Relevance: GS-3: Indian Economy, mobilization of resources, changes in industrial policy and their effects on industrial growth.

Relevance: GS-2: Government policies and interventions for development in various sectors.

Key Phrases: mobile phone exports, Phased Manufacturing Programme, Performance Linked Incentive, Electronics Manufacturing, Atmanirbhar Bharat campaign, capital-intensive industry, value-added activities, printed circuit boards, manufacturing units, Information Technology Agreement, skilled personnel, supply chain, policy engagement.

Why in News?

• The PLI scheme has helped, but value addition and entering the supply chains of global brands are vital to maintain the trend.

Context:

• The recent news of mobile phone exports hitting a record $5.6 billion in FY22 from $3.1 billion in the pandemic fiscal FY21, is welcome. The surge in exports is the result of two successive policies:
  • The Phased Manufacturing Programme (PMP) (FY17 to FY20) — exports of mobile phones increased from $0.17 billion in FY17 to $3.84 billion in FY20. And
  • The Performance Linked Incentive (PLI) scheme — which offers an incentive subject to thresholds of incremental investment and sales of manufactured goods.
• With exports increasing phenomenally, time may be opportune to understand if industry can sustain it.

Nature of Industry

• Mobile phone is a capital-intensive industry. In order to focus on value-added activities and benefit from economies of scale, global brands outsource assembling to contract manufacturers. Many of the components that go in to the phone are patented and are produced in select countries such as South Korea, Japan, and Taiwan.
• In response to incentives offered, global brands usually set up only final assembly plants where mobile phones are assembled from imported semi or completely knocked down kits. Compared to assembly, value addition is higher in branding or marketing activities and in manufacture of components such as baseband processors and display. Now that India has multiple assembly plants, the aim should be for higher value addition, and for that we need to recognise the following:

Low Value Addition

• As a response to PMP, mobile phone units invested more in plant and machinery. In addition, the government in September 2018 exempted tariffs for capital goods, which increased their imports sharply. The government followed this with the PLI, which incentivises domestic production value and not domestic value addition.
• The huge exports of mobile phones that will be seen during the PLI period may not be sustained if the focus is not on increasing domestic value addition. In 2017-18, the average value addition at only mobile phone assembly units was 5.4 per cent. The latest export-import data confirms that this trend of low value addition is continuing.
• The value of mobile parts imported in the first three quarters of FY22 touched $6.4 billion, while exports of the same languished at around $0.28 billion. A probable silver lining here is the encouraging trend of increasing exports and decreasing imports for loaded printed circuit boards (PCBs). This trend may be because of the investments into PCB assembly over the last few years; however, this inference can be confirmed only after a couple of years.

Setting Up Manufacturing Units

• While setting up assembly plants in growing markets, global brands rarely collocate production facilities of their entire supply chain. PLI in its current form subsidises global brands to maximise economies of scale in assembly, which generates large savings for them.
• It is well known that modularisation, Information Technology Agreement (ITA-1), and lower transport costs have hindered the development of domestic backward linkages. PLI does not incentivise global brands to bring their supply chain to the country, hence automatic investments in backward linkages from these PLI facilities will not happen.

Lessons from Other

• The incremental production and sales under the PLI will have to be for the export market. Now that India has set the ball rolling on PLI, we need to extract the maximum from it. There are at least three lessons from which the country can benefit — one Vietnamese, and the other two Chinese.
• With respect to mobile phones, Vietnam’s exports have zoomed from $3.4 billion in 2010 to $49 billion in 2018; impressed by this India seems to be following the Vietnamese example.
• In Vietnam, though supply chain has collocated, the impact on domestic industrialisation has not been much. A probable reason for this could the lower availability of skilled engineers and technicians. India, on the other hand, has higher supply of skilled personnel and can thus benefit from collocation of supply chains. Spillovers from the supply chain manufacturing facilities will be much higher than those from the final assembly plants.
• The first Chinese lesson is of entering the supply chain of global brands. It may be noted that not many Chinese firms have been able to break into the supply chain of global brands. In the case of iPhone X, for example, all those that have been successful were able to add only 10 per cent of the retail price in 2019. One needs to explore if Indian firms have the capability to take this path.
• The second lesson comes from the Chinese firm Xiaomi, which has shown that there is scope to increase value addition by focussing on downstream activities such as branding, marketing, etc. Indian firms identified by the PLI can be encouraged, and, if need be, hand-held to capture the downstream value. Here, the loss of dominance of domestic brands such as Lava and Micromax is worth studying closely; it can help identified Indian firms fine-tune their strategy. These local brands should introduce best-selling products in the marketplace by leveraging our software strengths.

Way Forward:

• In sum, the increase in mobile phone exports is due to the design of the PLI scheme. However, value addition continues to be low. Policymakers should now create conditions for these PLI investments to take roots in the country. Given the unsavoury experience with the Nokia plant near Chennai, unless the government nudges the PLI beneficiaries to locate their entire supply chain within the country, it is possible that the final assembly plants may shut as soon as the PLI subsidies end.
• Policy should also encourage local producers to excel in branding and marketing. If India has to succeed and benefit from the mobile phone manufacturing space, continuous policy engagement with industry stakeholders and feedback from the ground are a must.

Source: The Hindu BL

Mains Question:

Q. The recent news of mobile phone exports hitting a record $5.6 billion in FY22 from $3.1 billion in the pandemic fiscal FY21, is welcome, but some challenges still persist. Discuss these challenges and suggest measures to overcome these challenges. Critically Examine.