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India lures handset makers to set up production base

India lures handset makers to set up production base

The demonetisation decision had an impact on the entire economy so it was unlikely that the price sensitive Indian mobile handset market would have saved itself from the disruption caused by it. But the saving grace was that companies were able to recover from the hit after that.

An industry observer said those among those who suffered the problems most were Indian manufacturers like Micromax, Lava and Intex as they used to operate in the cash category of sub Rs 8,000 – this was the segment on which demonetisation had the most impact.

Indian operators were not ready with their 4G smart phones portfolio when demonetisation happened and their stocks mostly comprised 3G handsets. So, in order to stay afloat in this highly competitive market, they had to immediately switch to 4G smart phone portfolio in order to enter the 4G phone market which was mostly a card segment in the price range of Rs 12,000 and above.

Demonetisation impact

“Demonetisation impacted on all Indian players. They were hit hard as they were not prepared with 4G. They were in the process of doing this. When Reliance Jio pushed its 4G services, the adoption (of the new smart phones) got accelerated by almost a year. All Indian players had 3G stock lying with them at that time. Because of that for two months, Chinese players took advantage of the situation because most of the Indian manufacturers had handsets under Rs 8,000 category for which the market is mainly in cash,” said an official from Intex Mobile, who did not wish to be named.

Most of the Chinese 4G phones are in the Rs 15,000-and-above category, and the customers use cards. Because of this, for a brief period, sales went down and 3G stock was lying unsold. But this was a temporary phase. “By March we were able to clear the 3G stocks and we had revamped to 4G volume,” said the Intex Mobile official.

Some companies had reported up to 30 per cent sales decline in the first few days, but recovered thereafter. This helped to prevent what would have been an extended loss and the initial losses were duly covered, said an Indian mobile manufacturer .

Apart from this sudden shake-up that the Indian mobile handset industry got following demonetisation, there has been a continuous journey towards local manufacturing.

Business model

‘No manufacturing. At best assembling in India’ was the business model of the global mobile and electronics companies till 2014. But that was till 2014. Mobile phone manufacturing in India witnessed a dramatic surge in the last couple of years and the number of such devices produced locally is expected to touch the 50-crore mark in a matter of three years from now, according to industry estimates.

This growth potential of the mobile sector has pushed the government into taking a slew of measures to ensure manufacturing under its ‘Make in India’ initiative is centred on this eye-catching, revenue earning industry. And a key aspect of this is pushing China behind as a manufacturing hub and taking the full plunge into local production.

However, the Chinese have been no pushovers. A key handset company, which also has a base in Shenzhen, said companies in China that are a part of the mobile ecosystem or are full-fledged handset makers are eager to come to India to put up plants. They feel India is ready to be a manufacturing hub – as land is available at the right price, clearances are happening faster, cheaper labour and hassle free bureaucracy.

In 2013, India was a market where companies that sell phones in India, either imported fully built units or semi-knocked down (SKD) phones from China, then assembled them with little manufacturing requirement. This is changing.

Lava Mobiles, an Indian company which has gained presence in the market at a rapid pace has shifted its entire manufacturing base to India since, according to the company, India has great potential to fill in the gap. Lava has manufacturing facilities in Noida and Tirupati where it makes smart phones and feature phones. The Lava portfolio of 4G handsets retails in the range of Rs 4,600-Rs 7,600.

A pure play Indian company, Micromax, which has survived the onslaught of many Chinese and European handsets makers, now wholly manufactures in India after shifting from China two years ago. Its main promoter, Rahul Sharma, has often credited the current atmosphere in the country to along with cheap local manpower vis-a-vis higher Chinese labour costs and a growing network of local suppliers of components helping to build a sound eco-system which is essential to a manufacturing base. The company has production centres in Noida, and Hyderabad.

Till two years ago, Micromax was assembling less than two-thirds of its products India. But slowly it started full home production for economic reasons, given the rising Chinese labour costs and a growing network of local suppliers of components. The company in full gear local phone manufacturing here is driven by a fully developed ecosystem and a far cheaper manpower as it shifts its operations from China back home.

Chinese firm Lenovo has started the local production of smart phones with Flextronics under a contract manufacturing deal at its Sriperumbudur plant in Tamil Nadu. Other Chinese firms like Oppo and Vivo also have manufacturing plants in Noida.

But its not just cheap labour or eco system development. There are different reasons for companies although the end destination is the same for everybody – India. It is the same even for Chinese companies who are based out of the Dragon’s Land.

Market moves

OPPO, the current Chinese sensation in the Indian market, which recently got a shot in the arm when the government allowed single brand retailing for it, says the reasons are multiple – market moving to 4G data and voice leading to volume smart phone adoption coupled with better infrastructure and skilled labour.

“India is a priority market for us given the huge potential and the opportunities it offers for smart phone manufacturers. While we are based out of China, our India operations have gained momentum in the past few years and will only get stronger. The reasons behind this are increasing conversion from 3G to 4G, smartphone adoption, internet connectivity, apt infrastructure, skilled and talented labour. These factors are making it possible for us to grow in India,” said Sky Li, Global VP and President, OPPO India.

HMD Global, the new owner of the iconic handset brand Nokia, says the devil is import duty of 12 per cent that decides in their case to go for local manufacturing. And of course the presence of partners like Foxconn makes it easier to produce locally who have full-fledged plants to manufacture.

“There are many factors behind the move to back local productions. These include the push towards ‘Make in India’ in the form of benefits offered by the government – fully imported handsets attract 10-12 per cent import duty which translates into increase of the retail price in the market. It is important to manufacture in India, if we have to offer a good value proposition to the customers, otherwise import duty will increase the pricing. As in our case when we partner Foxconn (the contract manufacturer) the whole process becomes a lot easier. They have skilled labour, set ecosystem, capacity, and plants up and running which is our global manufacturer as well. So, manufacturing in India helps us save on import duty,” says an HMD spokesperson. Oppo mobiles, depending on the data carrying capacity, retail from Rs 9,000-Rs 20,000.

Foxconn has a factory in China and its products are made in that factory too but they are not sold in India. Handsets manufactured at the China plant are for other global markets. “What we make in India, we sell in India. These are both smart phones and feature phones. There is no more importing,” says the HMD official.

Ashok Agarwal, head, manufacturing (operations), Intex Mobiles said that during the first phase of Phased Manufacturing Programme (PMP) in 2014 for import of devices, there was 12 per cent CVD, what is called GST now. But, if the same product is made in India, its duty was zero per cent. So, straightaway, there was a cost advantage of 7-8 per cent by way of making the products in India. This is what drove manufacturing.

Another Chinese brand, Vivo, a premium global smartphone brand, entered India in late 2014 but soon set up a manufacturing plant in Greater Noida with full-fledged distribution network across the country both online and offline.

All these have made the government smile. Union IT Minister Ravi Shankar Prasad said 95 mobile manufacturing companies set up plants in India and India was becoming a hub of electronics and mobile manufacturing.

Demonetisation did not scar the industry. It looks good at present. Chinese phones have a bigger market share than the local phones in the country whether they are made here or in China. In the coming time what will also matter is who sells how many phones. Demand will decide destination. And the destination is India.


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