Dixon Technologies, India’s biggest contract manufacturer of electronic items, has lauded the recently announced incentive scheme for mobile manufacturing in India, and said it is already able to sense strong interest from global smartphone manufacturers.
From being a consuming state, India has — over the last 10 years — managed to get the majority of the phones sold in India made in India. This has been achieved by keeping the import duty on finished mobile phones higher than that on components.
Combined with the highly competitive nature of the mobile phone market in India — where margins are often in the single digits for the manufacturer — the tariff regime has forced brands like Xiaomi and Oppo to open local manufacturing units.
However, the proportion of value addition that happens in the country is still minimal, as mobile manufacturing also refers to assembling various parts together, though a couple of manufacturers also produce items like circuit boards in India.
PLI SCHEME
As part of a recent slew of economic reforms announced by the center, India has announced a new scheme in which Indian companies stand to gain 4% to 6% of their total sales in the form of production-linked incentives from the government.
This essentially means that a Rs 10,000 mobile phone that is assembled by a foreign company can be manufactured for only Rs 9,500 by an Indian company, if the raw material costs and operating costs remain the same for both.
At present, most of the local manufacturing of smartphones is done at Indian factories established and run by foreign companies like Xiaomi and Lenovo. A ever-shrinking share is also manufactured by Indian brands like Lava and Micromax.
Dixon Electronics — which makes 15% of all TVs in India and 27% of all semi-automatic washing machines in India — however does very minuscule work in the smartphone arena.
This is primarily because smartphone brands like Xiaomi and Oppo don’t see any reason to hire a local company like Dixon Technologies to manufacture smartphones, when they can simply set up an assembly unit in an SEZ and do it themselves.
However, the new, Rs 41,000 cr production-linked incentive scheme could change the dynamics of the smartphone manufacturing industry in India.
“There’s one category [in the scheme] for foreign companies, and another for domestic companies,” pointed out Atul Lall, CEO of Dixon Technologies.
Even though the level of incentive remains similar at around 4-6% for both, he pointed out, there are some crucial differences in the eligibility criteria, he pointed out.
“For foreign companies, the threshold for investments and incremental sales is much larger, and that incentive is applicable only for mobile phones above $200. However, in India, more than 75% of the market is for mobile phones below Rs 15,000, and for that, only domestic companies are entitled,” Lall pointed out.
“We will be very aggressively bidding for this, an application will be filed shortly and this will be a significant growth area for us,” he added.
Lall said the government of India has informed that they will be selecting certain ‘manufacturing champions’ to be included in the scheme.
“We are confident that we should be one of the domestic champions identified by the government,” Lall said. “We are sitting on a sweet spot.”
He pointed out that his company has to invest Rs 50 cr to expand its operations.
“[Once] you reach a certain threshold [incremental] turnover — Rs 500 cr — that we are confident of, then you start getting the incentive. The first year incentive is 6% of your revenue. If you’re able to crack it, this will start getting reflected in Q2 this fiscal,” he added.
NEW SMARTPHONE CLIENTS
At present, Dixon manufactures around 2 million mobile phones per month, but all of these are so-called feature phones. Samsung is Dixon’s primary client in mobile phone manufacturing, and came on board last year.
While the 2 million phones per month that Dixon Tech manufactures at present gives it a market share of almost 30% in feature phones in India, the lucrative part of the mobile phone market is in smartphone segment, and here, Dixon’s presence is insignificant.
That seems set to change. It has already signed up three new clients for smartphone manufacturing.
First is Samsung, which has agreed to expand its existing agreement to cover smartphone manufacturing. Dixon Tech will start making smartphones for the Korean giant in a few weeks.
In addition, two other brands — LG and Infocus — have also come onboard. Interestingly, InFocus is owned by Foxconn, the world’s largest electronics contract manufacturer which makes phones for the likes of Apple.
Initially, Dixon Tech will make around 300,000-400,000 smartphones per month for the above clients, Lall said.
Company officials said they are trying to attract global players — who may not have thought of India as a manufacturing base — to have a look at what Dixon Tech and India has to offer.
“We are also talking to some very very large global customers. At present, I’m not in a position to share more details. We feel very strongly, and very positively about mobile as a business, particularly after the announcement of the PLI scheme,” Lall said.
The companies that Dixon Technologies is talking with include both those who have significant market share in India as well as those that target other markets. In the second case, India would emerge as a global manufacturing hub for these companies.
The move coincides with efforts by foreign governments, such as those in Japan, Australia and the US, to get their companies to diversify their supply chain and be less reliant on China.
“There is a lot of traction in that because the incentive is quite significant,” said Saurabh Gupta, chief financial officer of Dixon Technologies.