Tech companies' handset plans face multiple challenges
INDRAJIT BASU AND TSERING NAMGYAL, Contributing writers
KOLKATA, India/HONG KONG -- Leading mobile phone manufacturers are making multi-billion dollar investments in handset assembly plants in India, hoping to tap into a vast market and take advantage of lower labor costs. But India's lack of a manufacturing ecosystem, fluctuating import duties and low labor productivity may give many of these companies a rocky start.
A slew of handset-makers have announced manufacturing plans in India, encouraged by a government initiative labeled "Make in India" launched in late 2014 by Prime Minister Narendra Modi.
Taiwan's Foxconn Technology Group, the world's biggest contract manufacturer with nearly $133 billion in annual revenues, said in August that it would invest $5 billion to set up 10-12 factories in India over the next 10 years. Other investors include Flextronics International of the U.S., South Korea's Samsung and China's Huawei.
There are two main reasons behind the investment surge. First, India is the world's second largest handset market after China, with nearly 1 billion mobile subscribers. Gartner, the U.S. technology tracking group, said in its latest forecast in April that mobile phone sales in India would grow by 5% in 2015 to just under 290 million units, rising to nearly 310 million in 2016 and 324 million in 2017.
However, only 15% of this year's sales will be built locally, according to EY, an Indian business consultancy. Like consumers elsewhere, Indians want phones tailored to their lifestyles. "There is a need for localization that caters to the demand for local languages and preferences," said Sunil Vachani, chairman and managing director of Dixon Technologies, a leading provider of services to Indian electronics manufacturers.
Second, handset manufacturers are looking for lower costs and higher margins than they can get at home or in China. Hourly labor costs in manufacturing average 92 U.S. cents in India, compared with $3.52 in China, according to Boston Consulting Group.
As a further incentive, Modi's government said in March that it would scrap import duties on handset components, while hiking duties on fully built phones from 6% to 12%. That compares with a 1% levy on locally made handsets.
But for all the promise that India holds, there are plenty of potholes for companies to stumble into. Nokia, the Finnish technology group, ceased operations in Chennai last year in the wake of tax problems with the Indian authorities, prompting Foxconn to close its manufacturing capacity in the same city. Its main customer was the Finnish group.
"While making in India certainly makes sense in terms of lower manufacturing costs and proximity to one of the fastest growing markets, there are hurdles," said Arvind Vohra, chief executive of Gionee India, a joint venture between China's Gionee Communication Equipment and an Indian partner. Gionee plans to invest 3.3 billion Indian rupees ($50.8 million) to ramp up capacity to more than 1.2 million handsets a month from October through the contract manufacturers Foxconn and Dixon.
One major issue for manufacturers is the lack of a robust local supply chain. While Indian factories can assemble handsets there is little component manufacturing capacity. This means that up to 90% of components have to be imported, raising the overall costs of local production.
Micromax, India's top local brand, has been assembling handsets domestically since early 2014. It has announced plans to invest 40-50 billion rupees to expand capacity.
Costly and difficult
Moving large volumes of parts and finished goods around the country is also costly and difficult, given India's largely undeveloped transport and logistics systems. Factoring in all these costs makes assembling in India about 10% cheaper than importing finished handsets, industry experts say.
But that is not the full equation. According to M.N. Vidyashankar, president of the India Electronics & Semiconductor Association, an industry organization, further costs are imposed by infrastructure shortcomings such as interruptions in power supplies and regulatory problems such as the cost and difficulty of acquiring and transferring real estate.
A recent report by EY, conducted in conjunction with the Federation of Indian Chambers of Commerce and Industry, also identified inconsistent value-added tax regimes between different states as one of the challenges that confront handset manufacturing.
The Modi government is trying to help, planning to improve infrastructure, tidy up the tax system and cut regulatory red tape, all of which may minimize these problems over time.
In any case, said Pravin Sinha, secretary general of the Indian Industrial Relations Association, manufacturers are free to invest in those parts of India that have a better than average track record. States such as Maharashtra and Karnataka, where Foxconn is planning to establish factories, have "fairly good infrastructure" and labor productivity that is "amongst the best in India," he said.
Sinha, an economist specializing in the Indian labor market, also said the government is planning to amend and streamline the country's complex labor laws to make it easier for foreign investors to do business. However, any changes will be subject to approval from the Indian parliament.
Other industry experts said many of the problems facing manufacturers were teething troubles that would ease with time. As the Indian handset-making industry starts reaping the economies of scale, the necessary manufacturing ecosystems will also fall into place, said Anwar Shirpurwala, executive director of the Manufacturers' Association for Information Technology.
"India has to start somewhere and that's happening," he said. "Component makers will see a case to ride that beginning and start setting up component-making [capabilities] too."
India also has some advantages over China. William Hurst, a specialist in Chinese labor who teaches at Chicago's Northwestern University, told NAR: "India has, at least in the minds of investors, substantially better institutional protections for ensuring a firm's long-term value and competitive position." These include tougher laws on intellectual property rights, trademarks and branding, he said.
At the same time, rising labor costs in China are pushing manufacturers to look for greener pastures. According to some estimates, starting salaries in the handset-making industry in China are roughly three times higher than in India.
"China is a victim of its own success as poorer or slower-growing developing countries in South and Southeast Asia, Africa, and Oceania can now claim dramatically lower costs for most types of production," said Hurst.