there is India’s complicated relationship with China. Because of India’s actions against Chinese firms, experts say there is little hope Chinese suppliers will come to India easily, making the journey to set up a domestic supplier base much longer, since technology is neither easy to build nor cheap.
“Take Tatas’ example. They have opted to buy an operational plant put together by Wistron, since building a facility from scratch would have been a tall order for the conglomerate which has very little experience of participating in global supply chains,” an industry executive said.