How PLI-2 scheme is attracting traditional tech cos to manufacture in India

While PC, laptops, mobile phone makers are setting up a manufacturing hub in India, with players like HPE and Cisco coming in, it adds to diversity of hardware capability the country is building

Networking gear manufacturer Cisco has in the past tried to set up a manufacturing unit in India twice. But its plan to have a manufacturing footprint in India only came true in 2023. The company gave full credit to the government of India’s various product linked incentive schemes.

Cisco is not the only tech products major to set up its base here. After Cisco’s announcement, HPE said that it will partner with domestic player VVDN Technologies for manufacturing high-end servers in India.

Both firms have also stated that they are expecting significant business momentum from these manufacturing hubs. HPE has said that it aims to make some $1 billion worth of products from VVDN’s plant in Manesar, Haryana in the next five years. Cisco will cater to the growing demand from customers in India and aims to drive more than $1 billion in combined domestic production and exports in the coming years.

What has propelled this interest among the global tech players to have a hardware footprint in India after having a presence in the country for over two decades are the various initiatives and schemes that the government has announced.

In case of HPE it was the product-linked incentives (PLI) 2 that made it finally firm its plan. HPE in a statement said that the ‘Make in India’ initiative and the recently announced PLI 2.0 by the government of India encouraged and made the environment conducive for IT hardware manufacturing companies like ours to set up manufacturing in India.

Som Satsangi, SVP and MD, HPE, India in an email response to Business Standard explained why the PLI 2 scheme makes it conducive for players like them to set up a manufacturing hub.

“The recently introduced PLI 2.0 by the government of India takes into account the complexities and nuances of server manufacturing. PLI 2.0 is for 6 years (as compared to PLI 1.0 which was for 4 years) and has a higher percentage of incentives on offer. This addresses the issue of the higher cost of manufacturing servers as compared to mobile phones or laptops,” he said.

Satsangi further added that companies have been provided with a two-year window between the commitment to Make in India and the start of local manufacturing. Whilst PLI 1.0 helped consumer technology companies to start manufacturing in India, PLI 2.0 has enabled enterprise technology vendors to ‘Make in India’.

With a hardware footprint in India, HPE’s presence in India is now completed. The company has a total workforce of 14,000 full time team members, which is the largest base outside of the US. Its Mahadevapura campus in Bengaluru is the largest campus for HPE in the world. Over 4,000 of HPE’s most distinguished scientists, engineers, and research teams are based out of HPE’s R&D hub at this campus. For all high-end technology services and innovative solutions, HPE has its largest remote delivery center in India.

In 2019 the company announced an investment of $500 million in India over the period of five years. HPE has invested in and expanded its presence in India over the last four years. HPE has created 2,000 net new jobs over the last three years across all our business units in India.

While PC, laptops, and in recent times mobile phone manufacturers have grabbed headlines on setting up a manufacturing hub in India, with players like HPE and Cisco coming in, it adds to the diversity of the hardware capability the country is trying to build.

Daisy Chittilapilly, President, Cisco India and SAARC, believes that this focus on building hardware capability needs to be further accentuated. “We are sitting in an economy where manufacturing, frankly, as a percentage of GDP at 17 per cent is underperforming, but the government's got a clear path. Manufacturing has to get to 25 per cent of GDP for us to keep our economic goals in sight,” she told Business Standard in a recent interaction.

She does believe that the incentive schemes support players like Cisco to make these decisions. “Most importantly, the ecosystem in India is maturing. For a high tech electronics manufacturing company like ours, it is very important to have an ecosystem in India that can support the manufacturing process,” she added.

Cisco will be focusing on networking equipment, including routing and switching portfolios. It will work with its contract manufacturing partners in Chennai.

Other than the initiatives that the government of India has rolled out, Kunal Chaudhary, Partner, EY shares that there are three main reasons for companies to look at setting up manufacturing unit in India, "Domestic demand, expansion outside China and preferential market access for made in India goods for supplies to the government, which is now a large customer for majority of the OEM’s”.

Importantly, Chaudhary points out that there is a business case too. “Majority of the players will shift few SKUs to India, which would be manufactured in bulk for India and for exports. With more production coming to India, the OEM’s are also looking at setting up component manufacturing eco-systems in India,” he added. 

The government on July 31, extended the deadline to apply for benefits under the production-linked incentive scheme for IT hardware products such as laptops, tablets, all-in-one PCs, servers, and edge computing devices till August 30.

As notified in May, the modified IT hardware PLI scheme offers incentives of up to 9 per cent on incremental sales of locally manufactured IT products to attract investments in the sector. Initially, the application window was set at 45 days from the launch of the scheme.

The budgetary outlay was more than doubled to Rs 17,000 crore compared to the previous scheme with a provision of Rs 7,325 crore.

As per the government’s estimates, the new scheme is likely to generate 75,000 direct jobs. The revised scheme was notified in the official gazette on May 29.

The PLI scheme may provide maximum incentives of Rs 4,500 crore for global companies, Rs 2,250 crore for companies with hybrid (global and domestic) production models, and Rs 500 crore for domestic companies. The incentive will depend on net incremental sales of manufactured goods over the base year of 2022-23. The new scheme offers additional incentives for the localisation of certain optional items. Localisation of semiconductor design, IC manufacturing, and packaging have been newly added to the scheme as incentivised components.