SMARTPHONE ECONOMY
India’s smartphone journeyhighlights its electronics boom but also sparks questions about its position in the global value chain.
In a country with a growing consumer class, the mobile phone represents aspirations, a portal to a better quality of life. Demand for discretionary products like smartphones and other gadgets is on the rise.
India’s journey with the smartphone is a success story that illustrates the growth of India’s booming electronics industry. It also shows how a thriving manufacturing ecosystem can be created.
The Premium Segment
The aspirational premium smartphone segment (Rs. 20,000 – 30,000) is one of the most advanced and most competitive in the smartphone market. Brands like OnePlus, Samsung, and Vivo compete through modern specs and features like 5G, camera quality, storage capacity, and unique design aesthetics.
According to a consumer survey by CyberMedia Research (CMR), a technology research and consulting firm, youth prefer aspirational premium smartphones. This only underscores the positioning of smartphones as not just a functional buy but a lifestyle statement. This premiumisation is spurring a shift towards higher-end devices, which will benefit vendors and supply-side companies whose manufacturing and assembly take place in India.
While the premium brands cross price levels of over Rs 1,00,000, cheaper processors and chip affordability have made smartphones more affordable. With greater penetration of mobile-based internet at affordable rates, smartphones have ensured that digital lifestyle permeates every corner of our lives, whether rich or poor. The surge in mobile internet consumers reflects this; from 2017 to 2022, the number of internet subscribers grew at a compound annual growth rate (CAGR) of 15 per cent.
The average Indian, especially in an urban landscape, increasingly uses only digital payment through UPI apps loaded on their smartphones. Digital transactions grew at a CAGR of 46 per cent between FY18 and FY22.
With all its deaths and disruptions, the pandemic had a positive impact in ushering online education, healthcare and governance. This ensured that the multipurpose smartphone became the hub of all activities-lifestyle, professional and leisure. No longer considered a luxury, smartphones have become a priority purchase to gain access to the digital world. With a wide spectrum of prices and capabilities between various brands and models, almost all segments of society can afford one type or other matching their purses.
The Smartphone Boom
After China, India is the second largest manufacturer of smartphones. It is also home to the second-largest smartphone market in the world. Phone production accounts for almost half of its electronics industry. Further, India has managed to achieve substantial self-reliance in the sector. In 2014, only 19 per cent of phones were made in India, while the rest were imported. In 2022, India produced 98 per cent of its smartphones, a total of 2 billion smartphones. The sector witnessed a 23 per cent CAGR from 2014 to 2022.
More importantly, the sector witnessed growing value addition and supply chain development. From 2 per cent value addition in 2016 (assembly), India has progressed to 15 per cent (assembly and sub-components) in 2022. This increased local value addition is enabled by a conducive ecosystem. Several major smartphone companies have set up units in India which manufacture components in addition to phones. This attracts more investment and creates skilled jobs. However, it is still far from satisfactory as the value addition must definitely go up, which will encourage the growth of a domestic supply chain.
Smartphone exports have also increased, boosted by smartphone giants like Apple and Samsung, shipping to the UK, Netherlands, Austria, Italy, the Middle East, North Africa, and South America.
According to Morgan Stanley, the projected future is equally rosy; India is set to become the fastest-growing smartphone market in the next ten years. India’s growing GDP is expected to more than double over the next decade with a matching rise in per capita income, which will boost sales further. So, buying stock from smartphone companies would be a good investment in India!
Attracting the Big Boys
Both foreign and domestic companies have contributed to India’s smartphone boom, supported by factors like a highly skilled workforce, affordable labour, beneficial government measures, and growing consumer demand. Samsung, a South Korean brand, has established its largest phone-manufacturing unit in India. Foxconn, a Taiwanese electronic company, is setting up a unit on the outskirts of Bangalore that will produce about 20 million iPhones a year. Tata, a major domestic conglomerate, has set up two units making iPhones. Although it joined the smartphone market as recently as 2021, it has already advanced from producing components for old iPhone models to assembling iPhones. Dixon Technologies, aleadingIndian electronics company, has started manufacturing smartphones for foreign brands, and its share price has shot up by 150 per cent over the past year.
Geopolitical factors have also carved out a context where India is increasingly seen as an attractive option for manufacturing electronics at the cost of China. Geopolitical and supply-chain risks, precipitated by the pandemic, U.S.-China tensions, and the Ukraine war, are prompting the big players to reassess their manufacturing hubs. India must compete with nations like Vietnam, Indonesia and Malaysia to attract investments.
Governance Issues
India’s smartphone story exemplifies how government policies can combine with other favourable factors to spur the manufacturing ecosystem. Government investments in upgrading infrastructure have paid off and helped companies with supply chain logistics. India is working on localising the manufacture of sub-assemblies or sub-components. India’s smartphone imports have steadily declined.
In 2016, the central government set up a Phased Road Map (PMP) to promote domestic phone manufacturing. It included the following interventions:
A 12.5
per cent
countervailing duty on imports (to offset subsidies made by the foreign exporting country)
.
Customs duty exemptions for domestic manufacturers
.
Differential excise duties
.
Incentives of 20-25
per cent
on capital expenditure, given that electronics manufacturing is highly capital-intensive
Production-linked incentives (PLIs) on sales of manufactured phones
as well as
goods that form a part of the smartphone value chain. These include telecom and networking equipment.
Looking Ahead
Going forward, India can focus on moving up the value chain. Earlier, most Indian companies were assembling and labelling end products imported from China. However, this is now changing as companies rely on their India facilities to manufacture different sub-components and casing. The government is also making efforts to foster semiconductor manufacturing, which would enable Indian companies to start manufacturing chip goods like processors, memory, and storage units for smartphones.
India stands to benefit from gaining ground in high-value segments. The domestic market for priority components (which account for a substantial portion of the demand for components), such as camera modules and printed circuit boards (PCBs), is projected to grow. If India can reduce its dependence on imported priority components, it can benefit from the growing demand and create thousands of skilled jobs. India manufactures components like chargers, cables, and batteries, but more sophisticated components like screens and computer chips are imported. Countries like Korea, Japan, Taiwan, and China are at higher levels of the mobile phone value chain.
A Counter Perspective
The smartphone success story has been challenged by Mr Raghuram Rajan, former RBI governor, and others. Mr Rajan contends that while smartphone exports are growing in number, most of the components are imported. The export boom has created low-level assembly jobs while imported components have shot up. Moreover, taxpayer money is spent on subsidies and exemptions to smartphone companies.
However, this has been countered by the Ministry for Electronics, which claims that not all imported components (screens, batteries, etc.) are used to make smartphones but are also used for other electronics. Further, the PLI scheme supports only about 22 per cent of mobile phone manufacturing. Regarding value addition, as the broader supply and assembly chain is established in India, value addition will go up.
It is worth noting that the government has provided production and capital-linked incentives for other components along the value chain (such as core transmission equipment, 4G/5G, and semiconductors), which would help localise these critical elements of the supply chain and reduce the risk of import-dependency.
Another way to reconcile the issue that Mr Rajan refers to could be to gradually reduce subsidies and incentives linked with churning out completed products and instead target value addition.
Assessment
The smartphone reflects the aspirations of India’s consumers
as well as
its manufacturers.
As consumers increasingly invest in an upgraded lifestyle, manufacturers
are looking
to move up the value chain.
India’s smartphone success story exemplifies that government measures, growing domestic demand, and skilled human resources can create a
supportive
ecosystem for electronics and capitalise on companies de-risking from China.
India will have to reduce its dependence on imported components and build its capabilities towards manufacturing higher-value goods along the supply chain, enabling it to create skilled jobs and ensure that import costs do not outweigh its electronics boom.
