Can India build a local electronics supply chain free from Chinese firms?

In 2020, amid growing tensions on the border, the Indian government tweaked its policy governing foreign direct investment (FDI), in effect closing the doors on Chinese companies in electronics manufacturing. However, this did not lead to rapid localisation.

For instance, value addition in mobile de­vices has been low — 12 to 20 per cent — in the first three years of the production-lin­ked incentive (PLI) scheme, which is half of the target of 40 per cent to be achieved by the end of FY26. Similarly, 95 per cent of the laptops are imported, mostly from China.

That raises the question, can India build a local electronics supply chain free from Chinese companies?

“It is a choice the Indian government must make. With economies of scale and the latest technology, Chinese companies can speed up the building of the local sup­ply chain,” says the top executive of a leading mobile phone company.

Nurturing home-grown players will take time and, without Chinese participation, a local supply chain will be costly to bui­ld. For many components, the only suppl­i­ers are Ch­inese. Even now, 40-50 per cent of the bill of items in mobile pho­n­es as­s­em­b­l­ed in India is sourced and imported from China.

The good news is that the government is now willing to reassess its policy, as it starts discussions with stakeholders for a new PLI scheme specifically for electronic compon­ents, covering mobiles, laptops, wearab­les, and telecom gear. To ensure the PLI succ­eeds this time, it has also hinted at reviewing the contentious Press Note 3 of the FDI policy and is considering allowing Chinese players in joint ventures.

Press Note 3 requires investments from entities based in a land-bordering country, or when the beneficial owner of the investment is based in a land-bordering nation, to be made under the “approval route” which means only after goverment clearance.

Life without China

China is hard to ignore. Chinese companies assemble 60 per cent of the world’s mobile devices and as much as 75 per cent of the world’s laptops. In FY23, China was top of the pecking order, holding a 33 per cent share of global electronics exports — far ahead of Taiwan’s 12 per cent.

Companies such as Apple Inc might be pushing iPhone production toward India, but 80 per cent of it is still in China. No few­er than 151 of the 188 suppliers for the iPh­o­ne have a facility in China, reports suggest.

India’s move to keep Chinese companies at bay has been Vietnam’s gain in the China Plus 1 strategy. Companies trying to hedge their bets in the face of the rising needle between China and the United States have found themselves gravitating towards the open and welcoming arms of Vietnam.

For instance, electric vehicle maker BYD, thwarted in its attempt to assemble iPads for Apple Inc in India, went to Viet­nam. Lu­x­share, a large Apple Inc vendor from Chi­na, moved its investments to Viet­nam after it did not see much movement in its proposal to make components in India. Even local el­e­ctronics manu­f­acturing and services pla­y­er Dixon has dro­pped its application to set up a joint venture with leading original des­i­gn ma­n­ufa­cturer TINNO after a year of waiting.

Getting the Chinese to participate in the revamped component PLI might not be easy. The Centre’s first tentative bid was to provide initial clearance to 12 Apple vend­ors from China so that they could form joint ventures with Indian entities and then seek FDI clearance. But this proved to be a non-starter. Chinese companies stayed away.

“With punitive action on many Chinese firms in mobile devices and the difficulties in getting visas for their executives, Chinese vendors are not enthusiastic,” says the top executive of a Chinese electronics maker.

There are several non-Chinese vendors whom India can woo. The Indian Cellular and Electronics Association (ICEA) is working on a proposal to focus on critical core co­mponents for localisation, rather than sp­re­a­­ding the incentives under the propos­ed PLI across all components. The logic is simple: Even in China, the value-add, after decades of mobile phone manufacturing and assembly, is pegged at 40 per cent.

Cost advantage

One area the ICEA has identified is printed circuit board, or PCB, which is the core for making all electronics products, be it mob­ile, laptops, wearables, or television. One cannot depend only on imports for PCBs.

India currently has only PCB assembly factories, which put together imported PCBs, with passive and active components (capacitors and transistors) and a bevy of chips thrown in. The global reality is that though 40 per cent of the PCB market is controlled by China, there are enough non-Chinese players in Taiwan, South Korea, and Japan. These include Korea Circuits, Compeq, TTM Technologies, and Sanmina.

An ICEA executive says the way ahead is to have discussions with prospective firms to understand their requirements in the PLI scheme and push them to come to India.

There are many critical areas that acc­ount for a substantial portion of the cost of production, where non-Chinese players are already in the game. Apple Inc has tied up with TDK of Japan to source critical cells in the lithium battery for the iPhone through a factory the latter is setting up near Delhi. Cells account for over 62 per cent of the cost of the battery and in mobile the battery acc­ounts for 6 per cent of the production cost.

Corning, the king of glass, has made an entry into India through a joint venture with Optiemus to make cover glass with an initial capacity of 30 million pieces per annum. This glass is used in mobiles, smartwatches, and laptops. The company said it was looking to tap PLI incentives.

But many global players say a component PLI supporting non-Chinese and Indian players is not enough to change the game. The sheer economies of scale of the Chinese vendors, aided by government support, gives them a big cost advantage over the Japanese, Koreans, and Taiwanese.

For instance, in AMOLED displays for mobile devices, the Chinese, led by state-owned BOE Technology, have undercut LG and Samsung in pricing, forcing the two Korean companies to close ranks. Samsung shuttered its LCD factory and is now producing its panels with its rival.

Will the non-Chinese close ranks in India? Or is it better for Indians and Chinese to close ranks?