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Components
February
18, 2005
Need to wisely pursue electronic components
production
Geetanjali Wadhwa & Pradeep Chakraborty
NEW
DELHI -- Electronic components are the building blocks
and an essential input for the electronics hardware
sector. The total size of the Indian electronics industry
has been pegged at US $10 billion with components contributing
around US $1.6 billion. The other major contributors
were consumer electronics at US $3.3 billion and industrial
electronics at US $2.1 billion. Electronics components
were among the largest and fastest growing industries
globally. The content and scope of electronics was also
increasing across all sectors, such as automotive, medical,
industrial and communications. Now all of this represents
a huge opportunity - if wisely pursued.
According to N.K. Goyal, president, TEMA, India projects
to have about 250 million mobile phones by 2007. This
would involve an investment of Rs. 160,000 crore, which
in turn means that demand for components would be about
Rs. 50,000 crore by 2007. This itself provides a big
opportunity! However, the spanner in the works seems
to be the WTO zero duty regime that is set to be implemented
from next month onward.
Rajoo Goel, secretary-general, ELCINA, said that the
electronic components industry formed 40 percent of
the total electronics industry of the world on an average,
whereas, in India, it constitutes only 16 percent. Compared
to some other countries, like China (40 percent) and
Taiwan (62 percent) this figure seems abysmally low.
An interesting fact is that over 40 percent of the local
production is exported. Thus, out of the US $3 billion
domestic demand for components, the local suppliers
are currently meeting only about 25-30 percent. This
means that Indian manufacturers are good enough for
overseas markets, but are unable to compete locally!
He said: "The growth in the electronic components
industry is being driven by exports, which are growing
faster than the total production. This has resulted
in a large gap between supply and demand, which is only
likely to increase further. Another disturbing fact
is that a major share of growth in the exports of electronic
components is limited to very few star companies, which
are large and able to compete globally. To top it all,
high and anomalous tax structures encourage gray market
operations in many electronics/IT products, which is
over 50 percent of the total market in many cases."
Cell phones, consumer electronics growth drivers
Given the promising shape of things to come, lets examine
the major product lines driving growth of the electronic
components industry in India. According to ELCINA there
is a tremendous demand growth in all the sectors. It
has been estimated that the overall demand for electronic
products would increase from under US $25 billion at
present to US $90 billion by 2010. Goel said: "This
figure may sound almost ridiculous. However, if we consider
the increasing use of electronics in all spheres of
our lives, such exponential growth is definitely possible."
The sectors currently driving growth are telecom equipment,
related to the growth of cell phones and Internet usage,
computers and peripherals, and consumer electronics,
including products like VCD/DVD players, televisions
and audio equipment. Automotive electronics is another
growth sector and will be significant in the near future.
Overall, the component manufacturing industry experienced
a growth of 13 percent last year.
Indian
Electronic industry (2004-05) - Total $10 Billion
(All figures in $ Million)
|
Consumer
Electronics
|
3300
|
|
Industrial
Electronics
|
2100
|
|
Computers
|
1400
|
|
Communication
& broadcasting Equipment
|
1200
|
|
Strategic
Electronics
|
600
|
|
Components
|
1600
|
Overall
component manufacturing experienced a growth of 13%
last year.
Electronic components form the largest chunk of electronic
exports from India. Ironically, due to a tax structure
skewed in favor of imports, while the domestic market
is being fed by imports, roughly 50 percent of the components
manufactured in India are being exported. Many Indian
suppliers depend on exports for survival, as they cannot
compete in the domestic market.
Indian Electronic Exports (2003-04)
All figures in $ Million
|
Consumer
electronics
|
179
|
|
Industrial
electronics
|
329
|
|
Computers
|
313
|
|
Communication
and Broadcasting Equipment
|
36
|
|
Components
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821
|
The major export items include passive components, such
as capacitors and resistors; wound components; CD-ROMs;
connectors; color picture tubes and computer components/assemblies,
such as head stacks; memory modules and RFID products.
The main destinations for India's exports are the European
Union, ASEAN countries and the United States.
The emerging areas today include design services, automotive
electronics, broadband, STBs, etc. ELCINA estimates
that with penetration levels comparatively very low
in India, these areas offer excellent opportunities
for growth. Goel said: "For the manufacturing sector,
auto electronics, cell phones and set-top boxes have
excellent growth potential, and we can expect 15-20
percent growth year-on-year (YoY) at least for the next
five years."
Role of telecom components
Let us examine the role of telecom components, and their
current status in terms of volumes, etc. As per ELCINA,
the Indian telecom equipment-manufacturing segment registered
a three-fold production growth from US $1.3 billion
to US $3.26 billion during 1994-2003. However, this
has not kept in line with the growth in demand for telecom
equipment, which was increasingly being fed by imports.
This sector faced many anomalies in policy, pointed
out earlier by TEMA. As a result, adequate investment
has not been made this sector, and domestic manufacturing
has lagged behind.
Demand for cell phones has also grown at a scorching
pace and is currently close to 2 million units every
month. As of today, there is practically zero production
of cell phones in India - although recently there have
been a flurry of announcements by major cell phone manufacturers
to set up units in India. "The Indian electronics
components industry is eager to supply components for
handsets, and this is a great opportunity for the industry
and the government to join hands to ensure that India
does not miss the opportunity. We must make cell phones
a star product that can drive growth for many years
to come," added Goel.
The past year witnessed tremendous growth in demand
for mobile phones in India. While mobile phone users
grew from 13 million to 33 million (160 percent growth)
between March 2003 and March 2004, fixed line connections
barely managed to crawl ahead from 41 million to 42
million. Last December, the number of mobile phone connections
in the country overtook those for fixed lines.
Global leader such as Elcoteq, Hyundai, LG, Nokia and
Samsung have announced major plans in this country.
"Even if these announcements were substantially
discounted, we are looking at a very encouraging scenario
for the manufacturers of components and assemblies for
mobile phones. Though widely regarded as IT equipment,
networking products such as routers, modems, etc., are
witnessing high growth rates, along with telecom cables
and connectors, etc.," said Goel.
Challenges facing a thriving components industry
ELCINA has recommended a number of short and long-term
measures to the government to take urgent action and
ensure the survival and growth of the Indian electronic
components industry. With the entire sector facing zero
duty under the ITA-1 Agreement, urgent steps need to
be taken.
Goel pointed out that the most important and immediate
short-term step to be taken by the government would
be to accord special sector status to the electronic
components industry where all units may be given EHTP
status with domestic sales being treated on par with
exports. This should ensure that NIL duties/taxes are
applicable on all inputs, including dual-use items and
finished components throughout the entire value chain,
from raw materials up to the finished product.
It is also essential that the foreign trade policy,
as well as customs and excise procedures, are simplified
and converted to a self-declaration system. The industry
itself needs to respond actively to face this global
challenge and take immediate steps to reduce cost and
hence, boost volumes and strive for greater global visibility
and presence by participating in international events
and joint ventures, mergers and acquisitions, etc. A
far more aggressive stance is needed to be taken toward
R&D and becoming compatible to global quality and
environmental standards.
Goel added: "Important long-term measures need
to focus on enablers for the industry such as developing
India as an R&D hub and a design center, [points
raised in the January 2005 issue of Convergence*plus]
by leveraging our expertise in software and enlarging
our technical capabilities from embedded designs to
integrated semiconductor production. We also need to
develop fully integrated electronic parks with modern
infrastructure - power plants, logistics and effluent
treatment facilities- on the lines of STPI. To enable
local industry to compete with the highly competitive
and rapidly changing demands of global customers, we
need to put in place industry-friendly labor laws, develop
flexible working environments, develop skilled manpower
and improve the state of the infrastructure."
Impact of WTO's zero-duty regime
The WTO's zero-duty regime comes in force next month.
TEMA's Goel said: "With the WTO regime coming in
force from 1.3.2005, it will result in zero customs
duty on imports of all telecom equipment. There is an
immediate need to allow the import of all components
and raw materials at zero duty. Something needs to be
worked out to promote the manufacturing of telecom equipment
as well as components by way of fiscal policy and incentives."
According to ELCINA, 217 IT/electronic items were covered
under the ITA (Information Technology Agreement) of
the WTO for complete customs tariff elimination by 2005.
Out of these 217 items, several items were already at
NIL customs duty. In fact, IT/electronics was the first
sector in India to face complete customs tariff elimination.
Consequently, the Indian IT/electronics component manufacturing
would be weakened considerably with no new investment
flowing into this sector.
Goel highlighted that the impact of ITA-1 would result
in intensifying competition as more imported products
will find easy access at lower prices. WTO led external
liberalization was being done speedily without corresponding
internal liberalization of domestic policies. Thus,
most of the benefits of the WTO may remain a mirage.
He added: "Only those businesses, whether producing
for the domestic or foreign markets, that have an international
vision will survive and grow. India could also emerge
as a hub for electronic manufacturing services (EMS)
as the duties on components would be eliminated. However,
this would be possible only if our industry is supported
with supportive policies and a world class infrastructure."
So, what should the Indian government do to transform
the threat of zero-duty regime into an opportunity for
local manufacturers? It first needs to recognize that
the electronics component industry in India is an endangered
species, but has huge potential to contribute to the
nation's economic growth and well being.
Goel said: "The threat of zero duty needs to be
tackled by removing all of the roadblocks faced by our
manufacturers so that they can obtain all inputs and
resources at global prices. Where we face disabilities,
which adds to our costs, compensation should be given
by way of DEPB, duty drawback schemes, and a reduction
in central and state duties. Till such time as these
impediments are removed, the government should actively
promote Brand India and create support structures to
enable us to upgrade technically and place our products
successfully in the world market."
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