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How Does Government’s Production Linked Incentive Scheme (PLI) Seeks to Boost Mobile Phone Manufacturing in India?

Jun 19, 2020 5:14 AM 3 min read
Editorial

Samsung is reportedly looking to invest c. $706m in a smartphone display manufacturing plant in Uttar Pradesh (UP). The South Korean company already operates one of the world’s biggest mobile phone manufacturing plants in UP. 

Apple is also examining the possibility of shifting nearly a fifth of its production capacity from China to India, scaling up its local manufacturing revenues to $40bn through contract manufacturing partners over the next five years.

Mobile phone manufacturer Lava has already announced its plans to invest $105m over the next five years to scale up its mobile phone development and manufacturing operations in India.

Why is there so much grapevine, real and speculative, around smartphone companies lining up to enter India, while moving their base from China?

Geopolitics aside, the Government’s Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing has a key role to play.

The PLI scheme proposes to offer production-linked incentives to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, including Assembly, Testing, Marking and Packaging (ATMP) units - thereby propelling growth in the electronics sector.

It covers two sets of electronic items: 

I) Specified Electronic Components (SEC) and 

Ii) Mobile Phones

 

For the sake of brevity, we shall restrict our discussion to the second set, i.e., mobile phones.

Incentive Structure: Under PLI, companies involved in the manufacturing of mobile phones will get financial incentives of 4%-6% on incremental sales (over base year which is identified as 2019-2020) of goods manufactured for a period of five years provided they meet a set of requirements.

Requirements: 

1) Companies manufacturing mobile phones must cumulatively invest ₹200cr ($26m) over four years from the base year.  

2) Companies must meet an incremental sales threshold criterion every year for the next five years. These incremental sales thresholds are ₹500cr ($65m), ₹1,000cr ($131m), ₹2,000cr ($263m), ₹3,500cr ($461m) and ₹5,000cr ($659m) from the base year.

 

Government’s Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing
Source: Ministry of Electronics & Information Technology, GOI

 

Potential Cash Benefit: A total investment of ₹200cr ($26m) over five years can drive a substantial ₹245cr ($32m) in incentives alone. This is obviously additive to the much more pronounced benefits of operating in a high growth vertical.

It is clear that the incentives via PLI are fairly attractive and offer meaningful cost advantage to domestic manufacturers. 

According to sources, global players that are likely to apply for the scheme include iPhone-maker Apple’s contract manufacturers Foxconn and Wistron, Samsung, and US’s electronic manufacturing services giant Flextronics. Lava International and Micromax are among the home-grown players.

Something for All

Through the PLI scheme, the Government hopes to attract large-scale smartphone manufacturing to India and raise exports to over $100bn by 2025 from under $3bn at present.

 

India Smartphone Shipments Market

 

The PLI scheme is also expected to provide an impetus to local mobile companies such as Micromax, Karbonn and Intex, who have over the years ceded market share to Chinese companies like Xiaomi and Oppo.

As many as 8L jobs are expected to be created over the next five years through PLI.

However, a question that remains is whether 4-6% direct cost advantage resulting in margin improvement of equivalent magnitude enough of a sweetener to nudge investments in the mobile phones verticals?

In a favourable industry it perhaps is! Lava is a textbook example of a mobile manufacturer shifting production bases to India from China recently.

But the fact that the starting point is a ₹200cr ($26m) investment in perhaps one of the most commoditised and cut-throat consumer product categories, it is the big fish who would naturally benefit. Plus the fact that Xiaomi, Vivo and Oppo, who supply close to 50% of all smartphone shipments in India, already have manufacturing facilities in India may imply the demand threshold of ₹1,500cr ($197m) annual sales may be too steep.  

Anyway this really ain’t vocal for local, is it?

FIN.

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