Beyond assembly: Can ECMS build India's missing electronics supplier base?

The next phase of India's manufacturing push is moving beyond assembly to components, materials and equipment. Can policy support create a globally competitive ecosystem?

India's first production-linked incentive (PLI) push helped the country build scale in finished electronics, particularly mobile phone assembly. The next phase of India's manufacturing push is trying to go deeper into the value chain. Through the Electronics Component Manufacturing Scheme (ECMS), the government is now seeking to build the suppliers, components and materials that sit underneath finished products.

 

Earlier this month, the Ministry of Electronics and Information Technology (Meity) approved 31 new electronics manufacturing projects worth ₹6,844 crore, spanning 10 states and 20 products including filters, coils, speakers and battery materials, under the ECMS, making the total number of approvals 106 so far. They include India's first domestic manufacturing proposals for several critical components and are expected to generate ₹82,243 crore in production and 9,588 direct jobs.

 

But getting companies to set up factories is only the first step. Can schemes such as PLI 2.0 and ECMS help India build a supplier ecosystem that is competitive enough to reduce imports and take on China's scale and cost advantage?

Getting companies to invest is no longer the biggest problem

Sujay Shetty, partner, electronics system design and manufacturing & semiconductor at PwC India, told Business Standard that the scheme is a well-designed intervention because it does not offer the same incentive to every type of component. "Its architecture reflects a nuanced reading of the sector: instead of a flat subsidy, it offers turnover-linked, capex-linked and hybrid incentives calibrated to each segment’s economics. For example, it recognises that a Printed Circuit Board fabrication (PCB fab) plant and a camera module line have very different capital, scale and gestation profiles," he said.

 

According to him, the response from companies has been strong. "On mobilising investment into a segment India struggled to build for two decades, ECMS is delivering," Shetty said.

China still has a big advantage

India may be attracting factories, but Chinese manufacturers have something that cannot be created through an incentive scheme overnight: scale. According to Shetty, Indian component manufacturing still carries a 14-18 per cent cost disadvantage against mature global manufacturing clusters. The gap comes from input tariffs, cost of capital and logistics, as well as the advantages enjoyed by established clusters with depreciated assets and dense supplier networks.

 

"Scale is the constraint no policy can legislate away," he said.

 

Large manufacturing clusters can spread their fixed costs over much bigger production volumes. They can also negotiate better prices from suppliers and improve production yields through years of experience.

 

Indian manufacturers simply do not have that scale yet. This means ECMS can help make a factory investment viable, but it cannot immediately make the factory cheaper to operate than one in China.

 

"The returns simply arrive over a cycle, not a quarter," Shetty said.

 

Saurabh Agarwal, tax partner at EY India, said: "China's advantage comes from decades of ecosystem development, deep supplier networks, integrated material supply chains and manufacturing scale. The real strength of ECMS is that it helps bridge the initial viability gap and encourages suppliers to establish manufacturing capacity in India. Over time, as supplier clusters emerge and volumes increase, competitiveness should improve independently of incentives."

The problem goes deeper than cost

According to the industry analysts, technology is another challenge that may be harder to solve, as many high-value components require years of research, specialised processes, patents and knowledge of advanced materials. Setting up a factory is therefore not enough.

 

Agarwal said technology access and dependence on imported raw materials are currently among India's biggest challenges. According to him, Indian companies often have to rely on technology licences, joint ventures or imported know-how for high-value components. At the same time, critical inputs such as speciality chemicals, laminates, battery materials, metallised films and rare-earth-based products are still sourced from abroad.

 

That means a product may be made in India but still depend on imported inputs at several stages of its production.

 

"The next phase of India's manufacturing journey has to be R&D-led," Agarwal said. Incentives can attract factories, but sustained investment in research, engineering, product development and intellectual property will be needed to create globally competitive Indian component companies.

 

According to him, the government is beginning to address this by including upstream materials such as copper-clad laminates, metallised films, anode materials and rare-earth permanent magnets within ECMS.

The ecosystem is beginning to take shape

Rahul Sharma, co-founder of Bhagwati Products, an electronics manufacturer, said India's next phase of manufacturing has to be about increasing the amount of value created within the country, rather than simply increasing production.

 

According to him, ECMS can help component manufacturing grow alongside the finished-electronics industry that India has already built. As more components are produced locally, supplier networks can deepen, manufacturing capabilities can improve, and the economics of local production can become more attractive.

 

He described this as a potential "virtuous cycle" in which domestic demand creates scale, scale supports localisation and localisation strengthens India's position in global electronics supply chains.

 

According to Shetty of PwC, localisation is gaining traction in electro-mechanical components and simpler products such as enclosures, wire harnesses, sensors, coils, speakers, filters and standard PCBs. However, the more complex segments remain a challenge. Advanced multilayer and high-density interconnect PCBs, surface mount technology-grade passive components and display components have yet to reach scale, as they require much higher levels of capital, technology and manufacturing expertise.

What can electronics learn from auto components?

India's auto-component industry offers a useful comparison because it has spent decades developing domestic supplier networks around large vehicle manufacturers.

 

Ajay Agarwal, group CFO and president, finance & strategy at Minda Corporation, an auto-component manufacturer, said India is already competitive in several auto-component categories, particularly where domestic manufacturing capabilities and volumes are well established. But China continues to have an advantage because its supplier base is deeper, with many components, materials and processes available within an integrated ecosystem.

 

"For India, the challenge is not only labour or manufacturing cost. It is the overall cost of the supply chain," he said. This includes imported raw materials and electronics, logistics and the difficulty of achieving scale in newer component categories.

 

The same challenge is emerging as vehicles become more electronics-intensive. India still has significant import dependence in semiconductors, advanced sensors, rare-earth minerals, specialised materials and some electronic sub-assemblies.

 

For a supplier, investing in these areas can be risky because the initial investment is large while volumes take time to build.

 

"If suppliers have confidence around volumes and a longer-term programme, they are more willing to invest in localisation," Ajay Agarwal said. Domestic suppliers also need access to technology, raw materials and supporting Tier-2 and Tier-3 vendors if they are to reach scale.

Can incentives create a self-sustaining supplier base?

Industry experience shows that incentives can help companies take the initial investment decision, especially in technology-intensive components where the entry cost is high. But they cannot create a sustainable business by themselves.

 

Manufacturers also need access to raw materials, electronics, tooling and testing facilities, along with greater investment in R&D and closer cooperation between original equipment manufacturers (OEMs) and suppliers so that components can be designed for local production from the beginning.

 

"Ultimately, the component has to be competitive without incentives," Agarwal said. Productivity, quality, technology and cost will determine whether the business survives in the long run.

 

India appears to be making progress on the first part of the challenge: convincing companies to invest in component manufacturing. Localisation is also beginning to spread across simpler components and move upstream into materials.

 

But that does not yet amount to a globally competitive supplier ecosystem. The bigger test is whether these investments can develop into dense networks of component makers, material suppliers and Tier-2 and Tier-3 vendors with enough scale and technological capability to compete with established Asian manufacturing hubs.