Atra, Tatra, Sarvatra!
This is a popular adage in Sanskrit which means 'here, there, everywhere'. It aptly explains how we are completely surrounded by electronics nowadays. Electronics are embedded in our day-to-day lives.
The increasing need for comfort and luxury led to the invention of many electronics over the years. The growing popularity of electronics led to a steadily growing electronics manufacturing services (EMS) industry over the years.
However, the electronics industry hit a roadblock in the calendar year 2019 due to three primary reasons -
As things stand now, the industry is picking up pace once again.
The global EMS market is expected to grow at a compounded annual growth rate (CAGR) of 5.4% to reach US$ 1,145 billion (bn) (about Rs 94,264.3 bn) in the calendar year 2026.
Globally, the EMS market is well established, and most service providers have high maturity levels in component fabrication, system assembly and testing.
In the last few decades, the market has expanded to offer design and development services and after-sales services such as repair and remanufacture marketing, and product lifecycle management.
Recently, some have even started offering software solutions due to the increased penetration of digitization in the end markets they serve.
That is why the global EMS market is growing at an accelerated pace which presents upon India a very unique opportunity.
Well, it doesn't take much time to figure out the reason as demand for domestic electronics keeps increasing.
In April 2023, India overtook China to become the world's most populous country. A growing population base suggests increasing demand for electronics in India.
The domestic demand for consumer electronics is seeing significant growth and is expected to touch US$ 21.2 bn (about Rs 1,745.1 bn) by 2025.
Driven by a healthy demand, the domestic electronics industry is expected to reach US$ 300 bn (about Rs 24,694 bn) worth of electronics manufacturing and US$ 120 bn (about Rs 9,877 bn) in exports by the financial year 2026. This will be supported by a US$1 trillion (tn) digital economy by 2025.
Currently, India imports majority of the electronics to cater to the domestic demand.
Rising input costs due to high imports combined with the Modi government's push on 'Atmanirbhar India' led to the need of a sturdy domestic electronic manufacturing industry.
Semiconductors are components needed for manufacturing cars, televisions, refrigerators, washing machines, personal computers, laptops, mobiles, etc.
These components are made from silicon and fit into microcircuits that power various electronic goods and components.
These little chips are so important that tens of thousands of workers must get lines that are a millionth of a meter, i.e. one micron wide, exactly right. Or else it won't work.
Taiwan accounts for more than 60% of all chips manufactured across the world. The China-Taiwan tensions coupled with pandemic led shutdowns in China led to an acute shortage of semiconductor chips in the auto industry and electronics industry.
These supply chain problems presented an interesting opportunity for the semiconductor rush in India.
The government of India acknowledged the growing need for a domestic semiconductor industry and launched various initiatives to boost the semiconductor industry in India.
Corporate giants like the Tata group dived head-first into the semiconductor industry. The Vedanta-Foxconn joint venture was also another big step towards establishing India's own Silicon Valley.
A growing semiconductor industry was the first stepping stone towards a growing electronics manufacturing industry.
China leads the global EMS business with almost 46.7% market share. Its dominance in the global market is attributed to a blend of cost-effectiveness and technological leadership in electronics manufacturing.
However, after the pandemic, many global electronics manufacturers are contemplating on China plus one strategy and looking for alternate manufacturing locations for export business.
This is creating tremendous investment potential for emerging countries like Vietnam, India, and the Philippines, etc.
So electronics manufacturing has emerged as one of the fastest growing sectors, and making India a hub for sub-contract manufacturing.
India also benefitted from the manufacturing shifts that happened in Japan and Mexico.
Due to the presence of giant players like Sony and Toshiba in Japan, it is one of the most preferred choices for semiconductor manufacturing equipment. Japan also has a strong hold on the EMS industry.
However, recently the Japanese government placed more focus on aerospace development.
This has opened a window of opportunity for other Asian countries such as India, which have the bandwidth, competency, and skill to be an efficient sub-contractor for large firms.
Maquiladoras are factories in Mexico that have been crucial in helping firms in the US with their manufacturing needs.
However, Maquiladoras have hit a roadblock due to several challenges they faced, in recent years which makes India a better sub-contracting proposition.
So that's how India emerged to become a global alternative for the EMS market...
Various factors such as the easy availability of raw materials, cheaper manufacturing costs, a skilled workforce, and robust export systems make India a well-reputed destination for manufacturers.
India is surrounded by rich and varied natural resources. This is a big plus point for electronics manufacturers. Development and innovation of raw materials and lower cost due to the easy availability of resources help India is eliminating any supply chain shortcomings.
Another big plus point for India is the availability of a huge labour force. India has the largest tech-savvy young workforce. This includes bringing to the table a host of competent resources, i.e., engineering skills, design proficiency, and cheaper labour costs.
Indian government's long-term vision laid out the following points:
Its short-term vision includes making electronics one of the top three export categories by 2025-26.
The government undertook the following initiatives to fulfil its long-term and short-term vision:
The National Policy on Electronics 2019 (NPE 2019) was notified on 25 February 2019.
The vision of NPE 2019 is to position India as a global hub for electronics system design and manufacturing (ESDM) by encouraging and driving capabilities in the country for developing core components, including chipsets, and creating an enabling environment for the industry to compete globally.
Under the aegis of NPE 2019, the government launched various schemes to incentivise large investments in the electronics value chain and promote exports.
The government had broadly divided electronics manufacturing into two different segments - largescale manufacturing and IT hardware.
It notified two different product-linked incentive (PLI) schemes for the electronics manufacturing market.
It was notified on 1 April 2020 to provide the financial incentive of 25% on capital expenditure for the identified list of electronic goods that comprise the downstream value chain of electronic products.
These are electronic components, semiconductor/display fabrication units, ATMP units, specialised sub-assemblies, and capital goods for their manufacture.
To widen and deepen electronics manufacturing, the Union Cabinet on 15 December 2021, approved a comprehensive program with an outlay of Rs 760 bn for the development of semiconductors and display manufacturing ecosystem.
This programme was modified on 21 September 2022. The modified programme offers fiscal support of 50% of project cost uniformly for semiconductor fabs across the technology nodes as well as for compound semiconductors, packaging and other semiconductor facilities.
Apart from the above major schemes, the Indian government also undertook various small yet important initiatives.
All of these efforts clearly indicate the government's intent to boost electronics manufacturing in India.
Let's take a look at which companies stand to benefit the most from this megatrend.
Large corporate houses, like Tata and Sons (via Tata Electronics), Reliance Industries (via Jio Phone), and Vedanta (via Vedanta - Foxconn joint venture) will be indirect beneficiaries of this megatrend.
The below-listed companies may also strongly benefit as they're dominating in their respective fields. Some of these companies are also big beneficiaries of the PLI scheme announced by the government.
Name of the company | Closing price as on 01-June-2023 | PE ratio | P/BV ratio |
---|---|---|---|
Polycab India | 3,483.80 | 41 | 7.9 |
Havells India | 1,331.80 | 77.6 | 12.6 |
Dixon Technologies | 3,908.80 | 110.3 | 23 |
Symphony | 849 | 36 | 6.5 |
Bajaj Electricals | 1,156.90 | 56.3 | 7.3 |
Eureka Forbes | 477.8 | 541.2 | 2.3 |
Orient Electric | 240.6 | 67.5 | 8.8 |
Whirlpool India | 1,433.70 | 98.4 | 5.9 |
Amber Enterprises India | 2,691.00 | 147.7 | 4.4 |
Jay Jalaram Technologies | 176.5 | 78.3 | 8.3 |
India aims to be a global EMS hub but there are lot of operational and technical difficulties in becoming one.
Lack of proper infrastructure, bureaucracy, and tough competition from other countries, may dampen the bullish sentiment in the Indian EMS segment.
Hence, an investor should clearly acknowledge and evaluate all the pros and cons before making any investment decision.
Stay tuned to know more about the developments in the EMS segment. In the follow up article, we'll dig deeper into individual stocks one by one and lay out their growth plans for the EMS segment.
Happy investing!
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