PLI Scheme: Is the electronics industry’s window of opportunity closing?

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By Smitha Francis and Murali Kallummal

PLI scheme: Reports suggest that the government is seeking another round of applications under the production-linked incentive (PLI) scheme for electronics industry launched under the Atmanirbhar Bharat Abhiyan. Electronics was rightly picked as one of the very first focus sectors by the government, when the production-linked incentive scheme (PLI) was launched with the aim of increasing India’s self-reliance in the manufacturing sector. The pandemic-related disruptions starkly established the perils of our digital economy’s extreme supply chain dependence on China, which researchers have been warning for years. While the PLI scheme was announced solely for mobile phones and specific electronic components in April, it has since been extended to medical devices, computer hardware, telecom & network products and high efficiency solar photo-voltaic modules. With a share of 33.5% in the total budget of 1.98 lakh crores, the electronics industry is the single largest PLI beneficiary.

Any company registered in India is eligible to apply if they meet the thresholds on additional annual investment and sales over 2019-20. The scheme offers an incentive of 4% to 6% on their increased sales, for a period of five years. This is intended to compensate the disability of around 8.5% to 11% suffered by electronics manufacturing firms in India on account of lack of adequate infrastructure, high cost of finance, etc. The eligibility criteria confirm the government’s stated intention on attracting large investments. For high-end mobile phones, incremental investment in the first year must be Rs. 250 crore, with incremental sales of Rs 4,000 crore. The lower thresholds for “domestic” mobile companies apply to lower end mobile phones (less than Rs 15,000 category).

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Applications from global handset makers Samsung and Apple’s contract manufacturers Foxconn, Wistron and Pegatron, along with some domestic players and component makers have been approved to export mobile phones worth around $100 billion. The government is now reportedly seeking out key supplier firms—especially Samsung and Apple’s contract manufacturers—to extend incentives for local component production. Will this central reliance on large foreign players help India to develop an advanced parts and components ecosystem?

PLI scheme eyes FDI-led integration into global supply chains

The Ministry of Electronics and Information Technology (MeitY) expects the PLI scheme to make Indian manufacturers globally competitive by creating economies of scale and making India an integral part of the global value chains (GVCs). They also believe that such large investors will establish backward linkages with the domestic MSME (micro, small and medium enterprise) suppliers. These are not new objectives. Several policy reforms were initiated since the mid-2000s to attract foreign direct investment and promote GVC engagement by electronics firms. These include the free trade agreements with ASEAN, South Korea and Japan, and Make in India.

But time and again, Indian policymakers’ faith in the ability of large foreign firms in high technology industries to support the growth of domestic suppliers has been found to be misplaced. The most recent example is mobile manufacturing, wherein the Phased Manufacturing Program (PMP) led to a significant increase in local assembly and exports of smart phones, but it also led to a huge increase in the import of mobile parts. While mobile phones had been India’s largest electronics imports since 2003-04 onwards, their share in total electronics imports dropped after 2015-16, and mobile phone parts and components have become the leading imports. This was the single major pro-active policy effort in recent years to increase domestic value addition, away from final product assembly towards domestic sub-assemblies/components.

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Continuing lack of local supplier linkages

A recent ICSSR-funded study carried out by the authors to assess GVC participation by Samsung India Electronics clearly showed that the shift towards domestic sub-assemblies has also not increased domestic value addition. Even when the share of exports in Samsung India’s total revenue began growing from 2017-18 and reached 20% in 2018-19, this was accompanied by a sharp rise in imports dominated by mobile parts and components. In 2018-19, twenty five years after the company began operations in India, the company’s import intensity was still as high as 85%.

While the parent firm accounted for more than 50% of the value of major imports by Samsung India in 2018-19, fellow subsidiaries (abroad and in India) supplied another 30%. Domestic purchases of higher value added services like IT consultancy or other technical assistance were also with companies belonging to the Samsung group operating in India and abroad. Localisation achieved by the company in 2018-19 for mobile production were for die cut parts, printed vinyl, new parts for mobile covers, moulds, etc.

Interestingly, one of Samsung India’s local suppliers involved in the manufacture of mobile components was Elentec India Pvt Ltd, a 100% subsidiary of another South Korean firm. While Elentec India’s supplies to Samsung India contributed to the latter’s domestic value addition, Elentec India has also been running assembly operations based on imports from its own foreign related parties.

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In 2019, Samsung India had begun outsourcing assembly of low-end to mid-segment models to a local contract manufacturer, DBG Technology India. The latter is a Chinese majority owned joint venture between a leading Chinese EMS provider (Hong Kong) and Karbonn Mobiles chairman. Yet again, there was large net foreign exchange outflows from DBG Technology dominated by raw material imports.

Another local supplier of Samsung is the domestic EMS provider, Dixon Technologies. Dixon has reportedly got approval under the PLI Scheme for lower end smart phones. While it was already producing Samsung’s feature phones, the expansion in subcontracting by Samsung for smart phones may appear to be vindication of the PLI scheme. However, Dixon’s existing pattern of operations do not offer any such evidence. Dixon purchased significantly from its subsidiary, which in turn was found to be involved in import-based assembly.

Clearly, even though Samsung India’s output and exports from India has been expanding rapidly in mature products, Samsung and its subcontractors in India have all been carrying out heavily import-dependent operations. Despite the presence of Indian research centres, Samsung India spent just 0.05% of its turnover on R&D in 2018-19. On the other side, royalties paid by the Indian subsidiary to its South Korean parent firm in 2018-19 amounted to Rs. 20.3 billion. Payments for goods imports, royalties, IT consultancy, technical assistance and other services meant that there were rising net foreign exchange outflows from Samsung India, which stood at Rs. 431.2 billion in 2018-19.

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It is evident that whatever success has been achieved even under the PMP and export promotion is not translating into the creation of an indigenous manufacturing ecosystem, but instead leading to foreign exchange leakages. The net outflow from Samsung alone accounted for about 31% of India’s total electronics exports in 2018-19! It thus remains to be seen what net benefits India will obtain under this kind of FDI-led integration into electronics GVCs, even as it may expand our exports.

This is not a pattern unique to India’s single largest mobile producer and its local sub-contracting firms. Several studies have pointed to the absence of significant linkage creation by foreign-invested manufacturing companies with the domestic supplier base. With non-strategic tariff liberalisation under the ITA-1 and FTAs incentivising imports, the above pattern of continuing import dependence by foreign invested and domestic companies is one of the key challenges faced by the industry that the PLI’s current blinkered focus on simplistic output-based incentivisation for large foreign firms has failed to factor in. The latter will only serve to further increase import-based production, even as India’s electronics export figures may well increase.

PLI scheme to address low private R&D

Lack of focus on R&D by the private industry has been one of the other major structural weaknesses behind the low domestic value addition. A number of studies have explained how India’s capabilities in integrated circuit design, system design and manufacturing remain within the R&D centres of multinationals that hold patents abroad.

This is why the largest share of the value from an increase in product sales, to which the incentives are tied at present, will still accrue to the brand-owning parent firms and other patent owners along the entire value chain. Such forex outflows are depriving the country of the resources required for reinvestments for capital expenditure and R&D, for improving productivity and dynamic competitiveness across the digitalising economy.

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For the creation of “domestic champion companies” and “Indian OEMs” in electronics and to have “supply chain resilience” and “secure digital networks” (as the Ministry of Electronics and Information Technology or MeitY expects from the PLI Scheme), the ownership and control of intellectual property (IP) of more designs and the products based on them must belong to companies headquartered in India. Only then will the revenue from the commercial exploitation of the IP and the associated product sales benefit the Indian economy.

Therefore, for a policy that came in the aftermath of the pandemic to truly seek to benefit from the diversification of global OEMs and generic component manufacturers away from China, the central focus should have been on incentivising local R&D and improving the linkages domestically between design firms and manufacturing companies. The fact that this is not being considered in the PLI Scheme even in the case of technologically mature products is a tragedy and waste of precious public funds, given all the accumulated evidence on foreign-invested firms’ continuing import dependence that stares at us.

Re-design PLI scheme to promote innovation

A fundamentally different phase in India’s search for a more self-reliant electronics industry cannot be heralded unless and until the country incentivises manufacturing centered on local innovation by both foreign and indigenous players, while simultaneously empowering indigenous SMEs and start-ups.
The Gazette notification of the PLI scheme for mobile phone and electronics components categorically states that the eligibility will be benchmarked against “incremental investment and incremental sales of manufactured goods as distinct from traded goods”. However, no definition has been given on what constitutes manufacturing in the context of the electronics industry. The definition of manufacturing must be linked to local R&D parameters.

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Rather than spending India’s limited public resources on attracting foreign investments in mature products, the PLI Scheme must be revamped by the Empowered Committee by exercising its mandate to revise the eligibility criteria. The incentives must be progressively linked to a company’s investments of 5-6% of annual turnover on R&D directly and tied to the number of its patents filed in India based on research in India. Incentivisation must also incorporate a focus on environmentally sustainable materials and manufacturing processes.

Simultaneously, India must re-visit the role played by our public sector electronics-related research laboratories such as the Centre for the Development of Telematics (C-DoT) and the Centre for Development of Advanced Computing (C-DAC). They contributed immensely to the growth of the electronics industry in India by developing technologies and licensing them to local companies. An additional mandate for C-DoT and C-DAC to validate and acquire indigenously designed and manufactured products with embedded software/new technologies from start-ups and other SMEs can save the latter from being forced to sell their technologies to foreign investors. This must include technologies developed using public funds under the MeitY’s Electronics Development Fund (EDF).

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In parallel, as several successful countries continue to practice, government procurement policies must be used in full measure to promote indigenous companies. Only policy measures like these will enable us to retain the ownership of new technologies with India and prevent leakages from the economy.

Solving the lack of domestic value addition and R&D faced by the Indian electronics industry due to decades of policy failures requires a drastic change in policymakers’ perception of the kind of state interventions required to overcome market failures. If we do not shake ourselves free of the continuing ideological insistence on FDI-dependent strategies, the current small window of opportunity to shift India away from being a digital colony will close in front of us.

(This article is based on India’s Participation in Electronics Industry Value Chains: A new analytical framework and a case study analysis, ISID Working Paper No.233/2020, Institute for Studies in Industrial Development (ISID), New Delhi. The authors are consultant, ISID and Professor, Centre for WTO Studies, respectively. Another version of this article appeared in the Hindu Business Line on January 5.)

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