indian esdm market analysis of opportunity and growth

F R O S T & S U L L I V A N

INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN

An IESA - Frost & Sullivan Report

Supported by the Department of Electronics & Information Technology, Ministry of Communications & Information Technology

Government of India

IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT2

Copyright © 2014, India Electronics & Semiconductor Association

2014INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN

IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT 3

Report released by

Shri J. Satyanarayana, IASSecretary

Department of Electronics & Information TechnologyMinistry of Communications & Information Technology

Government of India

COPYRIGHT

All content included in this study, such as text, graphics, logos, images, data compilations, etc. is the property of India Electronics & Semiconductor Association (“IESA”). The study is for customers’ internal use and not for general publication or disclosure to third parties. No part of this study may be given, lent, resold, or disclosed to non-customers or exploited for any commercial purposes. Furthermore, the Study in its entirety or any part cannot be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written consent of IESA.

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Copyright © 2014, India Electronics & Semiconductor Association

India Electronics & Semiconductor AssociationPrestige Terminus II, Unit-G-02, 901, Ground Floor,Civil Aviation Road, (HAL Old Airport Exit Road),Konena Agrahara, Bangalore - 560017Phone: +91 80 4147 3250Facsimile: +91 80 4122 1866Email: [email protected]: www.iesaonline.org

IESA is the premier trade body representing the Indian Electronic System Design and Manufacturing ESDM industry and has represented it since 2005. It has over 200 members - both domestic and multinational enterprises. IESA is committed towards building global awareness for the Indian ESDM industry and supporting its growth through focused initiatives in developing the ecosystem. This is through publishing credible data, networking events and alliances with other international associations IESA works closely with the Government as a knowledge partner on the sector, both at the centre and at the state level.www.iesaonline.org

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First print: January 2014

Published by: India Electronics & Semiconductor Association, Bangalore

Edited by: Debanjan Sinha, IESA

Designed by: Cocoon Creative Concepts, Bangalore

Indian ESDM MarketANALYSIS OF OPPORTUNITY AND GROWTH PLAN

An IESA - Frost & Sullivan Report

Assessment of challenges and identification of steps to develop ecosystem and increase indigenous value addition for top 25 high priority electronic products

and corresponding components market

Supported by the Department of Electronics & Information Technology, Ministry of Communications & Information Technology

Government of India

Acknowledgements

The research report on the Indian ESDM industry will be incomplete without acknowledging the contribution of all the individuals associated with this exercise. These individuals have been untiring in their efforts to bring in their wealth of experience and knowledge base to add value to the exercise. The research exercise could leverage their acumen and count on their unwavering support till the stage of its completion.

India Electronics & Semiconductor Association and Frost & Sullivan would wish to thank them wholeheartedly for their valuable time and guidance whenever we needed them.

Room No : 105, Sanchar Bhawan, 20 Ashoka Road, New Delhi - 110001

Phone: 91-11-23739191, 23372177 Fax: 91-11-23723330

MESSAGE

The India ESDM industry presents a huge opportunity and is expected to emerge as a vital contributor to the nation’s economy. While we continue to dominate the high-end semiconductor design space, we are also seeing a major shift in focus from just design to end-to-end product conception and manufacturing to truly dominate the global ESDM industry.

The Department of Electronics and Information Technology (DeitY), Government of India has been actively working towards reviving indigenous manufacturing in a big way. IESA has also played a prominent role in supporting the Government in its initiatives.

In order to realize the vision of the ESDM industry, we would need to promote the opportunities presented by the ESDM industry to attract investments in the sector. As the electronic products have a pervasive role in all industry verticals, it is desirable that the industry reports on the market opportunities in key products are carried out, which would serve as useful reference to the various stakeholders, and, thereby, help them in taking informed decisions on their plans of investing in India.

The IESA - Frost & Sullivan Report 2014 on the ‘Indian ESDM Market- Analysis of Opportunity and Growth Plan’ is a right step in this direction. This report includes an extensive study and analysis of the top 25 high priority electronic products and their related components in the Indian ESDM industry. This report also gives insightful information on resolving the current challenges and the recommendations to move ahead.

I congratulate DeitY and IESA for putting together this important and timely report for the benefit of all the stakeholders of the Indian ESDM industry. I am sure it will help us in achieving our vision of taking India to global leadership in the ESDM industry.

(KAPIL SIBAL)

Message

With the Indian ESDM industry is expected to touch the USD 400 billion mark in the coming decade, the Government of India has identified the electronics hardware manufacturing sector as a major thrust area for the country. IESA has done a commendable job of catalysing the growth of the domestic ESDM industry and is relentlessly working towards this objective. Taking cognizance of the demands of the economy and the industry, the Government of India has taken a number of steps to promote the Indian ESDM industry.

The Department of Electronics & Information Technology (DeitY) and IESA, as the Knowledge Partner to the Government, have brought out the report on ‘Indian ESDM Market – Analysis of Opportunity and Growth Plan’. This report identifies the top 25 electronics product markets with large opportunities and draws a roadmap for their growth. It also identifies the major components used in these products and evaluates strategies to promote their ecosystem in India.

I am sure that this credible report would be extremely valuable for decision makers both in the government and the industry. I congratulate DeitY and IESA for their excellent work in putting together this informative and timely report.

(J. Satyanarayana)

New DelhiJanuary 02, 2014

Message

The Indian ESDM industry is poised for exponential growth. India, as one of the biggest markets for electronics products, is at a crucial juncture today. With companies from the world over vying for their share of the pie, Indian companies today have the opportunity to dominate the global ESDM landscape by catering to this enormous local demand. Product innovation and manufacturing are the keys to capturing the market and establishing market leadership.

In this regard, the IESA-Frost & Sullivan Report on ‘Indian ESDM Market – Analysis of Opportunity and Growth Plan’ could not have come at a better time. With awareness about domestic manufacturing at a new high, Indian decision makers and the investors are looking for credible data on various products and components that make up the ecosystem. The IESA-F&S Report conducts an extensive study and SWOT analysis of the top 25 high priority electronic products and their related components.

This Data is also invaluable for the industry and the investors looking to capitalize on the opportunities available in the Indian ESDM industry. The recommendations in the report will also help us to leapfrog the challenges and quickly respond to market dynamics.

It is indeed heartening to note the single-minded focus that IESA brings to promote the growth of the Indian ESDM industry through its various initiatives.

I complement IESA in bringing out this timely report.

New DelhiJanuary 06, 2014

Your’s Sincerely

(Dr. Ajay Kumar)

W-11/68/2013-IPHW

January 06, 2014

Table of Contents

Foreword 15

Preface 17

Executive Summary 19

Top 10 Products and Components Markets to Focus for Near Term Local Value Addition Improvement 33

Mobile Handsets - Product and Ecosystem Analysis 39

Flat Panel Display TV - Product and Ecosystem Analysis 45

Notebooks - Product and Ecosystem Analysis 49

Desktops - Product and Ecosystem Analysis 53

Digital Camera - Product and Ecosystem Analysis 59

Inverters and UPS - Product and Ecosystem Analysis 65

Memory Cards and USB drives - Product and Ecosystem Analysis 71

4W EMS - Product and Ecosystem Analysis 75

LCD Monitor - Product and Ecosystem Analysis 79

Servers - Product and Ecosystem Analysis 85

Base Stations (BTS) - Product and Ecosystem Analysis 91

Power supplies - Product and Ecosystem Analysis 97

Set Top Boxes - Product and Ecosystem Analysis 101

Printers and MFDs - Product and Ecosystem Analysis 107

Router/Switches - Product and Ecosystem Analysis 113

Car Radio - Product and Ecosystem Analysis 117

CFL - Product and Ecosystem Analysis 121

Energy Meters - Product and Ecosystem Analysis 125

Digital Instrument Clusters (DICs) - Product and Ecosystem Analysis 129

Smart cards - Product and Ecosystem Analysis 135

GPON ONT - Product and Ecosystem Analysis 141

Tablets - Product and Ecosystem Analysis 145

LED Lighting - Product and Ecosystem Analysis 151

Payment Terminals - Product and Ecosystem Analysis 157

2W Ignition - Product and Ecosystem Analysis 163

Appendix 167

Foreword

The Indian electronics system design and manufacturing (ESDM) industry is at a huge inflection point. From being predominantly consumption driven, the Indian ESDM industry has a major potential to become a design led manufacturing industry. Concerted efforts from both the Government and the industry are required to propel the Indian ESDM industry into one of the critical GDP contributors in the near future.

The Indian Electronics and Semiconductor Association (IESA), a premier representative body for the ESDM industry in India commissioned a full-fledged research in its efforts to map the current status and future opportunities in the industry. The objective of the report was to establish the current status of all the value chain components in the ESDM industry and identify the growth trends. This exhaustive report developed by IESA’s consulting partner, Frost & Sullivan, and released in early 2013 is the only authentic detailed report on the overall ESDM industry in India. As a next step, there was the pertinent need to identify the high growth product markets within the overall electronics industry and do a deep dive evaluation of the existing ecosystem for these products. This study would help identify the appropriate initiatives needed for further developing the ecosystem for these high priority products.

The Department of Electronics and Information Technology (DeitY) has been very active in formulating and announcing various policy measures aimed at developing the ESDM industry in India. To ensure the effective implementation of these policies and for directing the focus in the right direction, this extended analysis of the top 25 high priority electronic products was commissioned by IESA.

The report on the ecosystem SWOT analysis of the top 25 high priority products covers the following product markets:

1. Mobile Phones

2. Flat Panel Display (FPD) TV

3. Notebooks

4. Desktops

5. Digital Cameras

6. Inverters and UPS

7. Memory Cards and USB Drives

8. 4W EMS

9. LCD Monitors

10. Servers

11. Base Stations

12. Power Supplies

13. Set Top Box

14. Printers and MFD

15. Routers and Switches

16. Car Radio

17. CFL

18. Energy Meters

19. Digital Instrument Clusters

20. Smart Cards

21. PON, GPON ONT

22. Tablets

23. LED Lighting

24. Payment Terminals

25. 2W Ignition

Preface

IESA is today recognized as the most credible voice of the Indian ESDM industry. As the knowledge partner to the Government of India and the foremost trade body representing the interests of over 200 member companies in the Indian ESDM landscape, IESA regularly undertakes research and publication activities. The IESA- Frost & Sullivan annual report on the Indian ESDM industry is one such report that is much awaited and widely referred by decision makers in the government as well as the industry.

The IESA- Frost & Sullivan report 2014 is the seventh publication since its inception in 2005. This year we have conducted an extensive study and SWOT analysis on the Top 25 high priority electronic products and their related components in the Indian ESDM industry. As we aggressively promote indigenous manufacturing and reduction of our dependence on imports, this report aims to uncover the challenges associated with manufacturing these top 25 electronic products and associated components domestically.

The findings of the report are interesting. And as always, we have proposed a range of measures to overcome these challenges and kick-start high-value addition manufacturing activities in a big way in India.

We sincerely hope that you will find these facts and statistics beneficial for strategic decision making and join us in taking the right steps to further enrich the Indian ESDM industry.

Mr. Sanjeev Keskar Chairman

Mr. PVG Menon President



Executive Summary

The Indian electronics system design and manufacturing (ESDM) industry is one of the fastest growing sectors in the country. Witnessing uninterrupted growth, the ESDM industry in India is globally renowned for its consumption potential. Changing global landscapes in electronics design and manufacturing capabilities, and cost structures have turned the attention of global companies towards India. Companies from around the world are looking to build local capabilities in India not just to serve the resident market but also to cater to overseas markets.

This has resulted in the development of indigenous capabilities across the ESDM value chain in India. The different segments within the ESDM industry are at varying stages of development. Similarly, various electronics applications markets such as telecom electronics, automotive electronics, consumer electronics and industrial electronics, are at different stages of ecosystem development. The focus is currently on providing the necessary impetus to take advantage of the dormant capabilities across the various electronics markets and developing the missing links so as to make the local ESDM sector globally competitive.

The Indian ESDM industry was estimated to be $68.31 billion in 2012. The impressive guidance between 2011 and 2015 for this industry is expected to result in a Compound Annual Growth Rate (CAGR) of 9.88 percent. The corresponding size of the industry by 2015 is anticipated to be $94.2 billion. The following chart illustrates the total ESDM industry market growth:

94.20

0

10

20

30

40

50

70

80

90

100

60

20112010 2012 2013 2014 2015

India ESDM Industry Forecasts (2010-2015)

Base Year: 2011 Source: IESA-Frost & Sullivan

Reve

nues

($ B

illio

n)

84.1675.61

68.3164.6159.01

The ESDM industry in India comprises the following four key components:

1. Electronic Products

2. Electronic Components

3. Semiconductor Design

4. Electronics Manufacturing Services (EMS)

Of the above, the first two represent products while the remaining highlight the services opportunities catering to the domestic and export markets.


Developing the Ecosystem is Crucial for Bridging the Supply Demand Gap Much of the domestic electronics consumption in the country is served through imports. This does not bode well for the economic health of the country in the long term. Electronics imports, which are currently the third highest, next only to crude and gold, accounted for nearly $30 billion in 2012, and are forecasted to scale past $50 billion in just 3 years. From a detailed assessment of the electronics market, total market (TM) was estimated to be $44.81 billion in 2012, representing a growth of 7 percent over the previous year. The TM is expected to grow at a CAGR of 11.5 percent and reach revenues of $64.85 billion by 2015. Total domestic market (TDM) for 2012 was estimated to be $17.07 billion, representing a growth of 11 percent over 2010. Growing a CAGR of 10.4 percent, the TDM is expected to scale to $22.66 billion by 2015.

The chart below represents the TM and TDM forecasts for the Indian electronics market.

64.85

22.68

0

10

20

30

40

50

70

60

20112010 2012 2013 2014 2015

India Electronics Product Market: TM, TDM Forecasts (2010-2015)

Total Market ($ Billion)

Total Domestic Manufacturing (High Value Add, $ Billion)

Total Domestic Manufacturing (Low & Medium Value Add, $ Billion)Base Year: 2011 Source: IESA-Frost & Sullivan

CAGR (2011 - 2015)

TM: 11.5%

TDM (overall): 10.4%

TDM (Low/Med value add) : 12.3%

TDM (High value add): 3.9%

18.33

15.57

19.47

57.1450.61

17.07

13.46

44.81

15.44

11.8911.54

15.27

41.91

14.67

39.21

10.55

4.12 3.74 3.55 3.623.9

4.35

Note: Total market or TM refers to the domestic electronics consumption in India which therefore includes all locally manufactured and locally consumed products as well as imports.

Total domestic market or TDM refers to the domestic production that caters to domestic demand. Value addition is classified into two broad categories:

1. Low/Medium Value Add: Includes negligible sourcing, minimal design activity, EMS, SKD and CKD assembly; corresponds to value addition of upto 50% (<20% being low value add and 20%-50% being medium value add)

2. High Value Add: Includes high local sourcing, high levels of indigenous design and complete system manufacturing; corresponds to a value addition of >50%.

Some of the key observations include:

• 65percentofthecurrentdemandforelectronicsproductsismetbyimports.Importsarelikelytogrowfrom$28billionin2011to $42 billion in 2015 in the absence of intervention

• Highvalueaddedmanufacturingislikelytoberestrictedtolessthan7percentin2015.Thisrepresentsacumulativeopportunityloss of $200 billion between 2011 and 2015 in the absence of intervention

• Increasing totaldomesticmanufacturing to50per centby2015will create additionaldirect employment fornearly 2 lakhpeople

• ThereisaverypertinentneedtorecognizetheESDMindustryasaprioritysectorandprovideafavourableenvironmentforitsgrowth



Government as an Enabler for the ESDM SectorThe Indian Government, through the Department of Electronics and Information Technology (DeitY), has instituted a number of forward-looking policies to foster the growth of the Indian electronics ecosystem. These policies are aimed at holistic development of the ESDM industry by offering specific incentives for the development of each element in the value chain. These forward looking policy measures include:

National Policy on Electronics (NPE): The objective of the NPE is to create an ecosystem for a globally competitive ESDM sector in the country by attracting investment of about USD 100 billion and generating employment for around 28 million people at various levels. The ultimate aim of the policy is for the Indian ESDM sector to develop core competencies in strategic and core infrastructure sectors like telecommunications, automobile, avionics, industrial, medical, solar, information and broadcasting, railways, intelligent transport systems, etc.

National Manufacturing Policy (NMP): The government has brought out the NMP to increase the growth of the manufacturing sector to 12 to 14 percent over the medium term and enable manufacturing to contribute at least 25 percent to the National GDP by 2022.

Modified Special Incentive Package Scheme (MSIPS): The MSIPS aims to offset cost disabilities and attract investments in the India ESDM sector through an INR 10,000 crore corpus. Subject to certain investment thresholds, subsidies to the tune of 20 per cent for SEZ units and 25 per cent for non-SEZ units will be given on capital expenditure along with reimbursement of excise/CVD.

Setting up semiconductor fabrication units: The Government of India has received the applications of two consortia (IBM, Jaypee Group, TowerJazz; STMicroelectronics, HSMC) to establish 2 semiconductor wafer fabrication units in Gujarat and Noida with the aim of operating at 20 nm process node within two years of initial operations and reaching a capacity of at least 40,000 WSPM of at least 300 mm size. Various incentives are being offered by the government to this effect: 25 per cent subsidy on capital expenditure and growth capital expenditure, reimbursement of CVD and excise duty, exemption from basic customs duties and 200 per cent deduction on R&D activities, among other incentives such as reimbursement of training costs, deduction for income tax and various forms of viability gap funding.

Electronic Manufacturing Clusters (EMCs): The government is offering financial support for the development of EMCs. For greenfield EMCs, assistance will be given up to 50 per cent of the project cost subject to a ceiling of INR 50 crore for every 100 acres of land. For brownfield EMCs, assistance will be given up to 75 percent of the project cost subject to a ceiling of INR 50 crore.

Electronics Development Fund (EDF): The EDF aims to create an ecosystem of R&D in electronics in India which will promote IP generation and large scale manufacturing, while simultaneously fostering the growth of the ESDM ecosystem. The focus of EDF will largely revolve around small and medium enterprises (SME) in line with the goal of promoting innovation and job creation.


The chart below captures the salient features of the various government initiatives to promote the Indian ESDM sector.

To attract investment of

USD 100 billion and generate

employment of 28 million

Aim to reach 20nm process

node within 2 years of initial phase,

and reach at least 40,000 WSPM of

300 mm

IBM, Jaypee, and TowerJazz;

and STMicro electronics and

HSMC got approval in principle

to establish 2 semiconductor

fabsMSIPS makes

available a corpus of INR 10,000

crore to attract investment in

ESDM

25% subsidy on capex; CVD and

excise reimbursed; BCD exempted;

200% R&D deduction; etc. EDF is a planned

scheme of DEITY to create ecosystem of electronics R&D

and promote IP generation

Focus will largely be on SMEs in line

with the goals of promoting

innovation and job creation

Brownfield: 75 per cent of project cost subject to ceiling of

INR 50 crore

Greenfield: 50 percent of project

cost subject to ceiling of INR 50

crore for every 100 acres of land

Financial support will be offered for development of

EMCs to aid growth of ESDM through innovation and

entrepreneurship

Scope of policy includes:

nanoelectronic, semiconductor fab, solar, LED, LCD, passive components,

and EMS

20% Capex subsidy for SEZ

units; 25% Capex subsidy for non-SEZ

units and CVD/excise

reimbursed

NPE’s vision is “to create a globally

competitive ESDM ecosystem to

meet the country’s needs and serve the international

market.”

NPE’s mission is to promote

manufacturing and R&D across the value chain,

especially in strategic

electronics

Source: IESA-Frost & Sullivan

Indian ESDM Industry: Snapshot of Government Policies

Identification of High Priority Product MarketsHolistic development of the ecosystem can be the panacea to all of the woes of the Indian ESDM industry. However, application of the Pareto principle at a broad level suggests that identifying the products that accounts for nearly 80 per cent of the electronics market revenues and provide the necessary support and incentives required to eliminate the disability costs associated with local manufacturing/value addition in these products shall enable enormous development in the overall ecosystem. Initiatives aimed at promoting indigenous value addition in the top 20-25 percent of products is expected to have a cascading effect on the remaining 75-80 percent of the products. In line with the Pareto principle, it is observed that the top 20 product markets accounts for 80 percent of the overall electronics TM revenues for 2012, as indicated by the chart next page.



Mobile Phones

Digital Camera

LCD Monitors

Set Top Box

CFL

FPD TV

Inverters and UPS

Servers

Printers and FPDs

Energy Meters

Notebooks

Memory cards and USB drives

Base Stations

Routers / Switches

Digital Instrument Clusters

Desktops

4W EMS

Power Supplies

Car Radio

Smart Cards

ProductRevenue

% of Total

Mobile Phones 38.85%

FPD TV 7.91%

Notebooks 5.54%

Desktops 4.39%

Digital Camera 2.73%

Inverters and UPS 2.65%Memory cards and

USB drives2.46%

4W EMS 2.33%

LCD Monitors 2.02%

Servers 1.72%

Total of Top 10 Products

70.60%

ProductRevenue % of Total

Base Stations 1.61%

Power Supplies 1.28%

Set Top Box 1.13%

Printers and MFDs 1.06%

Routers/Switches 1.05%

Car Radio 1.02%

CFL 1.00%

Energy Meters 0.66%Digital Instrument

Clusters0.58%

Smart Cards 0.52%

Total of Top 20 Products

80.52%

Indian Electronics Market: Top 20 Products by TM Revenues (2012)


Beyond just these top 20 products, it is also essential to identify as high priority those product markets that are currently not amongst the top 20 in their contribution to the overall revenues, but have growth trends in excess of even these top 20, thus indicating their potential to be significant product markets by 2015. Identifyingfive such products with significant CAGR trends and providing them the necessary impetus for ecosystem development is also important for the growthof the ESDM industry. The chart below highlights five such products across industry segments that have the potential, and hence, deserve the thrust.

Indian Electronics Market: Top 5 Products by with Highest CAGR (till 2015)

Industrial Electronics

• LEDLighting(CAGR=38%)

Automotive Electronics

• 2WIgnition(CAGR=10%)

IT/OA

• Tablets(CAGR=54%)

• PaymentTerminals (CAGR=19%)

Telecommunications

• PON,GPONONT(CAGR=120%)

2012 Electronics Product TM=$44.81Billion


SWOT Analysis of the 25 High Priority Product Markets

The characteristics of these product markets with regard to the Indian electronics ecosystem vary very widely. Hence, they need to be evaluated thoroughly with regard to their strengths, weaknesses and growth prospects among other factors in order to gain a thorough understanding of their unique market dynamics. This report contains detailed evaluation of the market dynamics, current ecosystem availability, disability factors restricting local value addition and future potential for these 25 high priority products. The chart below highlights the consolidated strengths, weaknesses, opportunities and threats for these 25 high priority products.

Consolidated SWOT Analysis of the Ecosystem for the High Priority 25 Product Markets

SWOT

STRENGTHSHuge Consumption Market.

Strong Design and R&D Capability in Select Products - Auto electronics, industrial etc.

Government Schemes a Good Demand Generator - NKN, NOFN, tablets for education sector, digitization policy, broadband push etc.

Adequately Developed EMS Industry - to be a significant contributor to ecosystem development.

Enormous ResidentTalent in Semiconductor Design and Embedded Software

OPPORTUNITIES Significant Local Demand as a Influencer for Investment Attraction

Rising Manufacturing Costs in China Leading to India as Alternate Destination

Government Policies - MSIPS, EMC, local FABs etc Favour Attracting Manufacturing Investments

Export Potential - huge consumption market in ME; emerging growth markets of North Africa and Latin America.

Existing R&D Capabilities can be Encouraged to Develop ‘Made in India’ Products and Generate Local IP

WEAKNESS Reliance on Imports for all Critical Components - Semi battery, LCD displays, electronic components etc

Convoluted Tax and Duty Structure - Imports made Cheaper than Local Products.

Debilitating FTAs with Thailand, Japan.

Lack of Subsidies/Incentives for Support Industries makes Local Manufacturing Costlier

Inadequate Domestic Standards andTesting Facilities. Slow and Delayed Policy Implementation

Inadequate Local Product Innovation and IP Creation

THREATS Established Manufacturing Ecosystem in China poses a Major Threat.

Emergence of other Low Cost Manufacturing Destinations like Vietnam.

Inadequate / Fledgling Ecosystem for Components and Raw Materials.

Infrastructure Inadequacy as Demanded by Certain Sectors - Electricity, Water, Utilities etc,

Depreciation of the Rupee as a Short Term Threat.

Component Ecosystem for the 25 High Priority Product MarketsResearch indicates that the most crucial elements for the development and sustenance of a robust ecosystem include:

• Ahealthyconsumptioneconomywithexportpotential

• Design,developmentandR&Dcapabilities

• Availabilityofrawmaterialstolocallysource

• Infrastructureadequacy

• Favourablepolicyenvironment

• Availabilityofnecessaryskillsets

Local availability of components/raw materials is considered very significant for achieving high local value addition in any product manufacturing. Moreover local supply of components ensures faster turnaround time and lesser production cost; this is why globally, component supply/manufacturing is closely located along with product manufacturing locations. Absence of a component ecosystem is a major disability in electronics product manufacturing. To evaluate the significance of this, the research did a detailed assessment of the local ecosystem for the top four components in each of the 25 high priority products. The table below provides a snapshot of the 25*4 matrix.



S.No Product Component 1 Component 2 Component 3 Component 4

1 Mobile Phone Memory (22%) Display (19%) Application Processor / System on Chip (15%) Camera

2 FPD TV Display( 50%) IC’s ( 15%) Electromechanicals ( 15%) Power ( 5%)

3 Notebooks Display (18%) Processor (15%) Motherboard (12%) HDD (10%)

4 Desktop Processor (15%) Monitor (15%) Motherboard (12%) HDD (10%)

5 Digital Camera Lens (30%) Image processor (15%) Image sensor (15%) Battery (10%)

6 Inverter, UPS Transformer(50%) Power Semiconductor(10%) Heat sink(10%) Microcontroller(5%)

7 Memory Cards, Drives Flash Memory chip (80%) Microcontroller/ASIC(5%) Crystal Oscillator (5%) USB connector (5%)

8 EMS 4 W Mechanicals - Pump, Injectors (40-50%) Analogs+Sensors (20%) Microcontroller (10%)

9 LCD Monitor Display( 50%) Electromechanicals ( 15%) IC’s ( 10%) Power ( 5%)

10 Servers Processor (25%) Memory (25%) Motherboard (15%) HDD (12%)

11 BTS IC (40%) Power Amplifier (15%) Power supply (12%) Antenna (10%)

12 Power Supplies Transformer (30-40%) Power Semiconductor Rectifier diodes PCB

13 Set Top Box IC (MPU,Memory,Tuner) PCB Power supplies Plastics and Mechanicals

14 Printers & MFDs Photosensitive Drum Fusing Roller Transformer Lens and scanner

15 Routers / Switches Software & OS (50%) Processor (10%) Memory (10%) Electromechanicals

16 Car Radio IC’s ( 30%) Electromechanicals ( 20%) PCB ( 10%) Power ( 10%)

17 CFL Lamps Capacitor (20%) Glass tube (20%) Transformer (10-15%) Transistor (10%)

18 Energy Meters System on Chip (20%) Transformer (20%) LCD Display and backlight (15%) Super Capacitor (10%)

19Digital Instrument Cluster

Stepper motor (20%) PCB (15%) Microcontroller (10%) LCD (7%)

20 Smart cards IC’s (62.5%) PETG/Polycarbonate body (20%) Software OS (10%) Antenna ( wire or

printed) (7.5%)21 GPON ONT Optical Module (35-40%) System on Chip (15%) Power Supply (8%) Memories (5%)

22 Tablet Display (38%) Memory (10%) Battery (10%) Processor (10%)

23 LED Lights LED (25%) Driver (20%) Heatsink (15%) Thermal interface material (7%)

24 Payment Terminals

Communication Module (16%) LCD/TFT Display (16%) Printers (16%) Processor (14%)

25 2 W Ignition Microcontrollers (20%) Power semiconductor (20%) CDI Capacitors (10%) Transformer (10%)

The percentage in brackets in the table above indicates the contribution of each component to the overall product bill of materials (BoM). The most common components that are within the top 4 BoM contributors across these 25 products are the following:

•Powerdevicesandsemiconductors

•Processor

•Memory

•Printedcircuitboard(PCB)

•LCDdisplay

•Transformer


Semiconductor Ecosystem Assessment

• GlobalhubforVLSIandboarddesign

• Strongthirdpartydesignservice providers

• Hugedomesticelectronicsconsumption market

• PresenceofR&Danddesigncentres of the top 23 global semi majors

• VerylimitedIPcreation

• RestrictednumberofFablesscompanies

• InadequateATMPfacilities

• AbsenceofFab

• FundforFablessPromotion

• EncourageATMPinvestmentsunder MSIPS

• Expeditethesettingupof2Approved Fabs

• IncentivizelocalsourcingofSemi

• LocalFabstofabricatechipsinhigh demand

CHALLENGES


STRENGTHS RECOMMENDATIONS

Semiconductors: As observed, 3 of these top 5 key components (power semiconductor, memory and processor) include semiconductor chips and devices. Currently, the absence of a local fab implies complete reliance on imports for these components. The FAB initiative that is expected to usher atleast 2 semiconductor fabs in India in the foreseeable feature shall help in making these core chips available locally. Given the numerous applications that require processing capability, creating an India-specific processor design, and fabricating them in local chips shall ensure a significant contribution to the local value addition.

Printed Circuit Board (PCB): India has a good number of PCB manufacturers in the country. However the local capability is restricted to producing single, dual and multi layered PCBs of upto 8-12 layers. The PCBs needed in most of the 25 high priority products, especially in telecom, consumer and automotive applications, require complex multi-layered PCBs that are not available locally, thus necessitating imports. Building on the existing capability, special initiatives need to be targeted to encourage indigenous design and manufacturing of multi-layered PCBs of upto 64+ layers. This will ensure local sourcing of PCBs for product manufacturers, thus contributing to higher value addition; this shall also meet the requirements of the local EMS players who source PCBs in bulk.

PCB Ecosystem Assessment

• PCBmanufacturingcapabilityexists locally

• Strengthsinsingle,duallayers

• Capabilitytodomultiplelayers too for less complex applications

• Exportmarketexists

• InabilitytocompetewithChinese imports on cost – Chinese exporters get 17% export incentive

• Workingcapitalchallenges

• Exciseandcustomsdutyprocedural issues

• HighimporttariffonPCBimports. Nil duty on raw material imports.

• Interestsubsidies/lowinterestloans for PCB manufacturers

• Quicker,easierreimbursementofCENVAT

• Exportsubsidies

CHALLENGES





LCD Displays: In the case of LCD displays, India possesses local design and manufacturing capabilities for some of the end use products. However, the cost of production of panels and its technology-intensive nature have kept India void of an LCD display assembling/manufacturing unit hitherto. Other challenges include the existing duty structure which makes importing a cheaper option for displays. Given the high volume demand anticipated in the various products that consume displays, it becomes pertinent to grow the ecosystem for LCD displays locally.

LCD Display Ecosystem Assessment

• Hugeconsumptiondemand

• Enduseproductmanufacturing through OEMS and EMS exists

• Favourableincentivesforpanelmanufacturing available under MSIPS

• Ecosystemdoesn’tprevail

• Inverteddutystructure

• DebilitatingFTAswithThailand, Japan etc

• Infrastructuralchallenges

• RelocationofabrownfieldGen5fab

• Preferentialexcisedutyforpanelmanufacturing; tax rebates.

• Hikeinimportdutyoffinisheddisplay imports

• Fundtoencouragelocaltechnology development

CHALLENGES



Transformer Ecosystem Assessment

• Hugeconsumptiondemand

• Enduseproductmanufacturing through OEMS and EMS exists

• Localdesignknowhowandmanufacturing technology skills exists

• Locallandedcostofproduction high: makes imports cheaper

• Relianceonimportsforcopper

• Delayedturnaroundtimedueto copper import time

• Preferentialexcisedutyfortransformer manufacturing: tax rebates.

• Subsidiesonlogisticcostsofcopper import to reduce product landed cost

• Specialinterestloansforworkingcapital for SME

CHALLENGES



Transformers: Transformers belong to the larger family of wound components. This is a market that is dominated by small scale indigenous manufacturers as it requires limited infrastructure and inexpensive labour. Consumer and industrial electronics segments drive the demand for transformers and, owing to cost advantage, transformers are predominantly imported from China, Taiwan and South Korea. Reliance on import for raw materials, specifically copper, is a major handicap for Indian transformer manufacturers in achieving faster turnaround time as well as lower production costs.


Product Specific Recommendations Each of the 25 high priority product markets has varying levels of developed and underdeveloped ecosystems and while there are some common initiatives that are required for eliminating the disabilities associated with local value addition across the 25 products, there are certain specific steps that need to be taken product-wise to enable holistic development of an ecosystem that services the local market and holds export potential as well. Here we summarize some of these key measures that shall help provide the necessary impetus to these high priority product markets.

Mobile phones• OfferingincentivestodevelopIndiaasahubformobilephonesbatteries

• Developingpoliciestoaddressthedisabilitycostsassociatedwithlocalmanufacturingthrough

- exemption of CVD on imported capital equipment and excise duty on capital equipment sourced locally;

- levying of a tax equivalent to CST on imported mobile phones;

- basic customs duty and CVD exemption from on all imported capital equipment for manufactureof mobile phone parts and components.

• Developing India-specific certifications to ensure quality of products.Thiswould also act as a non-tariff barrier thatwouldincentivize local manufacturing.

Flat panel TV• Encouragingdomesticassembly,includinglowvalueaddactivities,toboostlocalsourcingandgenerateemploymentinthe

long run.

• SettingupacenterforexcellenceforLCDandLEDdisplaystoencourageindigenousdevelopment

• ProvidingincentivesundertheMSIPsschemetobringFPDpanelassemblyactivityintoIndia.

Notebooks, Desktops, Servers• Simplificationofthereimbursementprocessforclaimingtaxcreditoninputdutypaid

• IncentivizingmanufacturingofmotherboardandLCDdisplaysforlaptops/desktopsbyexemptingtheirindividualcomponentsfrom basic customs duty and excise duty, or offering preferential excise duty.

Digital Cameras• NeedforDutyrestructuring-TheCENVATfordigitalcamerasisaround16%andanexcisecessof2%againstanimportdutyof

10% makes it more expensive to assemble or manufacture locally.

• Thecomponentecosystemandtechnologyleadershipforthissegmentbeingnon-existentinIndia,focuscanbeondevelopingbatteries for digital cameras rather than the product itself.

Inverters and UPS• Encouraginglocalmanufacturingbyloweringexcisedutyandmakingtheprocessofreimbursementoftaxcrediteasierand

quicker.

• MakingappropriateR&D investmenttogainexpertise in thedesignandmanufacturingofUPSwithhighpowerrating.Theplanned EDF corpus of DeitY could be an appropriate way of implementing this measure.

• ProvidingenergystarratingsundertheaegisofBureauofEnergyEfficiency(BEE)shallhelpinfosteringgrowthofsolarpoweredUPSaswellaspowerefficientUPSandinverters.ThehigherratedUPS/inverterswouldhavemoresophisticatedelectronicsandsemiconductors, thus boding well for the semiconductor market as well.

Memory Cards and USB Drives• Consideringthelowmarginsandthemagnitudeofinvestmentrequiredtosetupaflashmanufacturingfacility,itseemslogical

to divert the available resources towards other areas that would offer greater and faster returns on investment.



Automotive sub systems (CDI, Digital Instrument Clusters, 4W EMS, Car Radio)• SettingupofanautomotiveEMCpossiblynearChennaiorintheNCRtocompletelyindigenizethemanufacturingof2Wignition

units.

• IncentivizingthemanufacturingofPCBsandLCDdisplaysbyofferingpreferentialexcisedutiesorgreaterratesofCENVATcredit.

• Leveraging theMSIPS and EMC policies to set up an automotive EMC near the Bangalore-Chennai area to indigenize themanufacturing of instrument clusters.

• AttractinginvestmentthroughtheMSIPSpolicy,preferentialexcisedutiesorgreaterratesofCENVATtoprovideimpetusformanufacturemicrocontrollers in the country; the setting up of the two semiconductor fabs in the country would prove to be a great enabler in this regard.

• SettingupacenterofexcellenceforcarinfotainmentneedswithinanautoelectronicsEMCtoencourageindigenousdesignthrough frugal innovation.

• SettingupofautoelectronicsclusterunderEMCeitherinChennaiorPunewithfacilitiessuchasincubationcentertopromoteinnovation research, testing laboratories and all other essential infrastructure.

LCD Monitor• EncouragingLCDmanufacturingbyofferingpreferentialexcisedutyratesandfacilitatingeasierreimbursementoftaxcredit.

• InvestinginR&DfornewdisplaytechnologiestohedgeagainstanyinvestmentmadeinTFTLCDdisplayfabrication.

• Encouraging local sourcing of electromechanical components, SMPS transformers and the plastic enclosures used in theassembly of LCD monitors by offering tax credits for vendors who source these components locally.

• EncouragingcompetenciesinthemanufactureofLCDdisplays,especiallyfortabletandlaptopapplications.Thiswouldrequireinvestment in generation 5 fabs, which are mostly being used for these end user applications. Also, generation 5 fabs are growing at only 3 percent a year while higher generation fabs are clocking almost 26 percent annual growth. This could mean that relocationof a generation 5 fab to a brownfield location could be done at an affordable level of investment.

Base stations (BTS)• IncentivizingindigenousIPwithpreferenceingovernmentprocurement.

• ExploringIndia-specificstandardsfromasecuritystandpoint.

• Decreasing the in-land freight costs from 17 percent to about 4 percent through subsidies to reduce costs for indigenousmanufacturing and encourage local value addition.

• EncouragingdomesticmanufacturerstobuildtheircapabilitiestodesignanddeveloppowersuppliesandantennaeusedintheBTS.

Power supplies• Thecomponentdutycurrentlyrangesbetween12.36to16.85percentwhichisconsideredhighfortheindustryespeciallysince

the Indian market is a price sensitive market. Offering subsidies for manufacturers who manufacture in bulk volumes.

• Ensuringcontinualavailabilityofcopperthroughtheyearatsubsidizedpricestoreducetheoverallcostofthecomponents.

• Settingupregionalleveltestinglabsfortestingimportedgoods.

Set top boxes• IndigenousmanufacturersneedpayasalestaxinadditiontolocalVAT(~12.5percent)thatmakeslocallymanufacturedproducts

more expensive than imported STBs. Issuance of Form C to alleviate the payment of sales tax in addition to local VAT.

• Increasing the import duty for STBs would help create a level playing field between global suppliers and indigenousmanufacturers;ithasbeenobservedthatthehikeinthesameduring2012-13budgetwasnotsufficientforthispurpose.

• ExportsubsidiestocreateminiclustersforremotemanufacturingofthevariouscomponentsthatgointoasettopboxincludingRCA cables, remote control and passive components.

• OptimizingthetaxstructurebeingleviedontheDTHindustryandcableoperatorstoalleviatetheoperationalchallengesbeingfaced by them.

• Offeringspeciallowinterestloanswouldhelpsustaingrowthandincreasetheamountofdomesticvalueaddition.


Printers and MFDs• OfferingtaxcreditsonR&Dactivityinhigh-endlaserprintingandMFDs.Thegovernmentcouldalsofacilitatetheformationof

joint ventures between indigenous players and global OEMs to take advantage of latent manufacturing capabilities; there could be export opportunities to the Middle East, Sri Lanka, and Africa due to India’s geographical location.

• Incentivizinglocalvalueadditionforcomponentssuchastransformers,PCBsandcabling,thatarecurrentlybeingmanufacturedin India, by offering preferential excise duties and greater CENVAT credit for suppliers.

Routers/switches• Creationoffundsforlocaltechnologyknow-howdevelopmentandincentivizinglocalIPgeneration

• FocusingonpromotinglocalmanufacturingofcomponentssuchascomplexPCBsforrouters byeitherofferingpreferentialexcise duty rates for the manufacturing of complex PCB designs or offering greater rates of CENVAT.

• Prioritizing/invitinginvestmentinPCBsmanufacturingundertheMSIPSschemeandofferassociatedbenefitstothoseinvestors.

CFL• ReducingVATforCFLmanufacturingtozeropercentacrossallstates

• DevelopingISIcertificationstostandardisemanufacturingofCFLsinthecountry.

Energy meters• Developmentofstandardsformanufacturingofsmartmeters,createaR&Dfundforinnovationsinsmartmeters,andalsocreate

opportunities for manufacturing of key individual components such as communication modules and transceivers.

• IncentivizingexportdutyandestablishingIndiaasanexporthubbyencouragingproductmodificationssuitinginternationalrequirements

• SettingupanR&DfundforsmartmeterstoencourageSMEmanufacturerstoinvestininnovation

• Incentivizemanufacturingofcommunicationmodulesandtransceivers

• Globalmarketingsupportforcash-strappedSMEsuppliers

Smart cards• Incentivizingsoftwaredevelopmentandcustomizationservices

• Creationofindigenousstandardsthatareapplicationspecificwiththeaimtoensurehighersecurityinthesmartcardsconsumedin the country.

• SettingupofsubsidizedtestingfacilitiesforEMVcompliance

• The Indianecosystemhasenormous skillsetavailability in the softwareand integrationpartof smart cardswhichcouldbeincentivized through offering appropriate R&D deductions.

• Encouraginglocalsourcingofplastic(PETG)byofferingpreferentialexciserateswhenrawmaterialsarelocallysourced.

GPON ONT• Creatingsupportivepolicieslikereducedexcisedutiestoencouragedomesticmanufacturing.

Tablets• RepealingthelevyofSADindividualelectroniccomponentsorindividualcomponentsofLCDmonitorsandmotherboards.

• IncentivizingthemanufactureofmotherboardandLCDmonitorsbyexemptingtheirindividualcomponentsfrombasiccustomsduty and excise duty, or offering preferential excise duty.

• Simplifyingthereimbursementprocessforclaimingtaxcreditoninputdutypaid

• Creatingacentreofexcellencefortabletstoconsolidatethedifferentdesigneffortsintheprivateandpublicsectorstodevelopworld-class commercial ‘Made in India’ tablets.

LED Lighting• RestrictivetaxstructurewithahighVATof14.5percentobstructsLEDlightingpenetration.ReductionintheVATandauniform

VAT structure across all states will increase penetration.

• MandatingBIStechnicalspecificationstostandardizemanufacturingprocessesandproducts.ImportedLEDlampsshouldalsobe tested rigorously to prevent dumping of goods in the local market.



Payment terminals• Fundsallocation forprovidingdomain training in thepayment industry forpeople in themanufacturingsectorofPOSand

payment enabling products.

• OfferingfundstoenabletheIndianITentrepreneurstodevelopthe’EMVKernel’targetingvariousemergingplatformsincludingAndroid

• SettingupofAccreditedLabs for EMVCertificationandPCI-PTS test facilities andprovideeasy, cost effective andproduct-amortizable testing access to device manufacturers.

• Currentexciseis14percentwhilecustomsdutyis12percent.Reductioninsales,VATandexcisedutytoattractmoremanufacturersto consider local manufacturing.

• Encouragingtheusageofnofrillsdebitcardswithnosurcharge;Taxrebatetomerchantsifatleast50percentoftheirtransactionsin value terms are through cards.

• Introductionofstandardsforproductsavailableinthemarkettoincreasecustomerconfidenceandallowmanufacturerstobuildscale simultaneously.

The chart below illustrates some common recommendations beyond the specific observations product-wise listed above for ecosystem development of the high priority products.


Creation of non tariff Import Barriers

Developing and Mandating Indigenous

Standards for all Products and

Components

Funding for R&D and Indigenous Technology Development – Centres

of Excellence

Offering Tiered CENVAT credit based on value

addition trends

Reduction in Excise Duties; Increase in

Abatement rate

Provision of subsidies / Low interest loans to SME Manufacturers

Common Recommendations

ConclusionsThe top 25 high priority products are significant contributors to the overall electronics consumption in India. Providing a favourable environment for developing the ecosystem for these in the country can contribute to high value adding local manufacturing of these products. Continuing domestic consumption, changing global supply chain dynamics and the slew of policy measures to support indigenous manufacturing are positively influencing local electronics design and manufacturing; and the time now is most opportune. Ensuring hassle-free implementation of the new initiatives and taking corrective measures on restrictive policies shall go a long way in building confidence in the Indian business environment among global companies and usher manufacturing investments into the country. Having identified the 25 high priority products and also studied the ecosystem SWOT for each of these, the next steps entail addressing the challenges for ecosystem development for these 25 products, which implies addressing the issues for 80 percent of the electronics market in India. Developing the ecosystem for local design, development andmanufacturingfor80percentoftheelectronicsmarketlocallywillsufficetomakeIndiaaprominentleaderinthe$1.8trillionglobal electronics market.


The chart below captures the key messages from the research on the ecosystem SWOT of the high priority 25 products:

Key Messages: 25 High Priority Products Ecosystem SWOT

Top 25 high priority products account for 82% of overall electronics consumption in India. The top 5 alone account for 60% of the overall electronics consumption.

69% of local consumption of the top 25 priority products currently met through imports. Local production to cater to the same 31% local demand in 2015 too in the absence of intervention.

Inadequate components/raw materials ecosystem, convoluted tax and duty structure, debilitating FTAs, inadequate domestic product standards, lack of local IP, procedural hurdles in availing policy benefits are the challenges

to the ecosystem development for the priority products.

Power electronics/supply, Processor, LCD Display, Memory and PCB feature among the top 4 components contributing to the product BoM across majority of the top 25 high priority products. Initiatives are needed

to build ecosystem for these components locally.

Effective and speedy policy implementations, incentivizing component ecosystem, restructuring tax/duty structures, imposing non tariff trade barriers, developing indigenous standards are some of the measures identified to promote

ecosystem development for the high priority 25 products.

Strategic Recommendations• Aimtomeet50percentofdemandfor25highpriorityproductsbylocalhighvalueaddedmanufacturingby2018

• Address>20percentofthedisabilitycost inproducingthehighpriorityproducts locallybynormalizingdutystructureandcostofworking capital

• Providesubsidies/lowinterestloanstoaddressworkingcapitalissuesforSMEmanufacturers.

• FocusonEnergymeters,2WEMS,LEDlighting,paymentterminals, inverters/UPS,CFLandsmartcardsfortheshortterm.Existingmoderatevalueaddition,highdemandpotential,andexistingindigenousIP/designcapabilitymakethemviabletargets.

• Focusondevelopingkeycomponentsratherthantheproductitselfforthefollowingproducts-Mobilephones(battery/adaptor),FPDTV (LCD panels), laptops (battery) and digital camera (battery)– products where feasibility to develop a key component is more viable and recommended than the product itself.

• Focusondevelopingecosystemforkeycomponents–PCB,Memory,Processor,LCDDisplays,PowerDevicesandTransformers.

• ProvideasinglewindowsystemforquickclearanceofapplicationsundertheMSIPSandEMCpolicies.

• SkillDevelopmentCounciltofocusondevelopingskillsetsneededintheecosystemforthe25highpriorityproducts.



Top 10 Products and Components Markets to Focus for Near Term Local Value Addition Improvement

This report provides a comprehensive ecosystem assessment of the top 25 electronic products that account for 82 percent of the overall electronic products consumption and provides directions on steps needed to create viable ecosystems for these priority products. The report also evaluates critical components that make up the bill of materials (BoM) of the high priority products and provides similar prescriptive recommendations on the measures to create and build local ecosystems for these contributing components. Research indicates according immediate priority and attention to a limited set of 10 products and components including Energy Meters, Inverters & UPS, Smart Phones, LED Lighting, Smart Cards, Payment Terminals, 2W EMS, PCB, LCD Displays and Transformers leveraging upon their existing ecosystem strengths shall result in marked increase in indigenous electronics manufacturing in the next 2 years itself. Current limitations to high value addition and steps needed to improve the local ecosystem for these 10 products/components are illustrated below.

1. A regional level single point testing laboratory to conduct all tests for the local and imported meters.2. Incentivizing the export duty can boost exports3. With an expected shift towards smart meters, preparing for the future by investing in R&D especially in development

of relays by leveraging R&D tax credits 4. Notification of Preference Market Access5. Notification of safety standards by Department of Electronics and IT6. Product Specifications also need to be defined to prod indigenous manufacturing

STRATEGICRECOMMENDATIONS

OPPORTUNITY SIZE TM ($ B) TDM ($ B)

2012 0.3 0.35

2015 0.3 0.35

Top 4 Components (BoM Contribution

SoC Transformer

LCD Display Super Cap

ENERGY METERS

Strengths•Highconsumptiondemand•Productdesigncapability•Antitampertechnology design IP

Opportunities•Governmentpolicieslike R-APDRP•Focusonenergy conservation•Indiaasexporthub•Smartmeters

Weakness•Importforcritical components•Complextenderingsystemat utilities departments

Threats•Companiesthatusereference designs and launch cheap products


1. Excise duty should be lowered to 6 per cent at least; reimbursement of tax credit should be made easier 2. Design and manufacturing of UPS of higher rating (> 10KVA) encouraged by allocating R&D funds from EDF corpus 3. Formalize practicum programs between industry and engineering institutions to promote grassroots’ level interest

in design and technical activities4. Developing port and logistics infrastructure to facilitate copper imports, leading to shorter lead times5. Export incentives should be given for the export of inverters; extension of the zero duty EPCG is beneficial in this

regard

1. Imposing trade and non-trade barriers to bar low cost/unbranded imports 2. Imposing mandatory certifications that necessitate local manufacturing 3. Incentives / fund for fabless companies to generate mobile SoC / processor IP4. Creation of cluster under EMC with incubation cnter for Smart phone design5. Provision of low interest loans to Indian companies to address working capital issues and encourage product

development6. Bring under FPS scheme and encouraging exports




2012 1.11 0.95

2015 1.56 1.37


2012 17.41 3.84

2015 23.67 4.09


Transformer Power Semi

Heat Sink Microcontroller


Memory Display

Application Processor / SoC Camera

INVERTERS, UPS

SMART PHONES

Strengths•Robustdomesticdemand•Manufacturingecosystem exists•Expertiseandsupporting industries strength

Opportunities•Surgingdemandforbanking, education sector•PoliciessuchasMSIPS•Exportpotential

Weakness•LackofsubsidiesforSMEs•Lackofdesignexpertisefor high power rating UPS•Lackofscale

Threats•Establishedecosystemin China•Infrastructureinadequacy

Strengths•ReplacementDemandand Rural Demand•Localchipdesignstrengths•Applicationdeveleopment strengths•EMScapabilities

Opportunities•Impending4Grollout•Gainingprominenceof local OEMs•Indiaasexporthub•PoliciessuchasMSIPS

Weakness•Relianceonimportforchip, display and PCB•Negligentproductdesign capabilities•Limitedskillset•Debilitatingtaxstructure

Threats•Establishedecosystemin China•Infrastructureinadequacy•Emergenceofotherlowcost manufacturing destinations



1. Reduction and a uniform VAT structure across all states will increase penetration. 2. Exemption for capital goods for LED light manufacturers 3. More testing facilities to be established spread across the three regions in the country. Setting up of design houses

both for product and components. 4. Increase product awareness. 5. DEITY to mandate technical specifications . Government support to mandate new/ secondary roads to be replaced

with LED fittings. 6. Setting up of a brownfield cluster under EMC at Hyderabad with infrastructure including Test Lab, Tool room etc7. Setting up fund for LED driver and controls R&D and innovation. 8. Provision of low interest loans for LED lighting SME manufacturers for working capital 9. Setting up LED fab to have complete backward integration 10. Mandating LED Lighting usage in Street lighting, railways etc by Government



2012 0.17 0.04

2015 0.44 0.20


LED Driver Circuit

Heat Sink Thermal interface

LED LIGHTING

Strengths•Highconsumptiondemand•ProductdesignandR&D capability•LocalEMScapabilityinLED light manufacturing

Opportunities•IncreasingadoptioninGovt, commercial and industrial sectors•PoliciessuchasMSIPS•CompaniespositioningIndia as export hub for ME

Weakness•Lackoftestingfacilities•HighInitialcost•Absenceofnationaltechnical standards Lack of incentives to attract major firms

Threats•Establishedecosystemin China•Preferencefortradingover manufacturing•Debilitatingdutystructure

1. Leveraging export subsidies and considering product manufacturing under the EPCG scheme will benefit manufacturers in importing machinery at subsidized prices and exporting huge volumes.

2. Inverted duty structure needs to be amended3. More India specific application oriented standards need to be evolved, like SCOSTA4. Setting up of a fund for R&D in smart cards and providing the same for SMEs5. Make Use of contactless cards mandatory in banks



2012 0.21 0.13

2015 0.52 0.57


Chip PETG

Software OS Antenna

SMART CARDS

Strengths•RobustdemandfromGovt and Banking•S/W,oncardandoffcard technology capabilities•R&Dfocus

Opportunities•Anticipatedhighdemand from Govt projects•Escalatingmanufacturing costs in China•PMAforsmartcards

Weakness•Relianceonimportforchip•NolocalIP•Expertiseinsecurityand anti-theft technologies

Threats•InabilitytopenetrateIP strengths of US and France companies•Infrastructureinadequacy


1. Funds allocation for providing domain training in the payment Industry for people in the manufacturing sector of POS and payment enabling products.

2. Funds to enable the Indian IT entrepreneurs to develop the’ EMV Kernel’ targeting various emerging platforms including Android.

3. Setting up of Accredited Labs for EMV Certification and PCI-PTS test facilities and provide easy, cost effective and product amortizable testing access to device manufacturers.

4. Current excise is 14% while customs duty is 12%. Reduction in sales, VAT and excise duty would attract more manufacturers to consider local manufacturing.

5. Encouragement for the usage of no frills debit cards with no surcharge and creating awareness about usage of the same is pertinent. Tax rebate to merchants if at least 50 per cent of his transactions in value terms are through cards needs to be mooted.



2012 0.11 0.0058

2015 0.22 0.011


Communication module LCD/TFT

Processor Printers

PAYMENT TERMINAL

Strengths•Growingconsumption demand•Presenceoflocaldesign houses•Hugeretailmarketfavouring uptake•Availabilityofrawmaterials like sheet metal, plastics

Opportunities•Increasingtransactionsusing PoS; Emerging e-tail•Significantriseindebit/credit cards usage, micro ATMs•Financialinclusionprograms

Weakness•Relianceonimportforcritical components•Highcertificationcostsand lack of testing labs•Penetrationlevelsstilllow

Threats•Capitalintensenature–high costs for EMV and PCI-PTS certifications•Establishedmanufacturing ecosystem in China

1. Export-friendly policies and support structure to boost the Exports (a) To utilize ‘Extension of Interest Subvention Scheme’ (b) An additional interest subvention of 2% for those exporters who repay on a timely basis (c) Exports be brought back under priority sector lending and a separate cap be put on exports, within 40% norms

2. Extension of Focus Product Scheme to drive exports3. Setting up of incubation center for automotive electronics within a cluster under EMC scheme at Chennai or Pune.4. Reliance on imports for most of the critical components – chips, displays and PCBs - to be checked by developing

domestic semiconductor ecosystem and upgrading the PCB making capabilities5. An ECU for 2W (ECU’s only used in 4W presently) is being conceptualized – may make CDI’s redundant in 4-5 years

time - thus to provide product development support in the form of R&D exemptions for domestic companies along with providing preferential excise duty, greater CENVAT rate


OPPORTUNITY SIZE TM ($ M) TDM ($ M)

2012 210.4 210.4

2015 308.1 308.1


Microcontroller Power Semi

CDI Capacito Transformer

EMS 2WStrengths•Matureproductmarket•Establishedecosystem•DesignIPheldinIndia•ExcellentR&D,testing, manufacturing processes•Skillsetavailability

Opportunities•Untappedruralmarketfor 2 wheelers•ECUreplacementforCDI•PoliciessuchasMSIPS

Weakness•Relianceonimportforchip, display and PCB•Exportscurrentlylow•Marketgetting commoditized

Threats•Emissionnormsmaking current products obsolete•Highutilitycostsin manufacturing units impacting production



Steps to promote indigenous ecosystem for the key components include:

Steps to Promote Electronics Manufacturing Services (EMS) Ecosystem

Printed Circuit Board (PCB)• Imposinghighimporttariff;Nildutyonrawmaterialsimports

• Interestsubsidies/lowinterestloans;QuickerreimbursementofCENVAT

• Provisionofexportsubsidies

• Eliminationofinverteddutystructure

• Imposingantidumpduty/safeguardduty

Transformers• Incentivisingcomponentimportsbyprovidingtaxrebatesforlocalmanufacturers.

• SettingupoflocaldesignhousesandleveragingR&DtaxcreditwillattractglobalOEMsto invest in local manufacturing of components.

• Streamliningcontinualavailabilityofcopperthroughtheyearatsubsidizedprices.

• Preferentialexcisedutiesof2%;facilitatequickerreimbursementoftaxcredits

• OfferinggreaterCENVATcreditforlocalsourcing

• Developinginfrastructuretofacilitatecopperimports,leadingtoshorterleadtimes

• PromoteestablishmentofmanufacturingclustersusingEMCandMSIPSpolicies;solicitinvestment from VCs too

LCD Display• RelocationofabrownfieldGen5fab

• Offering of preferential excise duties or offering greater rates of CENVATcredit

• Hikeinimportdutyoffinishedpanelimports

• Fundtoencouragelocaldisplaytechnologydevelopment

India has been home to all the major EMS companies including Flextronics, Foxconn, Elcoteq, Jabil Circuits, and Sanmina as well as numerous home-grown EMS companies. EMS companies have hitherto been offering hardware solutions only. In recent times there is seen a marked shift towards total solutions provision by acquiring capabilities to offer design and software services also as part of their portfolio. India’s EMS market which was worth $3.01 billion in 2011 is expected to grow at a CAGR of 27.8 percent till2015.Themarketisexpectedtoreachrevenuesof$8.02billionby2015.ItisinterestingtonotethatServicesaccountfor~10percent of the overall EMS market revenues.

The fostering of the EMS industry is crucial for India’s local electronics manufacturing to reach appreciable levels. The EMS industry currently faces challenges of inadequate supply chain, logistic connectivity and lack of Government support. Initiatives taken to alleviate these, will pave way for an energized EMS industry in the country.

• Intheensuingyears,IndiaisexpectedtogainsomeoftheEMSopportunitieslostbyChinatootherlowcostdestinations.

• India’sEMSindustryfocusisexpectedtobeoncreatingasolidecosystemandsupplychainforelectronicsmanufacturing.

• MandatingallEMSactivityunderdefencecontractstobemandatorilycarriedoutinIndiaundertheDefenceOffsetSchemeisseen as a need.

• Recent trends indicate that an increasing number of engineering and design activities are also being outsourced to EMScompanies and they are becoming ODMs (Original Design Manufacturers). They also provide final system integration and logistical support.

• Theadventofpolicy initiatives suchas thedevelopmentofEMC isexpected topropelOEM’susageofEMSservices in thecoming years. However, reduction in eligibility threshold to Rs 10 crores (present capex is Rs 100 crs) for availing benefits under M-SIPs is very pertinent to enable increased investments in this space.


Common Conclusions for the Near Term Focus Products/ComponentsIndian electronics industry has over the years grown in stature for its inherent strengths in fundamental R&D and consumption. The missing link to the industry triangle is manufacturing. India’s electronics manufacturing has remained in obscurity due to multiple reasons including scale impediments, infrastructural inadequacy, absence of large scale manufacturing ecosystems, proactive IP orientation as well as debilitating tax and duty regimes. Recent policy initiatives to offset these disabilities clearly indicate the identification of electronics manufacturing as a priority sector. Electronics manufacturing gains significance in that it can help bridge a rapidly burgeoning trade imbalance while also create enormous employment opportunities for the skilled, semi-skilled and unskilled labourers. From a strategic lens, it thus becomes prudent to evaluate Indian electronics manufacturing deficiencies and develop capabilities that address the shortcomings as also strategize the short, medium and long term development plan for promoting local electronics manufacturing ecosystem.

Key drivers for making India a globally attractive electronics manufacturing destination include competent costs, talent abundance, quality focus, world-class infrastructure and business friendly environment. Of these, efforts have already been taken to improve the country’s infrastructure apart from moderate initiatives in quality enhancement and skill set development that needs continued acceleration. It becomes pertinent for newer policy measures to address/offer:

• Subsidies and/or tax and duty restructuring to alleviate the cost differential arising from higher logistics cost and highertransformation cost

• InclusionofFocusProductSchemeforselectpriorityproductsineffortstopromoteexportsandextensionoftheschemetoallEHTPs/SEZs

• EncouragementforR&DandIPgenerationthroughfundallocationandsettingupofincubationcentreswithintheEMCschemeclusters with sector focus

• SettingupofIncubationCentresforIndustryVerticals;priorityproductslikeSmartEnergyMeters,Inverters&UPS,CFL,LEDLightingandEnergyEfficientproductstobetheareasoffocusforthesecentres

• Provisionofviabilitygapfunding(VGF)forthepriorityproductsandcomponentstobeexploredandimplemented.

• Resolutionofworkingcapitalissuethroughprovisionoflowinterest/specialloans;Encouragementtofinancialinstitutionstooffer the same by declaring electronics as a priority sector

• Simplificationofprocessesinvolvedinavailingpolicybenefitsaswellasprocessesinvolvedinsettingupandfunctioningofbusinesses – creation of business friendly socio-political environment



SUMMARY

Product Local Manufacturing/Assembly/Design Only Assembly

Local Manufacturing/Assembly Volumes and Growth 136.35 million (2012); CAGR (2012—2015) 3.7%

Local Value Addition Low – No Sourcing; Only Box Assembly

Top 4 Components Memory, Display, Application Processor/SoC, Camera

Component Ecosystem Negligible; Predominantly Imports

Product Importance for Ecosystem Promotion; WhyHigh; Huge Local Market; High Growth Potential; Export

Opportunity

Steps to Promote Ecosystem

a. Focus on product IP and design

b. Top 4 Components do not have much potential for indigenization (global capacities, lack of local infrastructure etc)

c. Impose trade and non trade barriers on imports

d. Impose certifications mandating local manufacturing

e. Develop ecosystems for peripherals, battery, electro mechanical connectors, plastics etc

Mobile Handsets - Product and Ecosystem Analysis

Market and OpportunityDriven by replacement sales, proliferation of smart phones and multi SIM mobiles, and a rapidly growing rural mobile subscription base, the sales of mobile phones in India is continuing its buoyant journey. Mobile phone shipment volumes in the country are anticipated to grow from 198 million units in 2012 to 269 million units by 2015 growing at a CAGR of 10.9 per cent. Despite the high consumption volumes, local manufacturing has been hitherto restricted. Further Nokia’s global manufacturing consolidation strategy is expected to contain their local production volumes in the future. However, the increasing investments in local manufacturing by competitors like Samsung and the proposed investments by other indigenous manufacturers are expected to maintain flat growth in the local production volumes. Indigenous manufacturing volumes of mobile phones were estimated to be 136 million units in 2012 and are poised to scale to 152 million units by 2015 growing at a CAGR of 37 per cent.

23.67

0

0

5

10

15

20

25

20112010 2012 2013 2014 2015

Mobile Handsets Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%

Total Market ($ Million)

Total Domestic Manufacturing (High Value Add, $ Million)

Total Domestic Manufacturing (Low & Medium Value Add, $ Million)Base Year: 2011 Source: IESA-Frost & Sullivan

CAGR (2011 - 2015)

TM: 9.7%

TDM (overall): 2.3%


TDM (High value add): NA

4.09

0

21.19

19.41

0

3.88

17.41

00

16.35

0

15.28

4.23 4.5 3.84 3.88


Mobile Handsets: TM, TDM Volumes Forecasts

ProductTM Volumes

(Million units)TDM Volumes for Local

Sales (Million units)TDM Volumes for Exports

(Million units)

2010 165.93 49.91 92.69

2011 182.00 54.60 101.40

2012 197.74 47.72 88.63

2013 216.17 48.15 89.41

2014 240.92 50.43 93.66

2015 269.46 53.26 98.91


Industry SWOTThe mobile phone value chain comprises various component and subsystem suppliers, technology licensors and application developers and the downstream service providers and retailers. The advent of smart phones has catapulted the value of the core chips including the processor and memory. It has also brought to prominence the value of the software in a mobile phone. It is interesting to note that in most current mobile phones, the value of manufacturing of mobile components is equal to the value of manufacturing of the mobile phone itself.

The mobile phone value chain is depicted in the figure below.

Component and Sub-system Suppliers

Baseband

RF transceiver Core Chips

N/W Operators

Consumers

Retailers

Software

Application processor

Power Management

Memory

Camera

Connectivity

Display

Battery

Peripherals

Electro Mechanicals

Operating System

Applications

System Integrators Downstream

R&D, design, technology licensors

MobilePhones



India is flooded with competition from foreign suppliers and indigenous players. Besides the top 4 to 5 players who control almost 70 per cent of the market in India, there are numerous indigenous players with varying capabilities. Most of these indigenous suppliers currently utilize the services of contract manufacturers in China and do limited design activity in-house. Market leaders such as Samsung and Nokia do only the last level low value adding assembly locally. Activities such as PCB assembly, mounting the casing are handled locally, while the board with the key components mounted is imported into the country. Thus there is negligent local sourcing resulting in extremely low local value addition.

The table below captures the capability in India across the mobile phone value chain.

Category Product Local SupplyLocal

ManufacturingLocal IP

CapabilityCompany Names

Level of Local Value

AddRemarks

Components and Sub systems

Core ChipsOnly Sales

Offices; Total Imports

No NoQualcomm,

Mediatek, Nvidia, NA

Though design capability exists there is no local

realization of IP

BatteryImports; Local

Supply Yes Yes

Adit Infotech, Maxotel, Celltalk,

JPW, AR Industries etc

Medium

Numerous SMEs design and manufacture batteries; design value addition is limited. Local supply accounts for 12-15% of demand; predominantly in the

after market.

DisplayOnly Sales

Offices, Total Imports

No No

Samsung, AUO, Chimei Innolux, LG , Sony, Numerous Chinese suppliers

,

NA

Peripherals

Partial (Adaptors

manufactured locally)

Yes YesSalcomp, UKB, JPW,

Celltalk, Maxotel, SSR Group,

High

Numerous SMEs design and manufacture batteries; design value addition is limited. Local

supply accounts for 15% of demand; predominantly in the

after market.

Electro Mechanicals

Yes Yes Yes Perlos High

Fragmented supply base; Numerous small players; difficult to gauge market

supply volumes.

Software Yes Yes Yes High

Mobile Phones

OEM YesYes, only Low

Value Add Assembly

Yes Nokia, Samsung, LG Low

EMS YesYes, only Low

Value Add Assembly

YesFlextronics,

FoxconnLow

Analysing the mobile phone value chain in India, it is observed that the presence of a sustained and growing demand for mobile phones is a key strength for the industry apart from an established EMS ecosystem for mobile phone manufacturing. However the current limitation is that the EMS vendors are engaged only in box level assembly. Critical challenges include inadequacy of feeding industries as most components / raw materials are currently imported. The import of chipsets and display,the most crucial components, presents a huge void in the ecosystem and contributes significantly to the disability costs for mobile phone manufacturing.

Rising costs of manufacturing in China is seen as an opportunity for some of the indigenous manufacturers who are currently outsourcing their design and manufacturing to China to instead invest in local facilities. The possibility of Chinese mobile phone manufacturers themselves looking at investing in Indian manufacturing facilities is yet another huge opportunity for the ecosystem to develop. Policy initiatives such as MSIPS are expected to boost manufacturing investments while the prevailing tax structure is seen as debilitating and needing immediate corrective measures.


STRENGTHSHuge consumption demand

Replacement sales driving demand for higher priced smart phones

Chip design – single chip solutions for handsets have been completely developed in India

Mobile application development – numerous application developers

Well developed EMS industry – capabilities for mobile phone manufacturing

OPPORTUNITIES

Impending 4G roll outs to drive sales of handsets

Gaining prominence of local OEMs such as Micromax, Karbon etc and their gaining ground in the Smartphone segment.

India as a export hub for servicing ME, North Africa and Europe countries.

New policies such as MSIPS incentivizing local manufacturing investments.

WEAKNESS

Reliance on imports for most of the critical components – chips, displays and PCBs

Excise duty hike in mobiles priced over Rs. 2000 constrains local manufacturing of these in-demand handsets

Limited or negligent product design activities locally; Limited IP generation

Limited availability of necessary skill sets

THREATS

Well established manufacturing ecosystem in neighbouring China.

Emergence of other low cost manufacturing destinations like Vietnam.

Infrastructureinadequacy–sufficientpower,waterandother utilities – uninterrupted availability

SWOT

Component SWOTThe component ecosystem for mobile phones is extremely diverse in line with the wide range of prices of mobile phones. While components such as display, battery, memory and core chips are common for price point mobiles, the cost and capacity of these components vary depending on the features and applications supported by the mobile phones. The top 4 components that contribute to majority of the mobile phone bill of materials (BoM) irrespective of the phone type or price are:

1. Memory

2. Display

3. Application Processor / System on Chip (SoC)

4. Camera

2 of the top 4 components for mobile handsets are semiconductor devices. The absence of fabrication facilities in India forces reliance on imports of these components. However, there is design acitivity that happens locally in the SoC and processor space as the key suppliers of these chipsets have huge captive design centers in the country. Even complete design tape outs have been generated for some of these chips from the local design centers.

The second most expensive component is displays;this is yet another component that doesn’t have a supporting ecosystem locally. Globally the displays market is dominated by a handful of Korean and Taiwanese companies. Technology competitiveness acts as a high entry barrier which has ensured that globally the competition remains niche. The constantly evolving touch reflexes andthedemandtrendforhighresolutioninmobilephonesmakeitdifficulttobuildnewcapabilityinIndia.Furthermorethelocaldemand volumes for such devices do not justify such an investment.

Camera is the fourth component for which there is currently negligible ecosystem in India from the design as well as the manufacturing perspective. Optics are the most crucial element of mobile camera design and this expertise is not well recognized in India, leading to the heavy reliance on imports.

Of all the components of the Mobile BoM, it is thus the electromechanicals, peripherals, battery and software that have higher probability of increased local value addition; however, the contribution of these to the mobile BoM is tertiary in nature.



Product Major SuppliersLocal Supply

/ ImportsLocal Manufacturing/

Design/AssemblyLocal

CapacitiesChallenges to Local

Manufacturing

MemoryToshiba, Samsung,

Hynix, MicronImports NA NA

Excess global capacities; Absence of fab currently; Very dynamic technology

Display

Samsung, AUO, Chimei Innolux, LG , Sony, Numerous Chinese suppliers

Imports NA NA

Even for local assembling, the display is imported as

a panel and assembled. Globally a very niche

market dominated by handful of players. Entry

barriers high.

Application Processor

Qualcomm, Samsung, Mediatek,

Nvidia, AllwinnerImports

Negligible – a few suppliers have

design centres in India

NA Absence of fab currently

CameraToshiba,

STMicroelectornics, Omnivision, Sharp

Imports NA NAAbsence of local know-how

and optics expertise

Strategic ConclusionsGeneralFor local manufacturing to become cost competitive compared to destinations like China, it is essential for the Government to offer fiscal sops that help in equalizing the disability costs associated with local manufacturing. These, amongst others, include:

• Differentialdutyregimesforlocallymanufacturedandimportedhandsets

• LevyingataxequivalenttoCSTonimportedmobilephones

• Trade barrier to imports; Countries such as China and Brazil have been able to successfully grow their localmobile phoneindustry through similar practices. Since mobile phones are not part of the ITA list, trade barriers can be imposed to grow local manufacturing

IP developmentThere are numerous captive and third party design houses contributing to chip design for mobile devices. However, none of the IP is realized locally as all the patenting is done overseas. Through support for fabless companies, encouragement needs to be provided for IP generators to develop mobile SoCs and mobile processor designs whose IPs are realized in India. This will contribute to incremental value addition and revenue generation opportunities through licensing.

Component ecosystemAll imported capital equipment for manufacturing of mobile phone parts and components should be completely exemptedfrom CVD. Likewise capital equipment sourced locally should be exempt from excise duty. This would encourage the manufacturing of mobile phones parts and would promote the growth of the component ecosystem.

Product manufacturingDespite numerous indigenous brands claiming to do their own design and development, in reality, most of these brands source designs from Taiwan/China and develop their products. This does not contribute to actual value addition. Hence, the sops and incentives offered need to be linked to value addition generation so as to ensure total ecosystem growth.China has been able to bring in foreign investment and attract all leading mobile phone manufacturers to set up facilities in China by mandating standards and certifications such as the CCC (compulsory China certification mark) for all the mobile phones that are sold in China. Similar non-tariff barriers can be imposed in India which favour or necessitate local manufacturing.


Current Limitation Solution to Promote Ecosystem

Tax Structure

a. Lack of import barriers

b. Lack of favourable duty structure for capital equipment import

Trade and non trade barriers

Imposing mandatory certifications that necessitate local manufacturing

Value Addition

a. Promotion alike to pure play manufacturers and traders

b. Absence of local IP realization

Incentives to be targeted at manufacturers contributing to value addition and not those who source designs and assemble

overseas.

Incentives, financial support to fabless companies to generate mobile SoC/process IP

Component Ecosystem

a. Reliance on imports

Chips and Display core components – absence of capability limits any ecosystem development plans for these.

Focus can be to grow the peripherals, battery, electro-mechanicals and plastics ecosystems



Flat Panel Display TV - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Only Box Assembly

Local Manufacturing/Assembly Volumes and Growth

1.93 million units (2012); CAGR (2012—2015) 56.6%

Local Value Addition Very low

Top 4 Components Display, ICs, Electro-mechanicals, Power Components

Component Ecosystem Not Available

Product Importance for Ecosystem Promotion; Why High; Huge Local Market; High Growth Potential; Export Opportunity


a. Restructuring of Tax and Duty Structure

b. Redressal of SAD and Abatement rate issues

c. Interest linked subsidies for value added manufacturing

d. Definition of Indigenous Standards for Local FPD TVs

Market and OpportunityDigitization of broadcast, reduced replacement cycles and increased affordability is driving growth in the Indian Flat Panel Display (FPD) TV market. The advent of Internet-Ready and Smart TVs has altered the characteristics and dynamics of the TV market.The FPD TV market comprises LCD, LED, Plasma, 3D, and Smart TVs.Of the different types, LCD TVs have achieved greater proliferation in the Indian market. The increasing affordability of LCD TVs coupled with their better performance, smaller size, and wider options has resulted in their replacing CRT TVs. Growth is expected to be driven by enhanced purchasing power, digital broadcast (DTH, IPTV, STB cable) transition as well as consumer awareness of FPD TVs. India’s growing upper middle class that has already moved from CRT to LCD TVs is now driving the shift towards LED TVs. The huge rural populace on the other hand, is projected to be the greatest source of LCD TV demand till 2015.

Research estimates that the FPDTV market in India was valued at US $3.55 billion in 2012 and is likely to grow at a compound annual growth rate of 23.7 per cent by 2015.The total market (TM) for FPD TV in India in 2012 was 6.48 million units and the total domestic manufacturing (TDM) volumes was 1.93 million units for the same year.

6.40

0

0

1.00

3.00

2.00

5.00

4.00

7.00

6.00

20112010 2012 2013 2014 2015

Flat Panel Display TV Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 23.7%




3.30

0

5.50

4.62

0

1.59

3.55

00

2.74

0

1.75

0.39 0.671.06

2.36


FPD TV: TM, TDM Volumes Forecasts

ProductTM Volumes

(Million units)TDM Volumes for Local Sales (Million units)

2010 2.90 0.65

2011 4.80 1.17

2012 6.48 1.93

2013 8.98 3.09

2014 11.50 4.94

2015 14.38 7.41


Industry SWOTDomestic assembly is a low value-add activity as LCD panels are imported and only final leg assembly is performed here. The import-heavy nature of the FPD TV market has resulted in it being vulnerable to volatile currency conditions. For FPDTVs, 2012 was a turbulent period when increasing raw material costs and depreciation of the rupee added pressure to the prevailing conditions. This trend has continued much into 2013 as the rupee has reached never-before lows of INR 64 against the US $. This has resulted in increase in prices of FPD TVs by 5 to 15 per cent from different manufacturers.

Import duty on LCD panels was eliminated in the 2012-13 Budget, which led to anticipation of increased domestic assembly. However, India’s Free Trade Agreements (FTAs) with countries such as Thailand are proving to be a restricting factor, as some key manufacturers have built up capacity for FPD TV manufacturing in these locations and the FTA allows them free access to the Indian market.

The value chain for FPD TV market is depicted in the chart below.


Driver IC Core Chips

Core Components OEMs

General Trade

Consumers

Modern Trade

Other Components

BLUE

Glass Substrate

Polarizer

Color Filter

Chemicals

PCB, Passives

Liquid Crystal

Manufacturing / Assembly Downstream




All major suppliers of FPD TV globally,such as Samsung, LG, Sony, Sharp etc., have local presence and are the dominant players in the Indian market too. Indigenous brands such as Videocon, Onida, etc., also offer their FPD TVs in the Indian market. Samsung and LG are involved in low level last mile assembly activity in India apart from a few indigenous brands such as Intex. The rest import them as finished products. Even the assembling activity in the country is very low value add and is just box assembly.

The table below depicts the capabilities across the FPD TV value chain in India.

Category ProductLocal

SupplyLocal



Level of Local Value Add

Remarks

Components and Sub sys-

tems

Display No No NoLG, Samsung, Sharp,

NEC DisplayNA

Imported as part of fin-

ished product

ICs No No No

Himax Technologies, Orise Technology,

Sitronix Technology, Raydium

Semiconductor

NAImported as part of fin-

ished product

Electro mechanicals

No Yes No Medium

Through design capa-bility exists there is no

local relation of IP

Power com-ponents

No Yes No Medium

Through design capa-bility exists there is no

local relation of IP

FPD TV

OEM No No No LG, Samsung, Sony NANo local man-u f a c t u r i n g value addition

Indigenous players

YesYes, only Low

Value Add Assembly

No Videocon, Onida LowLow manufac-turing value addition

FPD TV manufacturing is very technology intense and dynamic. Apart from continuous advancements in panel component technologies, the FPD panel manufacturers themselves are moving towards 8.5 and 10 generation fabs. The sophistication in infrastructure and the supply channels required for FPD TV manufacturing require decades of development. It is improper to expect such ecosystem development in India within a few years to bring in FPD TV manufacturing.

The SWOT chart below captures the analysis for the FPD TV market.


All major global suppliers have local presence (sales) and few in assembly

Increasing consumer awareness on FPD technology driving sales

OPPORTUNITIES

LCD Panel manufacturing – opportunity to build atleast this capability

Encouragement for MNCs such as Sony, Sharp to bring in atleast last leg assembling activities to India

WEAKNESS

Totally absent ecosystem

No local supply of any component except may be some tertiary or non critical components

THREATS

Inverted duty structure that favours finished product imports

FTAs with countries like Thailand

SWOT


Component SWOTThe core top 4 components within the FPD TV BoM are:

1. Display

2. ICs

3. Electromechanicals

4. Power components

These 4 components together constitute roughly 80 to 85 per cent of the BoM of FPD TVs, with displays and ICs accounting for nearly two-thirds of the total BoM by themselves. There is totally nil indigenous capability of these 2 critical components in India. Korea, Taiwan and Japan dominate the global market for capacity and supply of the core components for FPD TVs. The proposed and on-going expansion plans of the key suppliers of these components indicate the lack of requirement to set up manufacturing facilities in new destinations like India.

Strategic ConclusionsGeneralDespite the high domestic volumes and the opportunities for exports, the possibility of ushering FPD TV manufacturing into India is a distant dream.

Product manufacturingThe focus can rather be on encouraging more domestic assembly, even if it is a low value add activity, as it can potentially result in local sourcing and employment generation in the long run. One element within the FPD TV value chain that can be promoted for indigenous activity is the panel assembly. Incentives under the MSIPs scheme are favourable to bring in FPD panel assembly activity into India and this needs to be encouraged for the contribution it can make to local value addition. There are several disability costs today that make imports of panels more attractive and these needs to be addressed through corrective tax and duty reforms.


Tax Structurea. Imports cost effective compared to

indigenous assembly for panels and TVs

a. Reduction of excise duty

b. Lowering of indirect taxes which currently account for 22% of transaction value

c. SAD to be eliminated

d. CENVAT credit to be made available to manufacturers

Value Addition & Component

Ecosystema. No activity at all

a. Promotion of indigenous capability for LCD Panels under MSIPs

Financial and other Incentives

a. Lack of low interest loans / financing for FPD TV or Panel manufacturers

a. Provision of interest linked subsidies

b. Abatement rate to be increased from the current 30% to 45% to decrease the pressure on manufacturers



Notebooks - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design No; finished product imports

Local Manufacturing/Assembly Volumes and Growth N/A

Local Value Addition Low – No Sourcing

Top 4 Components Processor, Display, Battery, Memory

Component Ecosystem Negligible; predominantly finished product imports

Product Importance for Ecosystem Promotion; WhyMedium; Huge local market; Robust growth Potential; Possible export opportunity


a. Reimbursement of tax credit to be made easier for encouraging investment in manufacturing

b. Motherboard and LCD display to be offered preferential basic duty and excise duty rates

Market and OpportunityThe market for notebooks/laptops was estimated to be worth US$ 2.48 billion in 2012, and projected to grow at about 9.4 per cent during the period 2011—2015. A rapidly growing substitution trend favouring notebooks over desktops has been observed in recent years. This effect has been further precipitated by the advent of tablets that have taken on the mantle of portable computing device of choice from laptops. The laptop market is also expected to be driven by the needs of the IT industry, SMBs, and by government procurement particularly in the short term. In fact, government procurement of laptops has been a key driver of this market recently. The tenders floated by the Uttar Pradesh and Tamil Nadu governments cumulatively contributed almost 1.5 million units to the market.

Though tablets have begun to eat into the market share of laptops, their USP is the easy access to and consumption of online content; they lack the computing power of laptops. This is expected to sustain demand for laptops as personal users and corporate users move away from using desktops and move towards using laptops. Since all laptops sold in the Indian market are imported as finished goods, their prices are very prone to fluctuations in currency value. The recent depreciation in the value of the Indian Rupee has led to laptop vendors mulling price hikes in order to cover their increased expenses. Lenovo, Dell, HP and Acer account for almost two-thirds of the laptop market. Indigenous player HCL also has a small but significant presence in the market.

0 0 0 0 0 00

500

1000

1500

20002107

2287

27132973

3282

2500

3000

35000

20112010 2012 2013 2014 2015

Laptops Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%



Total Domestic Manufacturing (Low & Medium Value Add, $ Million)


CAGR (2011 - 2015)

TM: 9.4%

TDM (overall): NA

TDM (Low/Med value add) : NA


2480


Industry SWOTThe laptops sold in the Indian market are all imported as finished products into the country. Since the laptop is a closed-box product, even low value added assembly at the market destination doesn’t make business sense. Hence, laptops are imported pre-configured into the country. However, the absence of a supporting ecosystem for electronics manufacturing and the fact that volumes are not growing fast enough have been strong enough reasons for companies to not invest in manufacturing facilities in the country.

The laptops value chain is depicted in the figure below.


Keyboard / Touchpad

LCD screen; speakers

Input / Output

CPU

Software

Motherboard; Memory; Processor

Operating System

Applications

Assemblers Downstream

Laptops

Enterprises

Consumers

Government


Hard disk / Casing

Video card; Sound card; Network card

Despite the strength in design capabilities, there is no local realization of IP. However, Indian design skills are quite valued and there is considerable value added in the design activity that happens out of India. Intel, NVIDIA, AMD and Microsoft, among others, execute a large amount of their R&D activity in India. The design aspect of the value chain is definitely a huge strength for the Indian electronics ecosystem. However, it lacks an institutionalized process to make that strength work for the country in terms of realizing local IP, etc.

Laptops: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 3.63 0.00 0.00

2011 4.07 0.00 0.00

2012 4.56 0.00 0.00

2013 5.15 0.00 0.00

2014 5.83 0.00 0.00

2015 6.65 0.00 0.00






CapabilityCompany

NamesLevel of Local

Value AddRemarks


ProcessorOnly Sales


No No Intel, AMD NAThough design capability

exists there is no local real-ization of IP

Display Imports No No Samsung NA

MotherboardImports /

Local SupplyYes No

Pegatron, ECS, Giga-byte, MSI, Foxconn

NA

HDD Imports No NoSeagate, Thoshiba

NA

Software Yes NA NoDell, Intel, Microsoft

MedBoth captive design cen-tres and design through

service model

LaptopsOEM Yes No No

HP, Dell, Lenovo, Acer,

HCLNA

EMS No No No NA

The table below captures the capability in India across the laptops value chain.

The Indian laptop market exhibits great local demand, which will also be well sustained in the medium term. However, since the market is import heavy, it is subject to the vagaries of currency fluctuation which creates business uncertainties for laptop vendors and price uncertainties for consumers. Government procurement of laptops will drive the market in the short term, while any increase in the computing power of tablets or the emergence of a disruptive form factor in the portable space could eat into the market for laptops fairly quickly.

The SWOT chart below captures the analysis for the laptops market.

STRENGTHS

Huge consumption demand for laptops

Well developed design skills

Government procurement and decline of desktops to drive market for the short term

Indian user segments are becoming more computer savvy - education, etc.

Well developed EMS industry - capabilities for mobile phone manufacturing

OPPORTUNITIES

Decline in desktop sales leading to demand for laptops, for computing power

Escalating manufacturing and labour costs in China could drive investment to India

New policy aspects such as EMC could encourage local assembly investments

WEAKNESS

Absence of supporting industries to support assembly of laptops locally

Reliance on imports for most of the critical components and for assembly

Limited IP generation

Import heavy market pushes Indian market behind on global product launch timelines

Market subject to currency fluctuation

THREATS

Well established manufacturing ecosystem in China and East Asia

Rate of technological change could see laptops being phased out in favour of tablets or other disruptive form factors

Import heavy market could worsen India’s import bill if left unchecked

SWOT


Component SWOTThe biggest contribution to the BoM in terms of dollar value in a laptop is accounted for by the display and the processor, which account for 15 per cent each. Next comes the motherbaord and the HDD, which alongwith the display and processor,could account for almost two-thirds of the total BoM of a laptop. In short, the top 4 components that contribute to majority of the laptop bill of materials (BoM) are:

1. Display

2. Processor

3. Motherboard

4. HDD

Since laptops are imported in finished product form for the most part, none of these components are locally sourced.

Strategic ConclusionsGeneralThe reimbursement process for claiming tax credit on input duty paid should be made easier and faster so that companies do not have to contend with uncertainties of receiving reimbursement. This would encourage companies to invest in manufacturing with confidence and peace of mind. The reimbursement process could be moved to an online portal for greater convenience.

IP developmentA large amount of design activity is carried out at the established IT firms such as HCL and Infosys and the captive design centres of Intel and AMD, but there is no local IP held in the country. Encouraging the growth of fabless design companies and software development firms through start-up capital seeding and, possibly through the mooted EDF corpus, could lead to the generation of indigenous IP in the short to medium term. The application of regional language software could provide opportunities considering the expected penetration of computing and connectivity in semi-urban and rural areas; the idea of setting up central government grants for such software development activity at the NITs should be considered.

Component ecosystemThe manufacturing of motherboards and LCD displays for laptops should be incentivized by exempting their individual components from basic customs duty and excise duty, or offering preferential excise duty. Likewise, sheet metal fabrication and plastic moulding are fairly mature technologies in India; hence, the manufacturing of laptop enclosures could also be incentivized too.

Product manufacturingThe challenges that are inherent to the assembly of laptops is that all of the supporting industries need to be present in close proximity so that the finished product can be assembled optimally and shipped to market destinations in its finished form. Unlike desktops, it doesn’t make sense for laptops to be shipped in knocked-down unit fashion and then assembled at market destinations. Considering that the Indian laptop market is import heavy and a fairly sizeable one too, it causes considerable stress on the country’s import bill. Hence, it would be wise to look elsewhere in the electronics ecosystem to address this issue; tablets, for example. However, if a decision to invest in the manufacturing of laptops is indeed taken, then the electronics ecosystem for laptops should be incentivized in a holistic manner to foster the growth of all the supporting industries that are needed to manufacture/assemble laptops in one location.


Tax Structure Convoluted process of claiming tax creditReimbursement process should be made easier to encourage investment in manufacturing and

ensure peace of mind for manufacturers

Value Addition Lack of feeding activitiesManufacturing of motherboard and LCD displays

should be offered preferential basic duty and excise duty rates; also enclosures



Desktops - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Only assembly


Local Value Addition Low – Negligible sourcing; only box assembly

Top 4 Components Processor, Monitor, Motherboard, Hard Disk Drive

Component Ecosystem Negligible; predominantly imports

Product Importance for Ecosystem Promotion; WhyHigh; Sizeable local market; Sustained demand potential; Export

opportunity


a Optimize tax structure and reimbursement processb. Rationalize customs and excise dutiesc. Incentivize manufacturing for motherboards, LCD displays, cabinets and enclosuresd. Utilize EMC and MSIPS schemes to promote cluster development for manufacturing of components

Market and OpportunityThe Indian desktop market was estimated to have been worth about $1.97 billion in 2012, and to grow at approximately 0.4 per cent in the period 2011—2015. The increasing adoption of laptops, due to the relative decrease in prices in recent years and the ability to harness computing power on-the-go, has led to predictions that desktops will cease to be relevant in this era of mobile computing. However, the disruptive influence of tablets upon the consumption of online content—and to a smaller extent, the creation of content—is due to impact the market for laptops.

India has got one of the lowest penetration of computers in the world (less than 15 per cent); while the A class cities already possess high penetration rates of computers in households, B and C class cities lag behind in this regard. The rising usage of online bill payments, registration for government schemes and ID, and consumption of online content is bound to increase penetration of desktopcomputersinthesecities.Thispenetrationcouldfurtherincreasewithincreaseinefficiencyofbroadbandservicesandrollout of 4G services.

0

500

1000

1500

2000 1943

2500

20112010 2012 2013 2014 2015

Desktops Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 0.4%

TDM (overall): 0.4%



0

1943

1973 0

1973

1968

1968

0 1978 1993

19931978

0 02008

2008

0


Desktops: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 5.95 5.95 0.00

2011 6.20 6.20 0.00

2012 6.41 6.41 0.00

2013 6.66 6.66 0.00

2014 6.92 6.92 0.00

2015 7.20 7.20 0.00


Industry SWOTAssembly of desktops is a widespread activity in India, and more than 60 per cent of the desktops sold in country are locally assembled. Companies like Dell, HCL, and Wipro assemble almost all of their desktops within the country. Acer and HP also assemble the majority of their desktops locally. Since desktops have to transported by sea, transportation of disassembled modules and assembly of final goods at the destination is preferable to importing final goods as finished products.

There is no indigenous IP held with regard to desktops. However, since desktops are designed based on open architecture, assembly at destination is made easier which also shortens the time-to-market. Also, some organizations, such as banks, have rigorous purchasing processes that might require pre-shipment inspection and pre-delivery testing which is made easier if assembly happens locally. Local value addition is limited to the assembly, testing, and packaging of desktops though, and in some instances, local sourcing of certain components. However, in the last few years, local sourcing of components is reported to be on the wane because of a convoluted duty structure that increases business complexity for manufacturers importing individual components for assembly; for example, import for finished mother boards attracts only CVD while import of individual components for motherboard manufacturing attracts CVD and an SAD of 4 per cent that will be refunded after raising a reimbursement claim for the same. This increases upfront costs for manufacturers apart from the uncertainty over the reimbursements. This is particularly relevant during times of currency depreciation when costs can increase drastically for such imports. Such factors discourage entities from making significant investments in manufacturing facilities considering the relatively thin margins that this industry operates on.

India possesses considerable competency in design; substantial design activity is carried out in IT firms such as Infosys, Wipro and HCL. These design activities range from basic motherboard design to high-end server design. However, most of their work is executed for MNCs and there is possibly no local IP held. CPU testing is also carried out fairly extensively in India, as is final configuration, testing, and delivery to customers. With respect to design alone, even though design development of desktop happens in parts and on different teams, the contribution of Indian talent could possibly be pegged at 15 per cent of overall design. The reputation of Indian design talent is considerable but the country lacks an institutionalized process to metamorphose it into tangible IP that could contribute to the economy. The overall value addition in terms of dollar value is about $ 6 (inclusive of margin), though the amount of activity in terms of resources used is fairly high.




Keyboard / Touchpad

Monitors; Speakers

Input / Output

CPU

CPU

CPU

Software


Operating System

Applications


Desktops

Enterprises

Consumers

Government


Hard disk / Casing


CD Drive; Printer; Modem

The MNCs currently import units in L6 configuration which doesn’t contain the CPU, memory and hard disk; the balance comprises of power supply, motherboard, etc. and arrives in pre-fabricated from outside India. The final configuration of desktops happens in India. However, indigenous companies HCL and Wipro perform grounds up assembly of desktops, with either local sourcing or the import of individual components depending on availability and business ease. Entities present in the unorganized market in India also perform grounds up assembly; they account for about 60 per cent of the consumer market. The enterprise business for desktops is completely handled by the organized sector, i.e., large MNCs and indigenous companies.




CapabilityCompany

NamesLevel of Local

Value AddRemarks


Processor Imports No No Intel, AMD NAThough design capability exists there is no presence of local IP

MonitorImports/

Local SupplyYes No

TPV, LG, Samsung

Low

MotherboardImports/

Local SupplyYes No

Pegatron, ECS, Gigabyte, MSI,

FoxconnLow

Local motherboard assembly used to be operational; shut down now

Hard disk Imports No NoSeagate, Toshiba

NA

Desktops

OEM YesYes, only Low

Value Add Assembly

NoDell, HP, HCL, Wipro, Acer

Low

Integrators YesYes, only Low

Value Add Assembly

No NA LowUnorganized sector that operates

in the B2C space

Table below captures the capability in India across the desktop value chain.

Currently, local manufacturing is not competitive globally due to a number of disability factors. In the light of latent manufacturing strength for certain products, inclusion of those products under ITA-1 has constrained the growth of local manufacturing due to the availability of imported goods. Also, domestic volumes are not growing fast enough for entities to invest in manufacturing on a large scale. MNCs invested in assembly facilities early on as they needed to be closer to their market; this also indicates their confidence in the manufacturing capability present in the country. However, the absence of a business environment in which local manufacturing can thrive has led to the suppression of local manufacturing capabilities.

The SWOT chart below captures the analysis for the desktop market.

STRENGTHS

Consistent demand expected, especially in B and C class cities

Manpower skills available, both vocational and skilled

Government schemes and policies expected to foster growth

Better quality and increased penetration of connectivity

OPPORTUNITIES

Active role of government in fostering electronics manufacturing

Rising manufacturing and labour costs in China driving manufacturers towards alternative destinations

India as a export hub for servicing Middle East and African countries

Rising entrepreneurial spirit among recent grads

WEAKNESS

Negative influence of INR depreciation

Convoluted duty structure causes complexity in business execution

Limited or nil IP generation; lack of incentives for indigenous design activities

Lack of wholesome supporting ecosystem for complete manufacturing

THREATS

Well established manufacturing ecosystems in China and East Asia

Rate of technology change introduces unpredictability in investment decisions

Emergence of disruptive models/form factors of computing devices

Infrastructure inadequacy – of power, clean water, and other utilities

SWOT



Component SWOTThe biggest contribution to the BoM in terms of dollar value in a dektop is accounted for by the monitor which costs US$80 approximately (excluding software costs). Next comes the processor which costs anywhere between US$60 and 110, followed by the hard disk and the motherboard that both cost in the range of US$40. On the motherboard, the semiconductor components and the PCB are most critical. Considering a BoM of US$40 for the motherboard, it can be estimated that the chipset costs about US$12, the PCB costs about US$6.5, and that the overall semiconductor cost is about US$20 including the peripheral chips.

In short, the top 4 components that contribute to majority of the desktop bill of materials (BoM) are:

1. Processor

2. Monitor

3. Motherboard

4. Hard disk

The motherboard is being manufactured in India, and indigenous players in particular source about 20 to 25 per cent of their requirements locally. Monitors are being made by LG and Samsung; HCL also manufactures monitors locally. Of course, processors for desktops are sourced from either Intel or AMD. The top suppliers for hard disks are Seagate and Toshiba. However, the situation with regard to hard disk is slightly on the balance currently due the shift in technology and enterprise business models, i.e., the shift towards cloud computing and centralized servers, and the movement in technology towards solid state drives. Hence, entities are presently thinking twice before investing in manufacturing facilities for mechanical hard drives and there are also questions about consumer adoption of mechanical hard drives in the future, given the advantages of using solid state drives.

With regard to value addition, the major activities that happen are either soldering or testing of components and the financial value of these activities is quite less. Over all, the manufacturing value added is about 10 per cent, including margins.

Strategic ConclusionsGeneralThe levying of SAD should be repealed at the very least on individual components of LCD monitors and motherboards. Also, the reimbursement process should be made easier and faster so that companies do not have to contend with uncertainties of receiving reimbursement. The reimbursement process should be moved to an online portal and there should be no restrictions on the number of times reimbursements can be claimed. Also, reimbursements should be directly transferred to merchants’ bank accounts. The increased liquidity and trust factor arising from these measures could help companies transact more or make greater investments. The present rate of abatement should also be raised from 25 per cent to reflect the rise in costs of doing business. SAD could be levied on finished product imports of motherboard and LCD monitors, for which a nascent manufacturing ecosystem exists in India.

IP developmentA large amount of design activity is carried out at the established IT firms such as HCL and Infosys and the captive design centres of Intel and AMD, but there is no local IP held in the country. Encouraging the growth of fabless design companies and software development firms through start-up capital seeding and possibly through the mooted EDF corpus could lead to the generation of indigenous IP in the short to medium term. The application of regional language software could provide opportunities considering the expected penetration of computing and connectivity in semi-urban and rural areas; the idea of setting up central government grants for such software development activity at the NITs should be considered.

Component ecosystemThe manufacturing of motherboards and LCD monitors should be incentivized by exempting their individual components from basic customs duty and excise duty, or offering preferential excise duty. Decrease in tax revenues could be offset a little through smaller hikes in sales tax or through offering greater rates of CENVAT credit on excise duties.The Indian manufacturing ecosystem possesses competencies in the manufacturing of these products, which incidentally also are the top two BoM contributors to desktops in terms of dollar value. These products also have applications in almost every electronics product. Once local manufacturing of these products is encouraged by exempting them from/ granting them preferential excise duties, it is very possible that investment will flow in and spur organic growth of the value chain. Likewise, sheet metal fabrication and plastic moulding are fairly mature technologies in India; hence, the manufacturing of cabinets and enclosures for use in desktops could also be incentivized through preferential excise duties and exemption from additional duties.


Product manufacturingThe assembling of desktops is already being carried out both by global OEMs and by indigenous players like HCL and Wipro. India has held back from discussing the ITA II due to the fact that the government recognizes the need for encouraging the growth of the nascent manufacturing capabilities in the country. If India were not to sign the ITA II, it could potentially push companies into investing in high-value added manufacturing in the country. Coupled with the wholesome basket of policy initiative being enacted by the government, this could also lead to the flourishing of downstream activities and lead to the establishment of a thriving product ecosystem.


Tax Structurea. Inverted duty structure

b. Low rate of abatement

a. Simplify reimbursement of SAD

b. Increase rate of abatement to reflect rising costs of doing business

Value Additiona. Lack of supporting industries

b. Absence of product design/IP generation

a. Incentivize manufacturing of PCBs, monitors, cabinets, and enclosures for desktops by giving preferential excise rates

b. Utilize MSIPS and Electronics Manufacturing Clusters scheme effectively to promote manufacturing clusters for these components

Component Ecosystema. Reliance on imports

b. Demand volumes

a. Increase CENVAT credit for locally sourced components/raw material

b. Increase basic duty for imports and reduce sales tax for finished goods



Digital Camera - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design

Nil; finished product imports


Nil

Local Value Addition Nil- No Sourcing; No Assembly

Top 4 Components Lens, Image processor, Image sensor, Battery circuit

Component Ecosystem Negligible; Only Imports

Product Importance for Ecosystem Promotion; Why

Medium; Huge Local Market; High Growth Potential


a. Top 4 Components do not have much potential for indigenization (global capacities, lack of local infrastructure etc)

b. Renew FTA for finished good imports

c. Encourage passive components manufacturing locally to encourage assembly level activity

Market and OpportunityIncrease in creation and sharing of digital content, increase in spending power and reduction in average selling prices is driving the digital camera market. Digital camera shipment volumes in the country are anticipated to grow from 4.2 million units in 2012 to 7.5 million units by 2015 growing at a CAGR of 21.3 per cent. Despite the high consumption volumes, there is no local manufacturing or assembly activity—Sony used to operate a plant in Haryana ten years ago that was shut down due to issues with the supply of raw material. Though, the digital camera market in India is still very attractive, the growth of smartphones is now affecting the market in India. Growing competition over the past few years has led vendors to launch feature-rich cameras at affordable price points. The competitive landscape for the digital camera players has undergone a major shift with reduction in prices. Prices of digital cameras in India have dropped extensively, especially in P&S segment, and a further 20 to 30 per cent price reduction is expected to be seen over the coming years. This will further bring tremendous opportunities for players to increase their market share in the Indian digital camera market.


Digital Camera: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 2.10 NA NA

2011 3.00 NA NA

2012 4.20 NA NA

2013 5.00 NA NA

2014 6.25 NA NA

2015 7.50 NA NA


1.8

00

0.2

0.6

0.4

1.0

0.8

1.8

1.2

1.4

1.6

20112010 2012 2013 2014 2015

Digital Camera Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 18.9%

TDM (overall): NA



0

1.6

1.4

0

1.2

00

0.9

0

0.66



Industry SWOTThe digital camera value chain comprises of various component and subsystem suppliers, assemblers and the downstream retailers and consumers. The lens technology and manufacturing process is the most crucial element in the manufacture of a digital camera. Japan holds the highest number of patents in this regard and hence presents a formidable barrier to exploring that segment in terms of design or manufacturing. The coating technology on the lens involves a high level precision and currently India does not have the skill set availability to implement this process. Also the quality and availability of raw material varies from country to country and currently India does not possess the right quality-availability mix required to manufacture the components of a camera. The digital camera value chain is depicted in the figure below.


Image Sensor

Image Processor

Motor Driver

Digital Camera - OEM

Digital Camera - EMS

Consumers

Peripherals

Memory

Capacitor

Battery pack

Lens

Audio interface

LCD controller




There are no manufacturers of digital cameras in the country and India is flooded with competition from foreign manufacturers. Besides the top 3 players who control almost 95 per cent of the market in India, there are other foreign players with varying capabilities. All of them import the digital camera as a finished product resulting in no local value addition. From an Indian ecosystem standpoint, with regard to components, all the core chips, LCD display, battery pack, sensors, lens etc., are imported while only a limited amount of local capability exists for the peripherals and LCD drivers.

The table below captures the capability in India across the digital camera value chain.





AddRemarks


Image sensor Imports No NoSamsung, Canon,

Toshiba, AOFNA

Lack of high quality raw materials

Memory Imports No NoAOF, Canon, Foba,

etcNA

Battery Pack Imports No No Electra, AOF, Foba NA

Lens Imports No NoAOF, Canon,

Tamron, OlympusNA

Japan holds the highest number of patents; no

design capability

Image Processor Imports No NoCanon, Sony,

ToshibaNA

LCD Controller, Capacitor,

peripheralsImports No No

AOF, Unorganized players

NA

Local manufacturing capability exists, but no OEM prefers to do any

kind of assembly activity locally

Digital Camera

OEM Yes No No Canon, Nikon, Sony NA

EMS No No No NA NA



Analysing the digital camera value chain in India, it is observed that the presence of sustained and growing demand for digital camera is a key strength for the industry. The absence of supporting industries is a critical challenge for the country; most electronic components are imported too. This inhibits the business case for local manufacturing of digital cameras. The Indian electronics ecosystem can potentially execute low level assembly for digital cameras; however, the duty structure for individual components is high and prohibits OEMs to consider investment in local manufacturing. The SWOT chart below captures the analysis for the digital camera market.


Shift in trend from Point and shoot camera to DSLRs especially from the younger population

Component design – components like resistors, capacitors, battery circuits can be designed in India

Skillset availability for component and product design

Well developed EMS industry to carry out assembly activity

OPPORTUNITIES

Paradigm shift towards Digital world. Increasing adoption of digital cameras.

Manufacturing and labour costs in China driving manufacturers to invest in facilities in India

India as a export hub for servicing ME, North Africa and Europe countries

New policies such as MSIPS incentivizing local manufacturing investments

WEAKNESS

Reliance on imports for the entire product – no product assembly or component imports

FTA imports through Thailand and Japan posing a huge hindrance for local manufacturing

Limited or negligent product design activities locally; No IP generation

Limited availability of necessary skill sets

THREATS

Smartphones hurting Digital camera sales

Well established manufacturing ecosystem in countries like China, Japan, Korea etc.

Well explored technology - Japan holds the highest patents for lens technology, no new development possible


SWOT

Component SWOTThe component ecosystem for digital camera is extremely diverse in line with the wide range of prices of digital cameras. While components such as lens, image sensors, battery pack, processors, memory, etc., are common for all types of cameras, the cost and capacity of these components vary depending on the features and applications supported by the camera. The top 4 components that contribute to majority of the Digital camera bill of materials (BoM) irrespective of the type or price are:

1. Lens

2. Image processor

3. Image sensor

4. Battery

Currently most of the digital cameras are imported as finished goods. The top players possess established manufacturing infrastructure in countries like China, Japan, and Korea. OEMs such as Canon possess manufacturing competencies across all stages of the value chain. Other players outsource parts of their manufacturing to contract manufacturers in China and other Asian countries.


Strategic ConclusionsGeneral recommendationsThe CENVAT for digital cameras is around 16% and an excise cess of 2% against an import duty of 10% makes it more expensive to assemble or manufacture locally. Over and above, the current situation in India is such that the FTA with Thailand and Japan makes it easy for most OEMs to import them as finished goods,thus making it inutile to develop an ecosystem for the same.

IP Development - DesignThe biggest challenge in terms of component manufacturing is the lack in design and skillset availability to develop lens and coating technology. From a design perspective, a well laid ecosystem in neighbouring countries restricts India’s chances of building indigenous capability, especially when the volumes do not warrant the need for local design.

Component ecosystem - Raw materialInadequacy of raw materials in India does not support manufacturing of the digital cameras or its BoM components in the country. In spite of our strengths in plastic, sheet metal and peripherals manufacturing, the risk associated with importing the lens and battery pack is very high and hence manufacturers prefer to import finished goods rather than investing in local manufacturing especially when there is no favourable taxation policy.

Product manufacturingUnless there is a renewal with the FTA, not much can be done with the product market. Developing an entire ecosystem for digital camera manufacturing is not very viable with Japan holding most patents for lens technology, the highest BoM component of a camera.Also,thetaxlimitationsofexcisedutyhigherthanimportdutymakethesituationdifficultforproductmanufacturing.Hence it is best suited to divert the available resources towards other areas that would offer greater and faster returns on investment.


Tax Structure

a. Cenvat of 16% and an Excise cess of 2% against an import duty of 10%

b. FTA with Thailand and Japan through which most OEMs import the product as a finished good

a. The situation has gone overboard. Unless there is a renewal of the FTA policy, not much can be done with respect to the product market.

Value Addition

a. Lack of Feeding Industriesb. Absence of Product Design/IP Generationc. Lack of Semiconductor fabs

a. With respect to Design and R&D, India did not invest in any segment of the value chain. Too late to invest in feeding industries.

Component Ecosystem

a. Reliance on importsb. Demand Volumesc. Lack of high quality raw materials

a. Although, India has it sown strengths in packaging, sheet metal and plastic manufacturing, importing the lens or battery pack is highly risk associated

Policy Initiatives

a. Invert duty structureb. Lack of regulations to develop skillset and

design capability in specific to lens and coating technology

a. Currently Japan holds the highest number of patents in lens technology which prohibits India from exploring such an option, thereby throwing off a policy initiative for labour reforms or skillset development



Inverters and UPS - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/DesignManufacturing; components imported depending on business

requirements


Local Value Addition Inverters: High; UPS: Medium

Top 4 Components Transformer, Power devices/Mosfet, Heat sink, Microcontroller

Component EcosystemStrong presence; unable to compete with price of Chinese-made

components

Product Importance for Ecosystem Promotion; WhyHigh; Huge local market; Available manufacturing and design

competency; Export opportunity


a. Government should reduce excise and simplify tax claim proce-dure

b. Government should exempt import duty on components and aid indigenous players in innovating

c. Incentivize R&D activity in higher power UPS through utilizing EDF corpus

Market and OpportunityThe inverter and UPS market in India was estimated to be worth US$ 1,189 million in 2012 and grow at about 9.7 per cent during the period 2010—2015. The manufacturing ecosystem for these products is quite mature while technological requirements of UPS manufacturing are greater than the manufacturing and design capabilities present in India currently. Some of the major players in the inverters market are Luminous, Sukam, and Microtek; in the UPS market, the major players are APC, Eaton, and Emerson.Steady demand from the home and SOHO segments is expected to buttress the growth of the inverter market. The unorganized segment has a large share of the inverter market, though its share has been declining lately due to enhanced consumer awareness. Unorganized players source their products in knocked-down units from East Asia, which do not compare favourably with locally produced products in their quality and reliability. However, their input costs have increased on account of levying of duties on the import of lead and lead products. Also, organized players have strengthened their distribution networks, thus posing a formidable challenge to the unorganized players. Due to frequent power failures, inverters, specifically sub-5 kVA inverters, are increasingly being used in applications like emergency lighting, elevator backup systems and other non-critical systems. The demand for inverters is seasonal, peaking during the summer due to frequent power outages. This situation, especially in the southern states, has contributed to the sharp rise in demand. The enforcement of pollution control norms is likely to support the substitution of generator sets with inverters of similar capacity. The market is also witnessing the entry of consumer durables players.


Inverters and UPS: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 7.72 7.19 0.00

2011 7.92 7.34 0.00

2012 8.67 8.16 0.00

2013 9.63 9.12 0.00

2014 10.81 10.27 0.00

2015 12.20 11.58 0.00


1565

0

0

200

400

600

800

1000

1200

1600

1400

20112010 2012 2013 2014 2015

Inverters and UPS Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 8.9%

TDM (overall): 9.7%



13721242

0

1415

1289

0

1127

1189

0

1033949

0

1112

0

1124

970



Industry SWOTThe domestic manufacturing of inverters possesses medium value addition; all the electronics components are mostly imported. Various companies present in the Indian industry leverage their local competencies and global supply to serve the domestic market.Indiaismoreorlessself-sufficientinthemanufacturingofinverters.Themostvaluablecomponentinsideofaninverteristhe transformer and India possesses considerable capabilities for their manufacture. Such capabilities could enable the country act as an export hub to countries such as Philippines, Vietnam, Sri Lanka etc.

With regard to UPS, some companies possess local competencies and choose to take advantage of it after considering their global supply chain options as well. Lower power UPS (5 to 10 KVA) are mostly imported from China, and in some cases from Europe. Some manufacturing of lower power UPS happens domestically as well. Higher power UPS are imported invariably from Europe or their home bases. These mostly arrive in the finished product form, or in some cases may arrive in knocked-down units too wherein they are assembled locally. The more critical technological requirements of higher power UPS require companies to source from their home bases and R&D facilities.


Transformer

Heat sink

Power devices / MOSFET

Microcontroller

Enterprises

Consumers

Power connectors

Capacitors

Cooling system

Inverters / UPS

Resistors

Inductors

PCB

Power module




India doesn’t possess end-to-end capabilities of designing UPS with higher power ratings. With regard to manufacturing, robust design expertise is an imperative for higher power UPS; the product lifecycle is high (approximately 4 years), the investment needed is huge, as is the risk of implementation. Also, it is not economical to set up manufacturing of higher power UPS due to the relatively small market size.

The table below captures the capability in India across the inverters and UPS value chain.


SupplyLocal


CapabilityCompany

NamesLevel of Local

Value AddRemarks


Transformer Yes Yes No HighThough design capability exists there

is no local realization of IP

Power devices/Mosfet

Partial No No NA

Heat sink Partial Yes No NA

Microcontroller Partial No No NAThough design capability exists there


Other active and passive components

Yes Yes No High

Enclosures Yes Yes No HighThough design capability exists there


Inverters/UPS

MNCs YesYes, low to

medium value addition

NoLow to

Medium

Depending on technology requirements, make or import decision

is made

Indigenous players

YesMedium value

additionPartial High

Components are imported, assembly happens locally



STRENGTHS

Robust domestic demand for inverters and UPS

Comprehensive manufacturing ecosystem and expertise for inverters

Fairly developed manufacturing competencies for UPS

Availability of supporting industries

Rude health of corporate sector buttressing growth of UPS market

OPPORTUNITIES

Escalating manufacturing and labour costs in China could encourage local manufacturing

India as a export hub for servicing ME and North Africa


Further strengthening supporting industries would entrench manufacturing competency

WEAKNESS

Reliance on imports for products requiring greater technical expertise

Lack of subsidies to encourage supporting industries; tax benefits, etc.

Lack of design expertise for UPS of higher power ratings

LackofscalemakesitdifficulttocompetewithChineseproducts on price

THREATS

Well established manufacturing ecosystem in China

Emergence of other low cost manufacturing destinations like Vietnam.

Infrastructure inadequacy– sufficientpower,water andother utilities – uninterrupted availability

SWOT

Component SWOTMany companies in the Indian electronics ecosystem import transformers and heat sinks from overseas though they are manufactured in India since indigenous players are unable to compete with the cost of importedproducts. The same trend is observed in PCB supply too. All semiconductor components are imported from East Asia.

The top 4 components that contribute to majority of the inverter/UPS bill of materials (BoM) irrespective of the phone type or price are:

1. Transformer

2. Power semiconductors

3. Heat sink

4. Microcontroller

The SWOT chart below captures the analysis for the inverters and UPS market.



Tax Structurea. No preferential excise duty rates

b. Convoluted tax exemption claim procedure

Government should set preferential excise duty rates and also simplify the procedure for

claiming tax exemption.

Component Ecosystem

a. Lack of impetus to increase value addition

Considering the rude health of the inverter component ecosystem, even import duties on these components could be reduced to

zero to have them compete against Chinese products, to help them innovate on cost while

maintaining quality

Value additiona. Lack of expertise in UPS of higher power

ratings

Government should incentivize R&D activities in this area through using the EDF corpus, so that

the ecosystem can add competencies across the value chain for higher power UPS

Strategic ConclusionsGeneralInformation technology is a prime driver of the inverter and UPS market. Opportunities for UPS will open wherever there is a need for unlimited power at constant frequency—this indicates that all critical applications in the corporate sector will need UPS to fulfil their purpose. Also, usage of UPS is directly related to productivity which can act as a driver across industries. It would be of great benefit to the economy of the country if we possessed holistic manufacturing competency of such a product. Hence, local manufacturing should be encouraged by lowering excise duty and making the process of reimbursement of tax credit easier and quicker to promote business confidence.

IP developmentThe government should seek to gain expertise in the design and manufacturing of UPS of high power rating (> 10 KVA) by investing appropriately in R&D—the EDF corpus could be an appropriate way of implementing this measure, especially considering the need for higher capacity UPS for cloud servers and large scale enterprise operations. Alternatively, the government could formalize practicum programs between industry and engineering institutions, which could lead to innovative design solutions and IP generation—this could also help develop interest in core design activities among students.

Component ecosystemThecountrydoespossesscompetenciesinthemanufacturingofPCBtransformers.However,Indianmanufacturersfinditdifficultto compete with cheaper Chinese products. Indigenous manufacturers also do not possess enough scale to compete with the Chinese who are able to price their products lower due to their economies of scale. The government could aid local players in this regard by offering preferential excise duties and facilitating quicker reimbursement of tax credits. Also, the manufacturing of transformers involves the import of copper, which affects lead time. Developing port and logistics infrastructure could go a long way in decreasing the lead times of manufacturers and making indigenous products more attractive in the marketplace for OEMs.

Product manufacturingThe steady demand from the PC market and frequent power outages will continue to drive the market for home UPS and inverters. Also, niche areas like cloud computing require reliable power supply to fulfil their performance guarantees and hence requite quality UPS of higher power ratings. Export incentives should be given for the export of inverters since the country possesses a holistic product ecosystem, and export opportunities are available in destinations like Sri Lanka, Philippines, Africa, etc. To this effect, the extension of the zero duty EPCG benefit to all sectors could be a huge boost in this regard as it would aid manufacturers in capacity expansion.



Memory Cards and USB drives - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Imported as finished products


Nil

Local Value Addition Nil

Top 4 Components Flash memory chip, Microcontroller, Crystal oscillator, USB connector

Component Ecosystem None; all imports in form of finished product


Low to medium; Huge local market; High growth potential; Critical role played in end user applications


a. Focus on eliminating grey market through levying CVD and eliminating dumping, ensuring reliability of products in the market

b. Deliberate thoroughly on pros and cons of establishing flash memory manufacturing facilities while assessing other investment opportunities in the electronics ecosystem

Market and OpportunityThe proliferation of digital content has created a surge in demand for storage devices. The flash memory market (memory cards and USB drives) was estimated to have been worth US$ 1.1 billion in 2012 and is expected to grow at about 11.7 per cent over the period 2011—2015. The magnitude of data being generated by imaging platforms and computing applications both in the enterprise and consumer segment has grown manifold. These factors continually emphasize the need for reliable storage media which should also be easily accessible and portable. The growth of social media and the sharing of content on social media websites have also greatly influenced the demand for memory cards used in mobile phones and digital cameras. In a fairly short period of time, the Indian market has been become fairly mature in the usage of flash memory. The most popular configurations are 4 GB, 8 GB, and 32 GB memory cards that are utilized in smartphones and digital cameras. Despite recent hikes in prices of flash memory, the market is expected to grow driven by the robust smartphone and tablet market and increasing demand for consumer storage in Tier 2 and Tier 3 cities. USB 3.0 drives are estimated to be increasingly adopted in consumer storage by early adopters, while USB 2.0 drive might still find takers among the value conscious purchasing segment untilprices drop.

1.59

0

0.2

0.4

0.6

0.8

1

1.2

1.6

1.4

20112010 2012 2013 2014 2015

Memory cards and USB drives Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 11.7%

TDM (overall): NA%

TDM (Low/Med value add) : NA%


1.40

1.24

0 0 0

1.10

00

1.02

0

0.93


Memory cards and USB drives: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 48.20 0.00 0.00

2011 55.70 0.00 0.00

2012 63.07 0.00 0.00

2013 74.64 0.00 0.00

2014 88.60 0.00 0.00

2015 106.09 0.00 0.00


Industry SWOTThe Indian electronics ecosystem possesses no competencies with regard to the manufacturing of flash memory. Fabrication of memory chips and the assembly of flash memory cards is a highly complex and intricate process that requires considerable investment. Almost all of the global flash memory suppliers are based in East Asia and the US, countries that possess mature semiconductor fabrication capabilities: Samsung, Toshiba, Micron Technology and Hynix, among others are prominent makers of flash memory. Since assembly of flash memory cards and drives is an intricate process and the finished products are not bulky as well, all of the flash memory cards and drives consumed in the Indian market are imported as finished products. An additional challenge to setting up flash memory fabrication facilities in India is that the business model revolves around low margins and high volumes. Considering the excess global capacity of flash memory fabrication, it does not present an attractive business case for investment in the Indian electronics ecosystem. However, manufacturers are investing capital in upgrading their equipment to implement smaller process nodes at the global level. Costs and power required per chip can then be reduced and memory densities can be increased. It is expected that 32+ GB configurations will comprise about 60 per cent of flash memory shipments, beginning 2014.

The value chain of memory cards and USB drives is depicted in the figure below.


USB connector plug

Microcontroller

Flash memory chip

Crystal oscillator

Personal data storage

Consumer Electronics

LEDs

Secondary memory chip

Memory cards / USB drives

Drive casing



Write protection switch



Recently, the government has opened a process of anti-dumping investigation with regard to imports of USB flash drives manufactured in China, Chinese Taipei and South Korea. The notification states that there is prima facie evidence to show that the normal value of USB flash drives being manufactured in these countries is significantly higher than the export price to India, indicating presence of a dumping margin. If proven, the government could impose CVD on USB flash drives which would go a long way in eliminating the grey market.

Table below captures the capability in India across the flash memory value chain.


SupplyLocal


CapabilityCompany

NamesLevel of Local

Value AddRemarks


Flash memory chip

No No NoSamsung,

Toshiba, HynixNA Imported as part of finished product

Microcontroller No No No NA Imported as part of finished product

Crystal oscillator

No No No NA Imported as part of finished product

USB connector plug

No No No NA Imported as part of finished product

LEDs No No No Cree, Nichia NA Imported as part of finished product

Casing No No No NA Imported as part of finished product

Memory cards / USB drives

OEM No No NoSandisk,

Kingston, Transcend

NA

Piracy has long been a bugbear of the flash memory market. Imposing CVD on flash memory products would counteract the effect of the grey market. It is expected that the resulting increase in prices would not affect the demand for branded products due to the guarantee of reliable data storage and performance.

The SWOT chart below captures the analysis for the flash memory market.

STRENGTHS

Significant demand for flash memory, and its associated advantages

Potential for greater growth in future due to rising usage of consumer electronics and IT

Established manufacturing facilities and technological improvements towards greater memory densities

OPPORTUNITIES

Increasing usage of mobile phones, digital cameras, and tablets

Newer product launches that incorporate date storage through flash memory

Observed trend of e-learning can be enabled by usage of portable flash memory

Usage of backup media made easier through flash memory

WEAKNESS

Price competition constantly eats into margins which are already low

Effect of grey market erodes demand for more expensive branded products

Absence of any of value chain stages locally

Market is extremely import heavy

THREATS

Well established manufacturing ecosystem in East Asia acts against local investment.


Piracy affects usage of branded products which offer reliability and greater performance

SWOT


Component SWOTThe components that make up a memory card or a USB drive are all mounted on the circuitry or the PCB itself due to the small size of the products. The cost of manufacturing a memory card or a USB drive is quite low due to the scale achieved by flash memory suppliers and advances in technology. All of these capabilities are present in East Asia on a large scale which acts against any potential decisions to invest in local manfacturing capabilities. Also, due to the small size of these products and the complexity of assembly, it is prudent to assemble memory cards and USB drives at the location of flash memory manufacturing and transport them as finished products to market destinations. The flash memory chip accounts for nearly 80 per cent of the BoM.

In short, the top 4 components that contribute to majority of the bill of materials (BoM) are:

1. Flash memory chip

2. Microcontroller/ASIC

3. Crystal oscillator

4. USB connector

Strategic ConclusionsGeneralThe government should impose CVD on memory cards and drives to discourage the import of unbranded products and ensure safety of customer data.

IP developmentConsidering the semiconductor design strength of the country and the critical nature of memory storage, the government should utilize the mooted EDF corpus to encourage design activity in this field. This would give the country a foothold in a valuable stage of a ubiquitous electronics product globally. The licensing of such IP would seed a great amount of design activity and overall economic activity. This could also be achieved on a smaller scale through a formalized practicum program wherein fabless design companies tie with nearby engineering colleges.

Component ecosystemEast Asian countries have already achieved scale in the manufacturing of flash memory chips and they also possess the necessary capabilities to assembly memory cards and USB drives. Advances in memory technology and the scale achieved by flash memory manufacturers have led to very affordable prices for these products.

Product manufacturingConsidering the low margins and the magnitude of investment required to set up a flash manufacturing facility, it seems logical to divert the available resources towards other areas that would offer greater and faster returns on investment.However, due to the critical nature of memory storage and the fact that it would add vital functionality to the products it is incorporated in, it would be prudent to deliberate on the merits of attracting investment in a flash memory fabrication facility, while assessing the other available opportunities for investment in the electronics ecosystem.


Tax Structurea. No measures present to

counteract grey market in flash memory

a. If presence of dumping margins are proved, CVD must be levied to create confidence among white market players and create access to reliable products for consumers

Value Additiona. Absence of flash

manufacturing facilities and associated assembly activities

a. Considering both the low margin-high volume business model of flash memory and the critical role it plays in end user applications, considerable thought should be given to attracting investment in flash memory manufacturing in the future, possibly through M-SIPS or through a separate and dedicated initiative



4W EMS - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Assembly and manufacturing


1.94 million (2012); CAGR (2012-15) 22.4%

Local Value AdditionLow – design, electronic components all imported along with

other materials

Top 4 ComponentsMechanicals - Pumps and Injectors (40-50%), Analogs &

Sensors (20%), MCU (10%)

Component Ecosystem Electronics imported


High; emission norms getting stricter and EMS aids in better engine performance


a. Focus on product IP and design

b. India’s proposed fab could look at MCU for automotive applications as a key product for local fabrication

Market and OpportunityThe need for better engine performance and the need to adhere to better emission norms have been influencing the adoption of EMS in 4 wheelers. The total market for 4W EMS in 2012 was 3.66 million units, which is expected to reach 5.47 million units in 2015 growing at a CAGR of 13.5 per cent during 2011—2015. Of the total market, domestic manufacturing was about 1.94 million units in 2012. It is expected to reach 3.56 million units by 2015 growing at a CAGR of 22.4 per cent.

1.34

0

0

0.4

0.2

0.6

0.8

1.0

1.2

1.4

20112010 2012 2013 2014 2015

4W EMS Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

10%

25%




CAGR (2011 - 2015)

TM: 7.9%




0.87

0

1.22

1.12

0

0.64

1.04

00

0.99

0

0.96

0.43 0.50.55

0.75


Industry SWOTAlmost 50 per cent of the total demand is met through imports, while the rest are assembled locally by companies like Bosch, Denso and MagnetiMarelli. These companies presently conduct testing and development of EMS software which equates to a medium level of value addition with regard to manufacturing in the country. These companies are also making substantial investments in the expansion of their local EMS capabilities, which will increase the level of value addition with regard to manufacturing of EMS in India.

The 4W EMS value chain is depicted in the figure below.

Component and Sub-system Suppliers System Integrators Downstream

Mechanicals - Pumps and Injectors

MCU

Analogs & Sensors 4W EMS OEM’s


4W EMS: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 3.04 1.37 0.00

2011 3.30 1.65 0.00

2012 3.66 1.94 0.00

2013 4.14 2.36 0.00

2014 4.76 2.90 0.00

2015 5.47 3.56 0.00




The table below captures the capability in India across the 4W EMS value chain.


SupplyLocal




AddRemarks


Fuel Pump Yes Yes Yes Bosch, Kayne High The Fuel pump and injector is manufactured and sold to

OEM’s as a combined unitFuel Injector Yes Yes Yes Bosch, Kayne High

MCU Imports No NoInfineon, ST

Microelectronics, Freescale, Renesas

NoneSemiconductor ecosystem

missingAnalogs and

SensorsImports No No

ST Microelectronics, Infineon, IR, Onsemi,

FreescaleNone

4W EMSOEM Yes Yes No

Bosch, Denso, Magneti Marelli

Low

EMS No No No NA NA

The SWOT chart below captures the analysis for the 4W EMS market.

STRENGTHSStricter automobile emission norms encourage EMS manufacturing in India

India already the largest market for automobile and a small-car export hub – adds to the demand for EMS

OPPORTUNITIES

India’s growing demand for small car to boost demand for ECU’s

Bosch India availing MSIPS to start production of ECU’s in next 5 years

WEAKNESS

98% of EMS components imported

OEM’sglobalofficesholdIPrightsofEMSdesign

Import duties on electronics should be reduced

THREATS

Slowdown of the Indian automobile industry

Importing components from China and Vietnam holds better business proposition


SWOT

Component SWOTThe top 3 components that contribute to the majority of the 4W EMS bill of materials (BoM) are:

• Mechanicals:pumpsandinjectors

• Analogsandsensors

• Microcontrollers

Analogs, sensors and microcontrollers are imported components since the Indian electronics ecosystem doesn’t possess the relevant competencies needed for the manufacturing of these components domestically. These are imported by companies such as STMicroelectronics, Infineon, Freescale, Fujitsu, and the like. Pumps and injectors are sourced locally through companies such as Bosch and Kayne that possess domestic manufacturing capacity.


Strategic ConclusionsGeneral:

The need for an efficient fuelmanagement system in vehicles has seen this product segment chart tremendous growth. Toaccentuate the growth of the product market further, using the EMC policy, an automotive electronic cluster could be set up in south India, preferably near the Bangalore-Chennai corridor, since the area already is home to significant automotive manufacturing activity.

IP development: India already holds the IP of one of the critical components, i.e. the fuel injector and pump. However, the IP right of the entire technologyisstillheldbytheglobalofficesoftheOEMwhicharesharedwiththeirlocaloffices.

Component ecosystem:

Nearly 95 per cent of the electronics and raw materials required are imported from countries such as Japan, Thailand, Korea, etc. The country needs to develop the electronics ecosystem along with the remaining raw materials to gain value as this product segment holds tremendous growth opportunities. This could be achieved by attracting investment through the MSIPS policy. Coupled with preferential excise duties or greater rates of CENVAT, this could provide impetus for electronics manufacturing in the country, especially in the area of microcontrollers since the Indian electronics ecosystem possesses considerable design competencies as well. The setting up of the two semiconductor fabs in the country would prove to be a great enabler in this regard.

Product manufacturing:

Bosch, Denso and MagnettiMarelli, manufacture the most critical component in the BoM, the fuel injector and pump, with around 40-50 per cent being locally designed and manufactured as well.


Market/ Value chainComponent market is import-

heavy; all major electronics components being imported

a. Fab policy could foster manufacturing of microcontrollers, due to existing design competencies and automotive manufacturing competencies.

b. Manufacturing of electronics components, especially microcontrollers, to be incentivized using preferential excise rates or greater rates of CENVAT credit

c. Using MSIPS and EMC, automotive electronics manufacturing clusters could be setup in the south, near the Bangalore-Chennai region.



LCD Monitor - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Finished product imports; Assembly


Local Value Addition Low to medium: Assembly activity

Top 4 Components Display, ICs, Electro-mechanicals, Power Components


Product Importance for Ecosystem Promotion; WhyMedium; Huge local market; High growth potential;

Export opportunity


a. Preferential excise and facilitate reimbursement of tax credit

b. Explore attracting investment for brownfield Gen 5 TFT LCD fab

c. Use EDF funds to foster R&D into new display tech-nologies

Market and OpportunityThe LCD monitors market was estimated to have been worth US$ 907 million in 2012, and was projected to grow at about 11.2 per cent during the period 2011—2015. LCD technology has nearly replaced CRT technology and dominates the display segment presently.LEDbacklitmonitors,thataremoreenergyefficientthanCCFL-backlitLCDmonitors,arefastgainingprominence.Already,major players have begun revamping their product portfolios solely with LED-backlit monitors. This has led to the emergence of small indigenous players who have moved into the CCFL-backlit LCD business, offering lower pricing. The assembled desktop PC industry is the biggest driver of the LCD monitor market. Hence, rising adoption of laptops has affected demand to a large extent. However, efforts to computerize government agencies which created demand for desktop PCs have served to sustain demand for LCD monitors to an extent. The resilient progress made by the Indian ITeS sector and SMBs is expected to further drive demand for LCD monitors. Although 50 to 60 per cent of the market consists of finished product imports, LCD panels were exempted from customs duties beginning 2012, and this is expected to give great impetus for local manufacturing of LCD monitors. Depreciation of the Indian Rupee has affected prices of monitors in the short term, as has recent hikes in excise duty.

The LCD monitor market is highly competitive. In addition to bigger players like Samsung, LG, Viewsonic, AOC and Philips, PC OEMs such as Asus, Acer, Dell and HCL also are present. There are also newer and smaller players present like Beetel, Intex, Moser Baer and iBall that have established fairly strong distribution channels through local contacts.


1245

0

0

200

400

600

800

1000

1200

1400

20112010 2012 2013 2014 2015

LCD Monitors Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 11.2%




827725

0

11211008

0

636

907

0

558490

0

816

0

756

397

LCD Monitors: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 6.00 3.15 0.00

2011 6.80 4.08 0.00

2012 7.86 4.90 0.00

2013 9.31 5.88 0.00

2014 10.89 7.05 0.00

2015 12.74 8.46 0.00


Industry SWOTThe TFT LCD (thin film transistor-liquid crystal display) industry is very capital-intensive. Typically, the cost of a new TFT LCD fab is about US$ 3 billion. This is because such a fab would contain expensive process equipment and also critical material handling equipment that work with the process equipment. The penetration rate of LCD panels has outstripped that of traditional displays. LCD panels were exempted from basic customs duty beginning 2012, and this is expected to attract investment in local manufacturing of LCD monitors. However, it is important to be cognisant of the present stage of evolution of display technology and its relevance to the Indian context.

Globally, LCD fabrication has gone through an evolution of nearly 9 generations since the first generation. The major difference in generation technology is the size of the mother glass that is used at the beginning of the manufacturing process. The size of the mother glass used in generation 1 was about 30cm x 40cm, and could make one 15” panel. Presently, the size of the mother glass used in hybrid generation 8.5 fabs is approximately 220 x 250 cm, and the glass thickness is less than 1mm.



The LCD monitor value chain is depicted in the figure below.


Backlight units

Colour filter

Polarizer

Array glass substrate

Consumers

Enterprises

Government

OEMs

Bridge Rectifier

SMPS Transformer

Output Filter Capacitor

Power IC

Schottky Diodes

Fuse

Opto-isolator


LCD monitors


Filter Capacitor

TheprogressionthroughfabgenerationsintheTFTLCDindustryalsoinvolvesincreasesinproductionefficiency.Forexample,32”LCD TV panels were originally designed to be manufactured in generation 6 fabs. But presently more than 70 per cent of them are produced in generation 8 fabs and generation 6 fabs now produce LCD monitor panels. Also, the usage of 0.5 mm glass substrates in generation 6 and newer fabs has introduced production flexibility; both laptop and monitor panels can now be made in these fabs, instead of having to concentrate production on one end user application alone.



SupplyLocal


CapabilityCompany

NamesLevel of Local

Value AddRemarks

Components and Sub sys-

tems

Display No No NoLG, Sam-

sung, Sharp, NEC Display

NAImported as part of finished

product

Electro- mehcanicals

No Yes No MediumThough design capability Exists there is no local realization of IP

ICs No No No

Himax Technolo-gies, Orise Technol-

ogy, Sitronix, Raydium, Semicon-

ductor

NAImported as part of finished

product

Power compo-nents

No Yes No MediumThough design capability Exists there is no local realization of IP

LCD monitors

OEM No No NoLG,

Samsung, AOC

NANo local manufacturing value

addition

Indigenous players

YesYes, only Low

Value Add Assembly

NoMoser Baer, iBall, Intex

LowLow manufacturing

value addition

The table below captures the capability in India across the LCD monitor value chain.

Generation 5 fabs now mostly produce tablet PC panels; 89 per cent of notebook PC panels are also made in Gen 5 fabs. Generations 5 to 7 currently produce LCD monitor panels.

The SWOT chart below captures the analysis for the tablets market.

STRENGTHS

Huge domestic demand for LCD monitors

Exemption of LCD panels from basic duty encourages local value addition

Sustained demand for desktops drives demand for LCD monitors

Highly competitive market increases awareness of product among consumers

Fairly developed EMS industry – capabilities for LCD monitor manufacturing

OPPORTUNITIES

Government initiative could encourage uptick in LCD manufacturing activity

Manufacturers evaluating India’s fit as an export hub for LCD monitors

Rising labour costs in China could drive investment towards India

Sustained demand projected for tablets and laptops, also desktops

WEAKNESSReliance on imports for most of the critical components – chips, glass substrates, etc.Excise duty hike in mobiles could constrains local manufacturingAbsence of LCD fab that could greatly reduce turnaround times and optimize costs for consumersAdequate capacity at global fabs could cause investors to reconsider investment decision

THREATS

Well established manufacturing ecosystem in East Asia

Capital intensive nature of setting up TFT LCD fabs

Emergence of new display technology that could hinder return on investment

Infrastructural deficiencies that could delay investment and implementation

SWOT



Component SWOTThe biggest contribution to the BoM in terms of dollar value in an LCD monitor is accounted for by the display panel which could cost up to 50 per cent of the total BoM approximately. Next come the electromechanical components,that could cost 15 per cent of the BoM, and then the ICs and power components that account for the remaining 15 per cent.In short, the top 4 components that contributes to majority of the LCD monitor bill of materials BoM are:

1. Display

2. Electromechanicals

3. IC’s

4. Power

The bigger players in the market mostly import LCD monitors as finished products and do not need to source locally as the basic duty on these are exempt as well.

Strategic ConclusionsGeneralTax structures should be amended to encourage LCD manufacturing through preferential excise duty rates and easier reimbursement of tax credit. Since finished product imports are also exempt from basic customs duty due to trade agreements, the government should explore the option of bringing local sourcing of LCDs under the Preferential Market Access Scheme.

IP developmentInvesting in R&D for new display technologies should also be considered to hedge against investment made in TFT LCD display fabrication. Samsung has already been pulling out investments in new TFT LCD generations and has begun investing in R&D for implementing new AMOLED display technology. This would lead to indigenous IP being created in the country, which could make India a world leader in those technologies, much like how Japan and Korea have a monopoly on cutting-edge display technology currently.

Component ecosystemThe Indian ecosystem does possess competencies in the manufacturing of electromechanical components, SMPS transformers and the plastic enclosures used in the assembly of LCD monitors. The manufacturing of these components should be incentivized, especially since they are relevant to the product ecosystems of other electronics products as well. Local sourcing of these components should be encouraged through tax credits for vendors who source these components locally. Simultaneously, the government could encourage local manufacturers to tie up with engineering colleges and institutes in the vicinity through a formalized practicum program, so that engineering students could contribute to design of these components.

Product manufacturingCompetencies in the manufacturing of LCD displays,especially for tablet and laptop applications (assuming the supporting ecosystem for these products are incentivized as well, so that LCD manufacturing can feed into them), could be encouraged. This would require investment in generation 5 fabs, which are mostly being used for these end user applications—79 per cent of tablet displays and 89 per cent of laptop displays are manufactured in generation 5 fabs. Also, generation 5 fabs are growing at only 3 per cent a year while higher generation fabs are clocking almost 26 per cent annual growth. This could mean that relocating a generation 5 fab to a brownfield location could be done at an affordable level of investment, instead of the typical $ 3 billion needed for a new fab.



Tax Structure

a. No preferential excise duty

b. Finished product imports exempt from basic duty

Preferential excise duty should be given to manufacturing of LCDs while also facilitating reimbursement of tax credit. The option of including LCD under PMAS should also be explored, if feasible.

Value Additiona. Absence of LCD fab

b. Feeding to supporting ecosystems

Government should look into attracting investment for an brownfield LCD Gen 5 fab, that would serve tablet and laptop markets; this could feed into incentivizing of the tablet and laptop ecosystems.

Policy Initiatives a. R&D for new display technologies

Government should also use Electronics Development Fund (EDF) funds to promote R&D into new display technologies to hedge against investment in a Gen 5 fab, and also with an eye on becoming a future leader in display technology



SUMMARY

Product Local Manufacturing/Assembly/Design No; mostly finished product imports


Local Value Addition Low – Negligible sourcing; negligible assembly

Top 4 Components Processor, Memory, Motherboard, Hard Disk Drive


Product Importance for Ecosystem Promotion; WhyMedium; Sizeable local market; Robust growth potential; Possible

export opportunity


a. Reimbursement of SAD to be made easier for encouraging investment in manufacturing

b. Increase rate of abatement

c. Motherboard and enclosure manufacturing to be offered prefer-ential rates of customs and excise duty

Servers - Product and Ecosystem Analysis

Market and OpportunityThe servers market in India was estimated to be worth US$ 769 million in 2012. The market is slated to grow at a rate of approximately 11.2 per cent during the period 2011—2015 and is estimated to be worth at least US$ 1 billion by 2015. The projected growth of the cloud computing market in India would also require humongous investment in cloud infrastructure, which will create equivalent demand for servers. Also, the amount of business being transacted by industries such as ITeS, retail and BFSI, among others, has sustained demand for servers. Contiuning investment in IT infrastructure across various verticals in the corporate sector has also contributed to the growth of the market. However, the market is import heavy and fluctuation in the value of the Indian Rupee frequently poses challenges for vendors.

IBM, HP, Dell and Oracle are the key players in the market, accounting for almost 90 per cent of the market cumulatively. IBM is the market leader, responsible for one-third of the market. Another trend being observed is the consolidation of IT infrastrucutre by SMBs who now looking towards virtualization as a solution. As a result, channel partners are now are playing the role of solution providers for SMBs. Hence, server vendors are in turn ensuring that channel partners are up to speed with the latest training and capabilities to safeguard their brand equity. The progress made by the Indian ITeS industry, the bright fortunes of cloud computing and increased technology spending by the SMB segment is expected to support the growth of the servers market.

1085

0

0

200

400

600

800

1000

1200

20112010 2012 2013 2014 2015

Servers Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 11.2%




141119

0

956

853

0

102

769

0

8780

0

709

0

677

74


Servers: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.11 0.02 0.00

2011 0.12 0.02 0.00

2012 0.14 0.03 0.00

2013 0.16 0.03 0.00

2014 0.19 0.04 0.00

2015 0.22 0.05 0.00


Industry SWOTThe current ecosystem for servers involves local assembly; however, it is limited to SKD assembly or packaging and local testing. This translates into value addition of not more than 5 per cent. However one opportunity for extra value addition lies in the sheet metal fabrication of server cabinets, just as in desktops. This can definitely be carried out in India; however, different grades of steel will have to be used to adhere to the criticalities of IT equipment. This is most definitely an opportunity in the Indian electronics ecosystem for servers.

A lot of design activity happens in the captive design centres of global MNCs like Intel, Dell, HP, etc. However, this doesn’t translate into any local IP since all IP is held at the base of operations of MNCs. Assembly is carried out at the market destination for pre-shipment inspection and pre-delivery testing, if those are required.

In the last few years, local sourcing of components has been on the wane because of a convoluted duty structure that increases business complexity for manufacturers importing individual components for assembly; for e.g., import for finished mother boards attracts only CVD while import of individual components for motherboard manufacturing attracts CVD and an SAD of 4 per cent that will be refunded after raising a reimbursement claim for the same. This increases upfront costs for manufacturers and also increases uncertainty for them due to reimbursement claims that they need to make. This is particularly relevant during times of currency depreciation when import costs can increase drastically. Such factors discourage entities from making significant investments in manufacturing facilities considering the relatively thin margins that this industry operates on.

The server industry might undergo vertical integration in the future. Infrastructure software players are re-architecting their products to support the dynamism of on-demand service oriented architecture. If on-demand becomes a dominant trend in the future, one can expect that the software providers who align themselves to this trend would gain power in the value chain. On the other hand, major systems vendors such as IBM and HP may partner with independent software suppliers or develop their own stack of software.




CPU

Power supply / UPS

Consumers

Government

Enterprises

Servers



Software

Operating System

Applications


Hard disk / Cabinet


The table below captures the capability in India across the servers’ value chain.



CapabilityCompany

NamesLevel of Local

Value AddRemarks


Processor Imports No No Intel, AMD NAThough design capability exists there is no presence

of local IP

MotherboardImports/Local

SupplyYes No

Pegatron, ECS, Gigabyte, MSI,

FoxconnLow

Local motherboard assembly used to be

operational; shut down now

Hard disk Imports No NoSeagate, Toshiba

NA

Memory Imports No No NA

Servers OEM YesYes, only Low

Value Add Assembly

No HCL, HP, IBM Low


The SWOT chart below captures the analysis for the servers market.

STRENGTHS

Manpower skills available, both vocational and skilled

Government schemes and policies expected to foster growth

Strong growth in the government and BFSI verticals drives market

OPPORTUNITIES

Active role of government in fostering electronics manufacturing

Rising manufacturing and labour costs in China driving manufacturers towards alternative destinations

India as a export hub for servicing Middle East and African countries

WEAKNESS

Negative influence of INR depreciation

Convoluted duty structure causes complexity in business execution

Limited or nil IP generation; lack of incentives for indigenous design activities

Lack of wholesome supporting ecosystem for complete manufacturing

THREATS

Well established manufacturing ecosystems in China and East Asia

Infrastructure inadequacy – of power, clean water, and other utilities

Advent of cloud computing could pose a threat to the market for servers

SWOT

Currently, local manufacturing is not competitive globally due to a number of disability factors. In the light of latent manufacturing strength for certain products, inclusion of those products under the ITA I agreement has constrained the growth of local manufacturing due to the availability of imported goods. Also, domestic volumes are not growing fast enough for entities to invest in manufacturing on a large scale. MNCs invested in assembly facilities early on as they needed to be closer to their market; this also indicates their confidence in the manufacturing capability present in the country. However, the absence of a business environment in which local manufacturing can thrive has led to the suppression of local manufacturing capabilities.

However, the advent of cloud computing has definitely thrown a spanner in the works in the server market. Cloud computing offers many advantages to organizations. The cloud allows organization to optimize costs while offering performance guarantees. However, organizations could possibly implement private and hybrid clouds, which would still require purchase of dedicated servers.



Component SWOTThe biggest contribution to the BoM in terms of dollar value in a server is accounted for by the processor which costs anywhere between $ 60 to 110 approximately. Next comes the motherboard and the hard disk which cost about $ 40 each, followed by the memory module that costs around $ 30. On the motherboard, the semicondcutor components and the PCB are most critical. Considering a BoM of $ 40 for the motherboard, it can be estimated that the chipset costs about $ 12, the PCB costs about 6.5, and that the overall semiconductor cost is about $ 20 including the peripheral chips.

In short, the top 4 components that contribute to majority of the server bill of materials (BoM) are:

1. Processor

2. Memory

3. Motherboard

4. HDD

Processors are sourced from either Intel or AMD. The top suppliers for hard disks are Seagate and Toshiba. However, the situation with regard to hard disk is slightly in the balance currently due the shift in technology and enterprise business models, i.e., the shift towards cloud computing and centralized servers, and the movement in technology towards solid state drives.

Strategic ConclusionsGeneralThe levying of SAD should be repealed on individual electronic components, or at the very least, individual components of motherboards. Also, the reimbursement process should be made easier and faster so that companies do not have to contend with uncertainties of receiving reimbursement. The present rate of abatement should also be raised from 25 per cent to reflect the rise in costs of doing business. SAD could be levied on finished product imports of motherboard for which a nascent manufacturing ecosystem exists in India.

IP developmentA large amount of design activity is carried out at the established IT firms such as HCL and Infosys and the captive design centres of Intel and AMD, but there is no local IP held in the country. Encouraging the growth of fabless design companies and software development firms through start-up capital seeding, and possibly through the mooted EDF corpus, could lead to the generation of indigenous IP in the short to medium term. The application of regional language software could provide opportunities considering the expected penetration of computing and connectivity in semi-urban and rural areas; the idea of setting up central government grants for such software development activity at the NITs should be considered.

Component ecosystemThe manufacturing of motherboards should be incentivized by exempting individual components from basic customs duty and excise duty, or offering preferential excise duty. Decrease in tax revenues could be offset a little through smaller hikes in sales tax or through offering greater rates of CENVAT credit on excise duties.The Indian manufacturing ecosystem possesses competencies in the manufacturing of motherboards, which is a top BoM contributor in terms of dollar value. It also has applications in almost every electronics product. Once local manufacturing is encouraged by exempting from/ granting preferential excise duties, it is very possible that investment will flow in and spur organic growth of the value chain. Likewise, sheet metal fabrication and plastic moulding are fairly mature technologies in India; hence, the manufacturing of cabinets and enclosures could also be incentivized through preferential excise duties and exempting them from additional duties, for use in servers.

Product manufacturingThe assembling of servers is already being carried out by global OEMs and indigenous players like HCL and Wipro. India has held back from discussing the ITA II due to the fact that the government recognizes the need for encouraging the growth of the nascent manufacturing capabilities in the country. If India were to sign the ITA II, it could potentially push companies into investing in high-value added manufacturing in the country. Coupled with the wholesome basket of policy initiative being enacted by the government, this could also lead to the establishment of a thriving product ecosystem.



Tax Structurea. Inverted duty structure

b. Low rate of abatement

a. Simplify reimbursement of SAD

b. Increase rate of abatement to reflect rising costs of doing business

Value Additiona. Lack of supporting industries

b. Absence of product design/IP generation

c. Incentivize manufacturing of PCBs, cabinets, and enclosures for servers by giving preferential excise rates

d. Utilize MSIPS and Electronics Manufacturing Clusters scheme effectively to promote manufacturing clusters for these components

Component Ecosystem


b. Demand volumes

c. Increase CENVAT credit for locally sourced components/raw material

d. Increase basic duty for imports and reduce sales tax for finished goods



Base Stations (BTS) - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/ Assembly/ DesignVery negligent complete local manufacturing; Predominantly low

value add manufacturing for exports; local demand through imports

Local Manufacturing/ Assembly Volumes and Growth

0.25 million (2012)CAGR 7.1% (2012-2015)

Local Value Addition Low – heavily reliance on imports of critical components

Top 4 ComponentsIC’s (40%), Power Amplifier (15%), Power Supplies (12%),

Antenna (10%)

Component EcosystemEntire Electronics including the Power Amplifier is imported; rest

supplies, body casing, packaging, etc. are sourced locally


High; India’s telecom growth story commendable; has 2nd largest subscriber base in the world which is expected to grow further


a. Focus on design and development of PCBs, power supplies, and antennas

b. Freight duty/entry tax on transportation of heavy goods across states should be rationalized

Market and OpportunityThe Base Station (BTS) industry is capital intensive since nearly 55 to 60 per cent of the total operational and management costs of a telecom operator is accounted for by the purchase, installation and maintenance of mobile towers. The high-growth telecom sector saw a decline in 2011 and 2012 due to oversupply and penetration saturation in urban areas. However, surging data usage through mobile networks has necessitated new installation and up-gradation of the existing BTS infrastructure to maintain quality and speed of data flow.

BTS shipment volumes in the country are anticipated to grow from 0.08 million units in 2012 to 0.15 million units by 2015, growing at a CAGR of 23.3 per cent. The domestic manufacturing landscape of BTS mostly serves the export market. India exported 0.25 million units in 2012, which is expected to reach 0.29 million units in 2015, growing at a CAGR of 5.1 per cent. Indigenous manufacturing of BTS for local sales is very negligible.


1.35

0

0

0.2

0.6

0.4

1.0

0.8

1.4

1.2

20112010 2012 2013 2014 2015

GSM BTS Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 11.3%

TDM (overall): NA%

TDM (Low/Med value add): NA%


0.180

1.26

1.08

0

0.72

00

0.88

0

0.98

0.09

BTS GSM: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.120 0.000 0.209

2011 0.110 0.000 0.240

2012 0.080 0.000 0.252

2013 0.120 0.000 0.272

2014 0.140 0.000 0.289

2015 0.150 0.000 0.309


Industry SWOTThe BTS value chain consists of BTS suppliers, EMS partners, sub-part suppliers and telecom operators. Almost all the leading suppliers of BTS globally, namely NSN, Ericsson, Alcatel Lucent, Huawei and ZTE, supply BTS in CBU form to Indian telecom operators by directly importing BTS units to the installation sites anywhere across the country. For the export market, a gamut of activities arecarried on by the OEMs, their EMS partners and the sub-part suppliers.



The BTS value chain is depicted in the figure below.


IC’s

Discretes

Passives

Semiconductors

Software

Operating System

Applications


Electro-mechanicals

Interconnex

Metals

packaging

Power Supplies

Antenna BTS

OEM

Customers

EMS Partner


There is some low value added assembly-cum-manufacturing of GSM BTS happening in Indian through manufacturing plants situated in Tamil Nadu. However, the entire production of these plants is exported to markets across Europe. The board with key components already mounted is imported while succeeding activities such as PCB assembly, casing mounting, etc. are carried out locally. While import of the critical components is unavoidable, some 25 to 30per cent of the BoM, comprising of the antenna, interconnectors, power supplies, metal casing, packaging materials, etc., are sourced locally from domestic sub-part suppliers.

Local suppliers either source the raw materials locally or import them to match the specification of OEMs. In some cases, OEMs may provide the local suppliers with the reference designs for the manufacturing of sub-parts/systems. As for components, all the semiconductors and electro-mechanicals are imported into the country while local players ensure the supply of packaging material, metal parts, antennae, power supplies, interconnectors, etc. The amount of design activity that happens in the country for BTS manufacturing is small.


The table below captures the capability in India across the BTS value chain.


SupplyLocal


CapabilityCompany

NamesLevel of Local Value Add Remarks


IC’s Imports No NoTI, Freescale,

NXP, ST Microelectronics

NA

Power Amplifier

Imports No NoPower wave,

Ericsson, NSN, Huwaei

NA

Power Supplies

Yes Yes YesVMC, Acme Tele,

GE power High

Companies use the designs given by the OEM and source

raw materials locally

Antenna Yes Yes No High

Interconnex Yes Yes No High

Metals, Packaging

Yes Yes No High

BTS

OEM NoYes, only Low

Value Add Assembly

NoNSN, Huawei, ZTE, Alcatel

Lucent, ErricsonLow


realization of IP

EMS NoYes, only Low

Value Add Assembly

No Sanmina LowLocal manufacturing feeds

exports only

Huawei and ZTE possess large-scale manufacturing bases in neighbouring China. The recent rise of Vietnam and Africa as emerging destinations for low cost manufacturing is seen as a credible threat to India’s dream of becoming a global manufacturing destination. Most of the BTS MNCs have established R&D centres in India; however, the intellectual output from the design and R&D activities carried out is held at their global headquarters. The recent policy initiatives are expected to attract investments into the local BTS sector given the enormous demand and export potential.

The SWOT chart below captures the analysis for the BTS market.

STRENGTHSRise of India as a telecom giant globally

Increaseindatatrafficinmobilenetworks

Roll out of 3G and 4G services with the penetration of smart phones

EMS companies capable in BTS manufacturing

Govt. committed to improve and expand telecom infrastructure in Far East and rural interiors

OPPORTUNITIES


India used as an export destination by global suppliers

Local freight charges needs rework – in-land cost higher than total import cost of product

100% FDI in telecom to boost penetration and demand for BTS further

WEAKNESS

Reliance on imports for most of the critical components – chips, power amplifiers, PCBs

Inverted duty structure discouraging investment in local manufacturing

Limited or negligent product design activities locally; Limited IP generation

THREATS

Urban saturation and over-supply of BTS limiting demand generation

Well established manufacturing ecosystem in neighbouring China.

Emergence of other low cost manufacturing destinations like Vietnam and Africa.

Fledgling ecosystem of raw materials and components

SWOT



Component SWOTThe BTS consists of thousands of components and almost half of the product cost is contributed by electronics used in the BTS. The top 4 components that contribute to majority of the BTS bill of materials (BoM) are:

1. ICs

2. Power Amplifier

3. Power Supplies

4. Antenna

The BTS value chain in India lacks the presence of a well-endowed ecosystem for manufacturing of both components and the end product. The electronic components of BTS are exempt from import duty (under ITA-1) which could act as a restraint against investment in the Indian component ecosystem.


BTS are exempt from customs duty for import of electronic components used in its manufacturing anywhere in the world, being part of the ITA- 1 list of products. Also, suppliers have raised concerns about the high in-land freight charges in India, which accounts for about 15 to 17 per cent at present, which is exceptionally high compared to the freight charges of importing BTS globally. Decreasing the in-land freight costs from 17 per cent to about 3 to 4 per cent would reduce costs for indigenous manufacturing and encourage local value addition.

IP development:

Irrespective of the presence of numerous captive and third party design houses in the country, along with individual design centres of the global BTS OEM’s, none of the IP is realized locally as all the patenting is done overseas. Although a good percentage of design related work is carried out here, probable lack of Governmental support and encouragement has led India to lose out on patent filing.

Component ecosystem: In the domestic BTS manufacturing ecosystem, parts and sub-parts such as the antennas, interconnectors, power supplies, metal casing, packaging materials, etc., are sourced from local suppliers, and these contribute around 25 to 30 per cent of the total BTS BoM. A closer look at the component composition of BTS indicates that only the electronic components are imported into the country, besides a few electro-mechanical parts. However, the setting up of semiconductor fabs in the country is a positive step towardsbecoming self-sufficientwith regard to semiconductormanufacturing.This factor could incentivizemanufacturingofelectronic components and other downstream activities that feed into the manufacturing of BTS.

Product manufacturing: The local PCB industry not only serves the domestic market but also serves the export market; around 24 per cent of the total PCBs manufactured annually is exported. Indian PCB manufacturers have also enhanced their capabilities from single 2-layered PCB’s to 16-24 multiple-layered PCB’s. However, local sourcing of PCBs is not considerable because the PCBs needed are too complex for Indian PCB manufacturers. Competency should be built so that local sourcing of the required PCBs can be done. Domestic manufacturers should also be encouraged to build their capabilities to design and develop power supplies and antennas used in the BTS from scratch to the final product indigenously. The MSIPS, EMC and NMP policies serve as a holistic guideline for suppliers to take cognizance of, and apply for appropriate subsidies.



Tax Structure

a. BTS is a ITA1 product, and is thus a zero duty product

b. High freight costs of approx. 17 per cent is undesirable

a. Freight costs should be rationalized through amending road tax and entry tax

Value Addition

a. Lack of feeding industries

b. Country’s infrastructure is lacking in some aspects

a. Development of support infrastructure like roads, power

b. Setting up of electronics clusters to promote downstream activities

Policy Initiatives a. No policies for logistics supporta. Government should help subsidize logistics costs

until such subsidy is no longer necessary



Power supplies - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Local design, assembly and manufacturing

Local Manufacturing/Assembly Volumes and Growth 187 million (2012); CAGR (2012-2015) 10.2%

Local Value Addition High – local sourcing, local assembly, packaging

Top 4 Components Transformer, Power Semiconductor, Rectifier Diodes, PCB

Component Ecosystem Only electronic imports

Product Importance for Ecosystem Promotion; WhyHigh; Huge Local Market; High Growth Potential;

Export Opportunity


a. Top 4 Components do not have much potential for indigenization (global capacities, lack of local infrastructure etc)

b. Incentivize electronic component manufacturing

c. Provide Infrastructure - land, water and energy facilities for electronic component manufacturing

d. Incentives to encourage exports

Market and OpportunityThe increasing growth of laptops, mobile phones and tablet PCs is propelling the growth of the power supplies market in India. The market generated revenues of US$ 574 million in 2012 and is expected to reach US$ 660 million by 2015 with a CAGR of 5 per cent. Tablet PCs, smartphonesand laptops use external adapters, which arethe highest growing segment in the power supplies market. The rollout of 3G and 4G is expected to boost the demand for smartphones and thereby influence the growth of power supplies for the same. The expected lanuch of newer verison of gaming consoles by Microsoft and Sony is also expected to boost the demand for external power adapters. The driving factors for increasing demand for products such as tablet PC, LED lighting, mobile phones, gaming consoles etc., is expected to boost the level of local manufacturing. India has a huge unorganized market for this particular market which indulges in high value addition local assembly. The domestic manufacturing for this product market was valued at US$ 444 million in 2012 and is expected to reach a value of $ 510 million by 2015 with a CAGR of 4.7per cent.

0.66

0.51

0

0.1

0.3

0.2

0.5

0.4

0.7

0.6

20112010 2012 2013 2014 2015

Power Supplies Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

78%

78%

77%




CAGR (2011 - 2015)

TM: 4.8%

TDM (overall): 5.3%



0.63

0.48

0.60

0.47

0.55

0.43

0.52

0.410.44

0.57


Power supplies: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 200 154.55 NA

2011 220 220.00 NA

2012 242 170.00 NA

2013 267.9 242.00 NA

2014 294.7 187.00 NA

2015 324.2 267.89 NA


Industry SWOTThe power supplies value chain comprises of various material and component suppliers, subsystem suppliers and the downstream segments like IT, ITeS, etc. The Indian market witnesses a huge unorganized market for power supplies comprising a number of small local players who execute local assembly activities. The electronic components are imported while the rest of the components are locally sourced and assembled. This contributes to high value addition in the indigenous manufacturing of power supplies. India meets around 70 per cent of the local demand through local manufacturing. The remaining 30 per cent is imported majorly as finished goods and either sold at lower prices since they do not undergo safety certifications or tested locally and sold at a higher price.

The power supplies value chain is depicted in the figure below.


Transformer

Copper wires

Power supply

IC

Power Supplies - OEM

Power Supplies - EMS

Consumer

IT / ITesMosfets

Rectifiers

Capacitor

Mechanical Components

Rubber

Plastic, Sheet Metal





VMC is one of the top players and holds patents for its designs. There are numerous small players carrying out their own design and assembly catering to particular end user segments. Manufacturing and local assembly are the country’s greatest strengths with high quality labour availability and cheaper labour costs when compared to China or other neighbouring countries.

The table below captures the capability in India across the power supplies value chain.





Remarks


CapacitorsOnly Sales


No NoKoshin, STM,

InfineonNA

Though design capability exists there is no local realization of IP,

Lack of infrastructure

TransformerMajorly local

supply, partially imported

Yes NoPulse magnetic,

Many local players

NA

Rectifier diodes

Partially Imported, Partial

local supplyYes No

Many small players

High

PCB Local supply Yes NoAT&S, Derg

electronics, Many local players, EMS

High

Mosfets/ Switching

devicesLocal supply Yes No

Many local players

Power supplies

OEM YesYes, High value

addNo

VMC, many local players

High

EMS YesYes, High value

addNo

Delta Electronics, many small

playersHigh

The challenge that the industry is currently facing is the component customs duty which is around 12.36 to 16.85 per cent. Mechanical components are locally sourced though. Although huge opportunities lie ahead, especially with the booming IT and ITeS sector, local manufacturing largely caters only to local demand. There are very minimal exports with respect to this product. Lack of scalable manufacturing capacity deprives the ecosystem of export opportunities.

The SWOT chart below captures the analysis for the power supplies market.

STRENGTHSAvailability of high quality labour

Availability of mechanical components at par with China/ Taiwan in terms of price and quality

Labour costs are cheaper in India when compared to China

Huge consumption demand

Well laid EMS industry –outsourcing assembly and PCB manufacturing

OPPORTUNITIES

Consistent end user growth in terms of laptops, Smartphones, LED lighting etc

Escalating manufacturing and labour costs in China driving manufacturers to invest in facilities in India


Increasing demand for high voltage power supplies in the IT/ ITes sector

WEAKNESS

Reliance on imports for some of the critical components - IC, electrolytic capacitors

Identifying right suppliers for component imports

Limited product design activities locally; Limited IP generation

THREATS

Many Chinese imports are sold in the local market without any testing

Emergence of other low cost manufacturing destinations like Vietnam

Well established manufacturing ecosystem in neighbouring China

SWOT


Component SWOTThe top 4 components that contribute to majority of the power supplies bill of materials (BoM) are:

1. Transformer

2. Power semiconductor

3. Rectifier diodes

4. PCB

The transformer, the most expensive component in an external adapter, is majorly sourced locally with a number of local players offering the same. Local transformer manufacturers are largely dependent on imported copper. The presence of large manufacturing capacities in China, Hong Kong, Taiwan etc.,make it more attractive for manufacturers to import transformers than source them locally. The ICs, capacitors, rectifiers and MOSFETs are also predominantly imported. The PCBs, mechanical components, plastic, sheet metal, rubber etc., are locally sourced and are available at competitive prices and reputable quality.

Strategic ConclusionsGeneral The component duty currently ranges between 12.36 to 16.85 per cent, which is considered high for the industry especially since India is a price sensitive market. Offering subsidies for indigenous manufacturers through capital subsidies and preferential excise duties would prove to be very beneficial since the ecosystem possesses considerable competencies already.

IP developmentAround 30 per cent of the power supplies are imported as finished goods, of which around 15 per cent of them are sold in the local market without safety certifications and testing. This necessitates the need for a policy initiative to prevent dumping of power supplies which would bolster the quality of power supplies available in the Indian market. Regional level testing labs should be established and testing for imported goods should be mandated. The proliferation of unbranded products in the market calls for CVD to be levied to prevent dumping in the local market.

Component ecosystemLack of volume capacities forces some manufacturers to import transformers from the neighbouring countries. The Indian Government could aid in ensuring continual availability of copper through the year at subsidized prices. This will reduce the overall cost of the components, thus making it price competitive.

Product developmentPower supplies is a high growth market due to the increasing demand for laptops, mobiles etc. Hence the market also possesses considerable export potential. However, export subsidies should be offered only after standardizing safety regulations and certification. Considering the low margins needed to set up the ecosystem for some of the critical components, it seems logical to leverage the EPCG scheme, which would help exporters to import machinery and equipment at affordable rates and produce quality products for the export market.


Tax structure a. High component duty of 12.36 - 16.85 %a. Incentivize customs duty to encourage local

manufacturing

Value Addition

a. Absence of Product Design/IP Generation

a. Establish design houses either through academia - industrial collaborations or in association with the Government

Component Ecosystem


b. Demand Volumes

c. Components like transformers, Mosfets etc are imported in spite of local supply

a. Subsidizing copper and enamel duty rates to carry out scaled quantities of transformers

b. Increase R&D efforts to reduce price further and minimize the power supply units

Policy Initiatives

a. Lack of policies for testing imported external power supplies

a. Policy initiatives to set up single point testing labs and also testing of imported power supplies to bring about standardization

b. Concession on export duty to encourage exports leveraging the manufacturing strength



Set Top Boxes - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/DesignDesign and Manufacturing (though low volumes), Assembly by

EMS companies


Local Value Addition Medium

Top 4 Components IC (MPU, Memory, Tuner), PCB, Power Supply, Plastics and

Mechanicals

Component Ecosystem ~40%BoMComponentslocallyAvailable;RestImported


Opportunity


a. Restructuring of Tax and Duty Structure

b. Redressal of From C issue

c. Priority Product – Preferential Loans for Manufacturers and Channel Partners

d. Localization of components and peripherals – RCA Cables, Remote control, Passives etc

e. Indigenous Development of CAS module

f. Definition of Indigenous Standards for Local STB

Market and OpportunityRapid proliferation of FPD TVs, which offer better viewing experience, combined with the broadcast digitization drive is driving growth of the Indian Set Top Box (STB) market. One of the hallmark product categories in the consumer electronics segment, the set top box (STB) market in India is poised for unprecedented growth. The Cable Television Networks (CTN) Amendment Bill 2011 mandates digitization of TV broadcasts pan India by 2014. This bill has provided the necessary thrust for driving growth of the set top box market, both cable and satellite. The STB market recorded a total market (TM, which represents consumption) of 18.4M units, of which satellite STB accounted for 10.4M units in 2012. The total STB market is expected to reach volumes of 39.4M units by 2015, representing a healthy CAGR of 28.8 per cent. In 2011, only 30 per cent of the local demand was serviced by indigenous manufacturing. TDM for 2011 was estimated at 4M units, 25 per cent of which represents manufacturing by EMS primarily for exports, thus increasing the reliance on imports from local demand. Apart from the analog to digital transition of Pay TV services, the other significant demand creators for STB in the near future include:

• DigitizationofDoordarshan’sterrestrialTVnetworkplannedforcompletionby2017createsdemandformillionsofSTBbasedon DVB-T or higher standards

• Government initiatives such as the National Optic Fiber Network (NOFN) and National Knowledge Network (NKN) drivingdemand for STB for secure delivery of content and interactivity

• ReplacementofMPEG2toMPEG4technologyandaverageproductlifeof5yearsforSTBsensuresahugereplacementdemandfor the existing installed base of 40 M+ STBs.


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0.9

20112010 2012 2013 2014 2015

Set Top Box Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 27.5%




0.52

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0.75

0.62

0

0.25

0.5

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0.36

0

0.52

0.17 0.14 0.18

0.37

STB: TM, TDM Volumes Forecasts

Product TM Volumes (Million units)TDM Volumes for Local Sales

(Million units)

2010 15.50 4.50

2011 10.50 4.00

2012 18.40 5.70

2013 23.52 8.70

2014 30.08 14.00

2015 39.35 21.00




Industry SWOTSTB value chain comprises various component and subsystem suppliers, technology licensors and software developers apart from the downstream players comprising the cable operators, multi system operators (MSO) and retailers.

The STB value chain is depicted in the figure below.


Memory

MPU Core Chips

Core Components

External Components

Set TopBoxes

Cable Operators

Consumers

MSO

Software

Tuner

RCA Cable

PCB, Passive Component

Power Supply

CAS

Operating System

Applications



The leading suppliers of STBs in India are, Huawei, Pace, Cisco, Chang Hong, Skyworth, Hathway, HUMAX, Technicolor, Echostar and MCBS, whose customers are the major DTH and Cable MSOs, namely, DishTV, Airtel, Tata Sky, Hathway, Incable, WWIL, etc. Most of thesesuppliersarealreadyoperatingfromtheirsalesofficeinthecountry.Theaftersalessupportactivitiesofthecompaniesareoutsourced to local companies like Carbon and SS Mobile.

The domestic STB manufacturing sector has received the much needed fillip recently with active participation from companies such as Videocon, Beetel, Mybox, Bharat Electronics and Indieon technologies. Beetel started importing free-to-air STBs as early as 2004 and continues to supply to Airtel, a service provider. Another DTH operator, Videocon, initially imported STBs to meet their captive demand, but started in-house manufacturing of STBs through their subsidiary Trend Electronics in 2008. Mybox, established in 2008, is a Govt. recognized R&D centre, which designs and develops STBs in-house. Even Indieon Technologies, started in 2008, contract manufacturers STB from different EMS companies and also fulfils the rest of the demand by importing components and assembling in its plant. Some global EMS companies in India, like Jabil Circuits, manufacture STBs primarily for their European clients, with a very small percentage being supplied to local service providers. Jabil, Dixon, Quad, Nainko, andKortek Electronics are some of the EMS companies manufacturing STBs in India. For the Doordarshan free-to-air service, STBs are manufactured in India by contract manufacturers, but they have very little expertise in making conditional access system (CAS) boxes.

The ecosystem for STB manufacturing in India is fairly developed when compared to other high priority products. Nearly 40-45 per cent of the BoM for STB can be locally sourced or there is localization capability. However the most critical challenge for local manufacturers is to keep their cost of production at a level that makes them competitive on par with global suppliers. Currently, there are various fiscal and supply chain related factors that prevent STB manufacturers from pricing their products lower than global competition.


Local capabilities in product design and IP are also abundant. With the product being developed with standard features and specifications, possessing local IP is not seen a great differentiator any longer. Local IP and design capabilities help in reducing the product cycle time and also in rapid technological advancements. Apart from local manufacturers holding IP, there are a few third party design houses like Tata ELXI that provide complete design service solutions for overseas STB OEMs.

The table below captures the capability in India across the STB value chain.



CapabilityCompany

Names


AddRemarks


ICOnly Sales


No No NXP, STM NAThough design capability exists there is

no local realization of IP

External Power Supply

Yes Yes Yes VMC, Axiom High Only

PCBPredominantly

ImportsNo No

Multiple Suppliers

NALocal PCB suppliers do not have

capability to produce 2 layer at 0.5 mm

CAS Imported No NoCisco, Nagara

visionLow

Foreign MNCs completely control this market; all STB manufacturers license

their CAS

Plastic , Sheet Metal, Packaging

Material

Yes Yes YesMultiple Suppliers

High

RCA Cables Partial Imports Yes YesMultiple Suppliers

HighCurrently minimal localization; however

capability exists for increasing it

Remote Control

Imported Yes MinimalMultiple Supplier

LowHigh probability for localization; Needs

to be encouraged

Smart Card Yes Yes Yes

G&D, Oberthur,

Sagem, Sharon

Solutions

High

Passive Components

Imported No NoMultiple Suppliers

LowLocalization is possible; needs

encouragement

Set Top Boxes

OEM Yes Yes Yes

Videocon, myBox

Technologies, Indeon

Technologies

High


Value Add Assembly

YesJabil Circuits,

KortekLow



The SWOT chart below captures the analysis for the STB market.


Technology Upgradation and Replacement driving demand

Local design and manufacturing capability

Preferential minimal policy intervention – hike in import duty

Fairlydevelopedlocalecosystem-~40%ofBoMcomponents available locally. Indigenous capability exists for another 20% of BoM.

OPPORTUNITIES

Export Potential – Ongoing digitization initiatives in many global economies

Inclusion of STB under the Special Focus Product Scheme – provides incentives for exports


Appreciating dollar promoting local manufacturing

WEAKNESS

Local manufacturing costlier than imports – debilitating tax and duty structures

Reliance on imports for most of the critical components – ICs, tuners and even remotes

Only 2-3 indigenous manufacturers with IP and manufacturing capabilities

THREATS

Cheaper imports

Lack of indigenous standards for STB favouring imports over local product

SWOT

Component SWOTThe component ecosystem for STB is partially developed in India. There are certain components in which India has self-sufficiency,andafewotherswherethisisnolocalcapability.Thetop4componentsthatcontributetomajorityoftheSTBbillofmaterials (BoM) are:

1. ICs (MCU, Memory, Tuner etc.)

2. Printed Circuit Board (PCB)

3. External Power Supply

4. Plastics and Mechanicals

Of the top 4 components, there is local capability and complete local sourcing of the external power supply in STBs. Companies such as VMC and Axiom provide the power supplies needed for STB. These companies are also engaged in exports. Beyond the top 4 components, there is local ecosystem and supply of sheet metal, plastics, packaging material or gift box and smart card (pay tv). All these cumulatively account for approximately 40per cent of the overall BoM. The most critical components of the BoM are the IC and tuner ICs, which are completely imported. NXP Semiconductor, STMicroelectronics and Renesas Technologies are some of the suppliers of these ICs. PCBs for STB are predominantly imported as local suppliers do not provide 2 layered PCB of 0.5 mm thickness desired for STB manufacturing. The PCBs are typically sourced from multiple Chinese vendors.

The other significant component, the CAS, is currently supplied by foreign players. Companies such as Cisco (which acquired NDS), Nagara Vision and Irdeto dominate and control the market through their licenses that are used by the various STB manufacturers. Indian manufacturers will be able to achieve cost competitiveness if local sourcing of CAS is possible. The ongoing initiative of DeitY to develop indigenous CAS will help in addressing this challenge.


Strategic ConclusionsGeneralHiking the import duty for STBscan curbimports and promote local manufacturing of STBs. The 2012-13 Budget did see a hike in thecustomsdutybutithasbeenfoundtonotbesufficientinthisregard.CountriessuchasChinaandBrazilareknowntohavehigh tariff rates for STB imports as a measure of promoting local manufacturing; this needs to be emulated by India too.

The existing business model for STB in the country involves the cable operators and MSO who package the STB as part of their offerings to customers. They do not pay VAT and hence are constrained from issuing Form C. This results in local manufacturers havingtopayCSTequivalenttolocalVAT(~12.5percent)makingthelandedcostforlocallymanufacturedproductshighandthuscostlier than imports. The remedial measure sought is the issuance of Form C without affecting the existing business model which is highly possible with Government intervention.

Product manufacturingThe DTH industry and cable operators are plagued by huge operational challenges. This is due to lack of financial assistance from the Government. The industry also pays multiple taxes such as service tax, entertainment tax, licence fee and VAT. The support system in countries like China and Korea is extremely industry friendly; this is reflected in the high level of exports from these countries. Today, the suppliers in these countries are tied up with financial institutions like EXIM banks, which offer long term credit over three to five years at an extremely low interest rate. No such financing is available in India as this is not treated as a capital goods industry. The STB market needs to be made a priority sector and low interest special loans need to be made available to both manufacturers as well as the DTH service providers.


Tax Structurea. Imports cost effective compared to

indigenous manufacturing

a. Creation of trade barrier through higher import duties

b. Normalization of tax rates; Uniform tax rates across States

c. Resolution of Form C issue;

Value Addition & Component

Ecosystem

a. Minimal activity in some sub components despite local capability

a. Promotion of indigenous capability for RCA cables, remote control, passive components

b. Definition of Indigenous Standard to promote local IP and manufacturing

Financial Incentives

a. Lack of low interest loans / financing for STB manufacturers and Cable Operators, MSO

a. Priority product status to create preferential financial loans for STB and DTH sector



Printers and MFDs - Productand Ecosystem Analysis

SUMMARY


Mostly finished product imports


0.33 million (2012); CAGR 27.9% (2012—2015)

Local Value Addition Low – only for assembly of dot matrix printers

Top 4 Components Photosensitive Drum, Fusing Roller, Transformer, Lens and scanner

Component Ecosystem Negligible


Low; Small local market; Huge investment required; Market shifting to enterprise segment


a. It would not be wise to offer incentives for manufacturing of inkjet and laser printers and MFDs

b. Offer greater CENVAT credit for local sourcing of components for dot matrix printers; raise import duties simultaneously

Market and OpportunityThe Indian printers & MFDs market in 2012 was estimated at 3.22 million units or about US$ 474.05 million. The total market is projected to grow at a rate of approximately 16 per cent through 2015 in revenue terms. HP, Canon, Samsung and Epson are the key players in the overall printers and MFD market and hold a combined market share of nearly 90 per cent; Ricoh and Konica Minolta have strong presence in the A3 MFD segment. The Indian market is very import heavy; more than 90 per cent of the market comprises finished product imports except for dot matrix printers that are manufactured/assembled locally by players like TVSE and WeP. Hence investment in the manufacturing or local value addition of printers and MFDs in India doesn’t present a justifiable bsuiness case for global OEMs. Design activities are carried out in the home countries of the OEMs at their global HQs for the most part and proudcts are manufactured in China and East Asia, although software design is carried to an extent in the Indian locations of the global OEMs. The robust growth of the enterprise sector has contributed to the demand for printers, especially MFDs. Increased business activity in the IT, BFSI, education, government and SMB segments have contributed the most to the growth of the market. However, fluctuations in the value of the Indian Rupee and cautious spending of IT budgets served to temper the growth of the market to a small extent. Also, the increasing ubiquity of tablets and smart phones has led to a decline in the fortunes of print in the home segment. With productivity services being offered through apps, a general decline in the usage of paper at home has been noticed. There is also a possibility of a shift towards devices with lower power consumption keeping in mind the increasing emphasis on “going green” and greater awareness about the power deficit situation in the country. Printer technology is seen as a very mature and saturated technology and no radical developments are expected, save the nascent rise of 3D printing. Global OEMs have been expanding their retail presence and have been releasing new models of laser printers, expecting a shift in consumer preference from inkjet to laser printers. Also, the market for colour printing and MFDs has been steadily increasing at the expense of the demand for monochrome printing machines.


756

0

0

100

200

300

400

500

600

800

700

20112010 2012 2013 2014 2015

Printer and MFDs Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 16.1%




99

0

630

545

0

61

474

00

417

0

396

28 42 49 76

Printer and MFDs: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 2.56 0.18 0.00

2011 2.78 0.28 0.00

2012 3.22 0.33 0.00

2013 3.71 0.42 0.00

2014 4.38 0.53 0.00

2015 5.25 0.69 0.00


Industry SWOTThe business conducted by enterprises, especially in the ITeS and BFSI sectors, calls for robust documentation which are fulfilled satisfactorilybyMFDs.TherisingnumberofentitiesintheSOHO(SmallOfficeHomeOffice)segmenthasalsoledtothepurchaseof affordable MFDs or laser printers. Global vendors and distributors are also targeting these segments. To this effect, OEMs are working closely with channel partners to expand their market reach and optimize their distribution strategy.



The printers and MFDs value chain is depicted in the figure below.Component and

Sub-system Suppliers

Motherboard / PCBs

Memory

LCD displays

Network ports

Consumers

Government

Enterprises

Transformer

Motors and drives

Lens and scanner

Printheads

Cabinet and casing

Cabling and filters



Power supplies

Drum and roller

Printers / MFDs

Since almost all of the products sold in the country are finished product imports, all of the hardware design activity happens at the global headquarters of the OEMs in their home countries, mostly in Japan which has legacy capabilities in printing technology. TheIndianofficesoftheseOEMsareengagedinsoftwaredesigntoasmallextent.Thedesignofdotmatrixprintersconceivablyhappens in India through indigenous players such as TVSE and WeP. These companies also possibly source locally for their assembly operations since India possessing capabilities in the manufacturing of transformers, metal and plastic casings, cabling and PCBs. However, the market for dot matrix printers is relatively small compared to the overall market and hence the overall value addition contributed by this activity is small.




CapabilityCompany

NamesLevel of Local

Value AddRemarks


Photosensitive drum

Part of finished product import

No No NA

Fusing RollerPart of finished product import

No No NA

TransformerImports/Local

Supply Yes No Low

Though design capability exists there is no local realization of IP

Lens and scannerPart of finished product import

No No NA

PCBs and power supplies

Imports/Local Supply

Yes No LowThough design capability exists there is no local realization of IP

Cabinet, casing, and cabling

Imports/Local Supply

Yes No LowThough design capability exists there is no local realization of IP

Printers and MFDs

OEM NoYes, only

assembly of dot matrix

No TVSE, WeP Low

EMS No No No NilThere are no such entities in

India

The table below captures the capability in India across the printers and MFDs value chain.

The printers and MFD market possess high entry barriers. Primary among them is that established players have entrenched market shares (overall, the top 4 players possess cumulative market share of 90 per cent). Newcomers would either have to differentiate themselves uniquely or contend with making lower margins and possessing enough working capital to stay in business until they break even. Also, distribution channels of the bigger players are more or less well established and newcomers would find itdifficult tomatchthereachofbiggerplayers.Also,competingwith thestrongbrandequityof thebiggerplayerswouldbea daunting proposition. However, due to the depreciating value of the India Rupee, bigger players have been increasing prices recently, which would not appeal to the value conscious nature of Indian consumers, in both the enterprise and home segments. Newcomers such as Pantum have entered the A4 market with a product portfolio of laser printers aimed at the home segment and the small business segment. Also, companies such as Ricoh and Canon that normally operate in the A3 market have entered the A4 market too. This indicates a trend towards offering greater value to the home and SOHO segment which are demanding greater functionality at lower prices in light of increasing independence from print.



STRENGTHS

Existing customer base exhibits a “sticky” need for print

Established trade channels and customer relationships

Presence of branded stores has led to widespread brand recognition

Relatively mature adoption of latest technology and colour printing

OPPORTUNITIES

Concentrating on enterprise usage of MFDs and printing services

Awareness of 3D printing should encourage appropriate investment in R&D

SMBs and smaller operations in rural areas could be penetrated better

WEAKNESS

Relatively small market size doesn’t justify need for greater investment locally

Marketing and selling practices not up to speed with consumer sentiments

More difficult to entice new customers, who prefere-based output (e-tickets, etc.)

Import-heaviness of industry-latest products are introduced after global launch

THREATS

Increasing prevalence of smartphones and tablets eating into relevance of print

“Go Green “ initiatives in IT sector and enterprises constrains IT spending on print

Currency volatility affects costs since market is very import-heavy

Slowdown in usage of printing devices in the home segment

SWOT

The SWOT chart below captures the analysis for the printers and MFDs market.

Component SWOTA printer or MFD is made up of a number of components and the value chain for the manufacturing or assembly of these components is nearly absent in India. Almost 90 per cent of the printers and MFDs sold in the Indian market are imported in the form of finished products. A few components such as transformers, cabling, cabinets and PCBs could be sourced locally if there were local assembly capabilities. These components are possibly being sourced locally for the local assembly of dot matrix printers by indigenous players like TVSE and WeP.

The top 4 components that contribute to the majority of bill of materials (BoM) are:

1. Photosensitive Drum

2. Fusing Roller

3. Transformer

4. Lens and scanner


Strategic ConclusionsGeneralIt has been observed that companies have been entering the A4 market space offering affordable laser printing products. This indicates that the companies are betting on these products gaining acceptance in the home segment, and possibly the SOHO segment too. However, a trend towards m-tickets and e-tickets and other such modes of display on electronic devices might act against the growth of the A4 market. It is quite possible that, in combination with the trend towards cloud printing, the home segment could witness consolidation of printing needs among users in a specific area or group. This could also lead to consolidation of functionalities at the printing node which could be satisfied by MFDs and its future version. The enterprise segment though, has a stated and compulsory need for specialized, state-of-the-art, and reliable printing solutions. This could be satisfied by high-end laser printers and MFDs alike depending on the enterprise’s needs.

IP developmentAlmost all of the design activity in the printers and MFD happens at the headquarters of the global OEMs, which is Japan for the most part. The design activity that does happen in India is mostly concerned with software, not core hardware design that contributes most of the value to the overall design of the product.

Component ecosystemSome of the components used in the manufacturing of dot matrix printers, such as transformers, PCBs and cabling, are currently being manufactured in India. Dot matrix printers are still being used on a large scale in both urban and rural areas by the retails sector and by SMBs. Hence, the government could incentivize local value addition through preferential excise duties and greater CENVAT credit for suppliers—these components possess a larger relevance in the electronics ecosystem too outside of the dot matrix printer product ecosystem.

Product manufacturingConsidering that the Indian print market is relatively small compared to the global market, possesses no export opportunities, and requires considerable investment to build manufacturing capabilities, it would not be a wise option to incentivize manufacturing of printers and MFDs in India. However, dot matrix printing still holds sway in the Indian market, with indigenous players also being present in the market. Considering the shift towards high-end laser printing and MFDs space, the government could offer these tax credits on R&D activity in these areas. The government could also facilitate the formation of joint ventures between indigenous players and global OEMs to take advantage of latent manufacturing capabilities; there could be export opportunities to the Middle East, Sri Lanka and Africa due to India’s geographical location.


Market / Value chain

a. Relatively small market does not justify investment in local manufacturing/assembly

b. No export opportunities

c. Shift towards MFDs which possess complex design

d. Shift to e-based output (e-tickets, etc.)

Considering the shift towards convergence of specialized functionalities (MFDs), the relatively small size of the market, paucity of export opportunities, and shift to e-based output, it would make better sense to divert

resources towards incentivizing other electronics products. Dot matrix printing has legacy capabilities in India, and

could still witness sustained demand from SMBs and government sector. Hence, the local assembly of dot matrix printers could be incentivized through offering greater than

100% CENVAT credit for local sourcing.



Router/Switches - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Entirely imported in CBU form by all suppliers


Nil

Local Value Addition Nil

Top 4 ComponentsSoftware and OS (50%), Processor (10%), Memory (10%), Electro-

mechanicals

Component Ecosystem Absent

Product Importance for Ecosystem Promotion; WhyMedium – demand entirely based on broadband penetration in the

country – considered quite low in the world


a. Focus on upgrading PCB Assembly capabilities specifically for routers

b. Making tax structures stable and friendlier

c. Policies should not compel Global OEMs into forced manufacturing

Market and OpportunityThe growing need to support diverse networks of wired and wireless devices has kept the enterprise networking market on an upward trend and also as an area of constant focus for IT and network managers. Additionally, increasing preference for built-in multiple capacity integrated devices, capable of supporting 3G/4G services, load balancing, content processing capabilities, etc., have catapulted the demand of sophisticated router and switching equipment.

The demand for routers and switches in the country has been steadily rising over the years, barring 2012 when the telecom industry was impacted by the global recession. The market for Routers/Switches in 2012 was 0.33 million units, which is expected to reach 0.059 million units in 2015 growing at a CAGR of 21.4 per cent. There is no domestic manufacturing competency present of the manufacturing of routers and switches.

0.72

00

0.1

0.2

0.4

0.3

0.6

0.5

0.8

0.7

20112010 2012 2013 2014 2015

Router / Switches Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 9.6%

TDM (overall): NA%

TDM (Low/Med value add): NA%


0

0.65

0.59

0

0.47

00

0.50

0

0.47


Routers/Switches: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.030 0.00 0.00

2011 0.033 0.00 0.00

2012 0.033 0.00 0.00

2013 0.044 0.00 0.00

2014 0.050 0.00 0.00

2015 0.059 0.00 0.00


Industry SWOTThe Router/Switches value chain in India consists of only the supplier and the end-user, with all the major global OEMs being present in the Indian market. World-leader Cisco, leads the Indian market followed by Avaya, Juniper, HP, Huawei, Pointred, Alcatel-Lucent, ZTE, etc. All of the domestic market is served by imports from the global manufacturing bases of these OEMs.

The Router/Switches value chain is depicted in the figure below.


Memory

Software and OS

Electro- mechanicals

Processor

EMS companies Customers




Globally, the OEMs and their EMS partners operate completely across the larger and global routers/switches value chain. In this regard, the biggest competency of the EMS partners is in the making of printed board assemblies which are then integrated into systems for direct order fulfilment. EMS companies also carry on other value added manufacturing activities depending on the scale of engagement with their OEM partners. However, this is not the case in India despite the presence of global OEMs and EMS companies. Since the manufacturing of routers and switches is relatively more complex, these companies find it more expedient to utilize the capacity of their manufacturing bases in China and East Asia and import into the Indian market. Also, since the manufacturing of hardware has become increasingly commoditized, companies are beginning to divert the majority of their investment towards R&D and innovation. Hence, there haven’t been any concrete plans of investment in the Indian manufacturing ecosystem in this regard.

The lack of a component ecosystem has been the biggest pain factor inhibiting the growth of the domestic manufacturing market. The table below captures the capability in India across the Router/Switches value chain.


SupplyLocal


CapabilityCompany

Names


AddRemarks


Software and OS

Imports No No NA

The highly complex nature of Router/Switches has restricted its development

to the global headquarters of OEM’s and they are not keen to change this

equation anytime soon in future

Processor Imports No No NA

Memory Imports No NoToshiba,

Samsung, Micron, Hynix

NA

Electro-mechanicals

Router/ Switches

OEM No No No

Cisco, Avaya, HP, Juniper,

Huawei, Pointred, etc.

NA

EMS No NA NA NA NAOEM’s might manufacture through EMS

companies in future

However, the abundantly available indigenous skilled manpower has seen establishment of captive R&D centres in the country by global suppliers like Cisco, Huawei, NSN, etc., who employ thousands of engineers and post-graduates in different fields of R&D. For instance, The Cisco ASR 901 Router developed by Cisco’s engineering team in India received numerous industry awards. However, the IP of product was not registered in the country, a practise seen with all other players, since it is easier to file patents for products in the same series in one location where the preceding patents were filed, which invariably is their global headquarters. The SWOT chart here captures the analysis for Router/Switches market.

STRENGTHSIndia’s edge in skill set competencies attracting global companies to set up their captive R&D centres in the country

Domestic demand for enterprise routers is on the rise

Rise in cloud services adoption driving sales of routers in the country

OPPORTUNITIES

To become a global manufacturing cum exports hub through existing EMS competencies already present

Companies beginning to divert investment towards R&D—opportunity for Indian design ecosystem

Launch of 4G/LTE services to demand sophisticated routers

WEAKNESS

Marginal demand and non-availability of raw materials/components encourage imports

Underdeveloped electronics manufacturing ecosystem unable to support complex manufacturing process of routers

Limited indigenous IP generation

THREATS

Market proximity to South East Asian manufacturing ecosystem constrains manufacturing potential

Multiple layers of bureaucracy and transaction delays discourage business

Dependent on imports for two most important components: processors and memory

SWOT


Component SWOTThe top 4 components that contribute to majority of the Router/Switch bill of materials (BoM) are:

1. Software and Operating System

2. Processor

3. Memory

4. Electro Mechanicals

The Indian electronics manufacturing ecosystem does not presently possess competencies in the manufacturing of the above components. Even though the country possesses excellent software development capabilities, the source code and IP created are registeredintheglobalofficesofthesuppliers,thuscreatingnorealvalueadditioninthecountry.Inarouter/switch,thesoftwareand OS account for about 50 per cent of the total BoM, and the system installation and software uploading is strictly done by suppliers’ personnel at the premises of the customers.

Strategic ConclusionsGeneral: Efforts are needed to boost the demand of routers and switches in the country which will ensure domestic manufacturing of the same by both global as well as domestic telecom players as opposed to them being imported in the country as is the present scenario. Also, the Government can formulate supportive policies and incentives in the areas of transfer pricing and royalty withholding to make them more conducive and also towards bringing down the inbound freight charges to offset these policy handicaps to encourage domestic manufacturing in India.

IP development:

A majority of the global suppliers of routers conduct their design and development activities associated with routers in their Indian design centres. However, the patents for the same are filed in their global headquarters for it holds large financial value from the scope of licensing. India can make an effort to make patent laws more friendly and rewarding by giving R&D sops, reducing patent fees, etc.

Component ecosystem: Lack of availability of local raw materials and the concern for the quality of the available raw materials has been a major reason for the import of this product in the country. The manufacturing of routers is a highly complex process and requires 24-60 layered PCB assemblies, which is currently not within the competencies of the Indian electronics manufacturing ecosystem. India’s PCB manufacturing capabilities are very nascent. To encourage domestic manufacturing of such complex processes, the government should either offer preferential excise duty rates for such complex processes or alternatively offer greater rates of CENVAT to encourage investment. Also, the government could prioritize, or call for, investment in such PCB manufacturing under the MSIPS scheme and offer associated benefits to those investors.


The product complexity limits its domestic manufacturing by both the local and global players. However, investments can be made under the MSIPS or EMC initiatives to gain benefits.


Tax Structurea. Inbound freight charges for components at

4-6% of BoMa. Incentives needed to offset this cost in the form

of direct reimbursement

Value Additiona. Lack of feeding industry

b. Absence of Product Design/IP Generation

a. Manufacturing of advanced multi layered PCBs (greater than 24 layers) should be encouraged through the MSIPS policy and offering preferential excise duties, or offering greater rates of CENVAT

Policy Initiativesa. Unpredictable tax regime

b. Stability issues limit business confidence

a. Transfer pricing and Royalty withholding norms needs relook

b. Robust implementation of policy benefits needed to build investor confidence



Car Radio - Product and Ecosystem Analysis

SUMMARY


90% Entirely imported in CBU form; 10% assembled


0.72 million (2012); CAGR (2012-15) 44.0%

Local Value Addition Low – Mostly imported in CBU form, a few units assembled

Top 4 Components ICs, Electro-mechanicals, PCB and Power

Component Ecosystem Entirely missing


High; Consumers spending on car infotainment and navigation system on rise


a. Component ecosystem needs to be built

b. Branded companies will not prefer domestic manufacturing for Car Radio as it is a low volume product

c. IP design creation and generation should gain attention from domestic manufacturers

Market and OpportunityAs the concept of a the “connected car” gains momentum in the country, car manufacturers are ensuring that the customers benefit from in-vehicle technologies and have constant connectivity. As a result, the infotainment market comprising of in-dash music players has seen a deluge of features being introduced very frequently by the car-radio manufacturers. The total market for car radios in 2012 was 4.03 million units, which is expected to reach 6.15 million units in 2015 growing at a CAGR of 15.2 per cent. Of the total market, the domestic manufacturing of car radios has been only 0.72 million units in 2012. It is expected to reach 2.15 million units by 2015, growing at a CAGR of 43.8 per cent.

0

0.1

0.2

0.3

0.40.42

0.6

0.5

20112010 2012 2013 2014 2015

Car Radio Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 10.9%




0

0.44

0

0.044

0.46

0.083

0

0.50

0.55

00

0.60

0.21

0

0.042

0.125 0.165


Car Radio: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 3.34 3.33 0.00

2011 3.63 0.36 0.00

2012 4.03 0.72 0.00

2013 4.64 1.16 0.00

2014 5.33 1.60 0.00

2015 6.15 2.15 0.00


Industry SWOTThe car radio industry presently caters to the domestic demand mostly through imports. Thus, leading OEM’s such as Sony, Panasonic, Pioneer, Kenwood, etc., are involved only in marketing activities in the country. The value chain consists of importers and domestic manufacturers. Domestic manufacturers, such as Nippon, Audiotronix, and Visteon, import raw materials and execute low level assembly of standard car radios. However, they import high-end systems in CBU form from countries like China, Thailand and Vietnam, much like the importers. Several after-market non-branded car radios are imported from China and sold thru retail market, which constitutes only 10-15% of the total market. Most of the car owners prefer branded car radios, and Japanese brands rule the after-market radios segment. The growing trend of factory fitted car radios is expected to make the factory fitted car radio market share equal tothat of after-market (dealer fitment) radios by 2016.

The Car Radio value chain is depicted in the figure below.

Component and Sub-system Suppliers System Integrators Importers Downstream

PCB

Semiconductors

Passives

Electro- mechanicals

Car Radio

OEM’S

Aftermarket




Although some of the leading companies like Sony and Pioneer had decided to start manufacturing car radios in India, they shelved their plans since car radios are not considered fast moving items; car sales also has not kept up recently with the rapid pace that it set in the past decade. However, the recent policy initiatives such as the National Manufacturing Policy, the National Policy on Electronics, and the MSIPS policy could encourage these companies into investing in local manufacturing facilities. Domestic manufacturers lack design and IP capabilities since the IP is held by the OEMs and only licenced to their manufacturing partners.

The SWOT chart below captures the analysis for the Car Radio market.

STRENGTHSGlobal automobile majors have set up their manufacturing plant in India

Country emerging as an export hub

OPPORTUNITIES

Annual vehicle sales projected to be 4 million units by 2015

PMAC and EMC might attract investments

WEAKNESS

Design and IP capability missing

Component ecosystem missing

Quality of locally available raw materials do not meet OEMs expectations

Rising fuel prices deterring consumer to buy automobiles

THREATS

Domestic automotive industry on a downslide

Taxes and Duties for the key growth sub-segments – Utility vehicles and Diesel driven cars – have been increased

SWOT

Component SWOTThe top 4 components that contribute to majority of the car radio bill of materials (BoM) are:

1. ICs

2. Electromechanical components

3. PCB

4. Power

The component ecosystem for car radios has been reliant on imports. Most of these components are imported in CBU form. Even for the amount of assembly activity that does happen in the country, the components other than ICs are imported from China or Taiwan due to their cost competitiveness. The Indian electronics ecosystem does possess competencies in the manufacturing of PCBs though; this could be taken advantage of to further promote assembly activity in the country. With enough impetus in this regard, the ecosystem could potentially gain competencies in activities higher up in the value chain.

Strategic ConclusionsGeneralAlthough considered a very niche product market, the growing demand of automobiles in Tier-2 and Tier-3 cities along with the second hand market has sustained the demand of car radios. The use of basic entertainment systems in cars has prompted many OEM’s to start assembling them locally. Also, the excise duty is at par with other products and there is zero import duty on import of electronic components. Offering preferential excise duties and imposing BCD on the components that have indigenous presence could promote domestic manufacturing activity.

IP developmentIndia has capability in design services, thus generating indigenous design activity and holding IP in the country should be the prime area of focus. Offering car radios with features based on the local needs, such as regional language interfaces, local on-board content, etc., could be a game changer


Component ecosystemOf the top four components, India possesses a good chance of elevating itself as a global supplier of PCBs. The country already is manufacturing and exporting almost 20 to30 per cent of the total production of PCBs across the world. However, the volumes and the subsequent price points in comparison with China is a major hindrance as is the ability of Indian PCB makers to handle complex products that require more than 24 layers. Government support in the form of lower excise duties and rebates for up-gradation of capital equipment will make a positive impact.

Product manufacturingCarrying out measures such as offering preferential excise duties, imposing BCD on components with indigenous capabilities, and creating local design and content, could entrench the manufacturing of car radios in the medium term. With greater design capability, the country could even be a forerunner in the design and manufacturing of futuristic on-board entertainment platforms in cars that succeed car radios.


Value Additiona. Feeling industry missing

b. Absence of Product Design/IP Generation

a. Semiconductor ecosystem to be made a reality

b. The component ecosystem will draw attention to local IP generation and creation

Component Ecosystem


b. Quality of available raw materials do not meet OEMs expectations

a. All raw materials entirely imported

b. Quality to meet global standards

Policy Initiatives



CFL - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Local Assembly, Design and manufacturing


Local Value Addition High; Only electronics imported

Top 4 Components Transformer, Transistor, Capacitors, Glass tube

Component Ecosystem Most of them manufactured locally, only electronics imported


Opportunity


a. Develop a proper mechanism for mercury disposalb. Top 4 Components do not have much potential for indigenization

(global capacities, lack of local infrastructure etc)c. Frame uniform excise duty and incentivize sales taxd. Block component imports and aid local manufacturing – Single

window clearance for manufacturers to set up foundrye. Encourage certifications for component manufacturing

Market and OpportunityThe CFL market in India was worth about 562 million units in the year 2012 and is expected to reach a size of 1090 million units by 2015 with a CAGR of 25 per cent. India has about 200 crore light points, of which about 60 per cent is still ICL, about 24 per cent CFL, and the remaining 16 per cent being LED and other lamp types. Though newer technologies like LED are eating into CFL sales, the trend is not expected to change until the prices of LED lamps are brought down significantly. Presently only a small quantity of high wattage CFLs are imported from China. Most of the local demand is met through local manufacturing. India is the second largest consumer of CFLs and has also the second largest capacity in the world.

0.89

0

0.1

0.3

0.2

0.5

0.4

0.9

0.6

0.7

0.8

20112010 2012 2013 2014 2015

Flat Panel Display TV Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

96%

94%

94%




CAGR (2011 - 2015)

TM: 18.6%




0.84

0.76

0.640.60

0.53

0.450.39 0.37

0.430.50

0.72


CFL: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 375.00 354.17 0.00

2011 450.00 425.00 0.00

2012 562.50 531.25 0.00

2013 708.75 669.38 0.00

2014 885.94 836.72 0.00

2015 1089.70 1029.16 0.00


Industry SWOTThe CFL value chain comprises various component and subsystem suppliers, assemblers and the downstream retailers and consumers. Three types of players exist in Indian market: manufacturer-cum-importers, importer-cum-assemblers and importer-cum-traders. The first category comprises of big brands that belong to well-known manufacturers of lighting products. These suppliers import both ready-to-use CFLs and raw material such as cut glass tubes, tri-band phosphor and electronic components in the ballast. Most of these companies have their own production facilities where about 90 per cent of the manufacturing process is carried out. The second category is a mix of well-known brands and tier 2 players who import parts of CFL and assemble locally. While the first and the second category are ISI certified, the third category represents the unorganized traders who import and sell non-certified products.


Glass tube

Filament Burner

Ballast

CFL - OEM

CFL - EMS

Commercial

Residential

Government

Industrial

Capsule

Phosphor coating

PCB

Capacitor

Transformer

Transistor

Burner

Base





Contract manufacturing plays a huge role in this industry. However, the real challenge in the ecosystem lies in terms of mercury disposal and the import of tri-band phosphor. Unfortunately, there is no mandate or industry-wide standard for regulating mercury in CFLs.

The table below captures the capability in India across the CFL value chain.


SupplyLocal


CapabilityCompany

NamesLevel of Local

Value AddRemarks


Ballast Yes Yes NoAssociated

Lighting, Future electronics

HighBallast is done locally; however the

electronics kits are imported

Burner Yes Yes No High

Phosphor Coating

Total Imports

No NoMany Chinese

playersNA

China holds 90% phosphor reserves whereas India holds 1-2% of the same

Base Yes Yes NoMany local

playersHigh

PCB Yes Yes NoMany local

playersHigh

CFL

OEM YesYes, High Value Add Assembly

Only ISI certifications,

No IP

Philips, Bajaj, Surya

HighCFL requires ISI certification; there is no

local IP

EMS YesYes, High Value Add Assembly

Only ISI certifications,

No IP

Many tier 2, 3 companies

High

The country is largely dependent on China and other countries for the import of tri-band phosphor, an important element for manufacturing of CFLs. Having captured almost all of world’s demand, China has now started restricting mining of rare earth and tri-band phosphor. There has been an increase in the price of tri-band phosphor to more than US$ 420 per kg, an increase of nearly US$ 40,,besides imposing an export duty of US$ 50 per kg. Priceshave been rising on a very frequent basis and India, being a major importer,has been severely impacted. This has forced CFL manufacturers in India to increase prices. The CFL industry in India contributes to high value added manufacturing though. BIS standardization, ISI certifications and anti-dumping duty have made the industry very robust. Except for the electronic circuits, phosphor and filament imports, all of the other components are locally developed and assembled either by OEMs or through EMS.

The SWOT chart below captures the analysis for the CFL market.

STRENGTHSHigh demand driving growth; replacement demand from ICL is still prevalent in rural areas

EMS services available locally in plenty

Entire product design is done locally, caters to ballast manufacturing

High design and skillset availability

OPPORTUNITIESGrowing replacement demand from ICL to CFL still prevalent in the rural areasEscalating manufacturing and labour costs in China driving manufacturers to invest in facilities in IndiaIndia as a export hub for servicing ME, North Africa and Europe countriesComplete customized product design can be outsourced

WEAKNESS

Reliance on imports for most of the critical components – tube and capsule

Existing tax structure pushing up the price of the product

Illegal CFL products in the market with fake certification

ISI certification process is cumbersome

THREATS

Mercury disposal - Lack of congruent policies

Expected phase out owing to mercury toxicity and energyefficiency

Evident replacement market - LED lighting

Components like transistors and capacitors are cheaper when imported owing to huge volumes

SWOT


Component SWOTThe component ecosystem for CFL is quite simple with the components common across all wattage type lamps. The top 4 components that contribute to majority of the CFL bill of materials (BoM) are:

1. Capacitor

2. Glass tube

3. Transformer

4. Transistor

India has design and skillset availability to design the electronic components but does not have the infrastructure to develop the same. Although raw materials like copper are present, the country is dependent on enamel imports for manufacturing locally. Volumeandcostissuesarechallengesthatthecountryfaces.Thevolumedemandissohighthatitisdifficultforlocalmanufacturersto cater to such volumes, and hence turn to imports which also works out to be cheaper. In countries like China, Taiwan etc.,, component manufacturing takes place on a large scale and hence orders are also fulfilled within a very short turnaround time.

Strategic ConclusionsGeneral recommendationsIt is noted that the VAT for CFL manufacturing varies from state to state. Although some of the states have brought down the VAT to zero per cent, other states as wellneed to bring it down to zero per cent to bring about a uniform reduced lamp cost.

IP developmentAlthough there is no IP development, presence of ISI certifications ensures standardised manufacturing of CFLs in the country. The greatest challenge faced by manufacturers in India is the severe documentation process involved in the ISI certification for the bulbs. Such processes can be made available through the internet to ensure easy access and adoption.

Component ecosystemIn order to address the challenges of using tri-band phosphor, immediate actions need to be taken by the government both at the central and state levels. By approaching bodies like WTO or Energy conservation bodies, the issue can be taken up with China in protecting the interest of CFL manufacturers. The current 2 to 3 percent reserves of tri-band phosphor that India has should be tapped and explored for local manufacturing.

Product manufacturing

The most urgent need is to bring about a regulation that will ensure safe disposal and recycling of CFLs. Recycling facilities should be set up by manufacturers and the entire recycling mechanism should be funded through taxes levied on the manufacturer. The government could incentivize the setting up of recycling facilities through a capital subsidy for the manufacturers for an initial period of 3 years. It would be ideal for state governments to come forward in offering land at subsidized rates for setting up of the same.

The current CFLs are designed for a life of 5000 hours. A regulation on increasing the life of CFLs to about 15000 hours will help CFLs last for about 3 to 4 years,and also cut down the issue of mercury recycling issue.. This could be enabled by electronic circuit improvements.


Tax Structure

a. a. Zero duty for component imports; makes it easier to import and assemble locally

b. b. Manufacturing concentrated in HP and Haridwar – No excise duty

c. Difference in VAT from state to state

d. Incentives on sales tax and excise duty structuree. Bring down VAT to zero per cent

Value Addition a. No IP for CFLs, only ISI certification b. Encourage certifications for component

manufacturing

Component Ecosystem

a. Highly reliable on certain component imports

b. Lack of availability of certain raw materials

c. Block component imports and incentivise local manufacturing

d. Setup semiconductor fabs

Policy Initiatives

a. Lack of an efficient policy for mercury disposal

b. BIS - Cumbersome ISI certification process

c. Evolve a policy for safe management of Mercuryd. Introduce a lamp recycling mechanism, incentivise the

policy through capital subsidy. Recycling facilities etc.e. BIS – To develop regulations for control of mercury

level and methodology for mercury measurement



Energy Meters - Product and Ecosystem Analysis

SUMMARY


Local design, assembly and manufacturing


25.41 million (2012); CAGR (2012—2015) 8.9%

Local Value Addition High – mechanical, electronic hardware design, assembly

Top 4 ComponentsSystem on chip, Current Transformer, LCD display and backlight,

Super capacitor



High; Huge Local Market; High Growth Potential; Export Opportunity


a. Smoothening of Tendering systemb. Huge potential for local manufacturing of SoC and LCDc. Incentivize electronic component manufacturingd. Provide Infrastructure - land, water and energy facilities for electronic

componenet manufacturing e. Incentives to encourage exports

Market and OpportunityExtensive power capacity augmentation and improvement of electrical grid networks are imperative to support the growth of energy meter market in India.

Several sectors in India, especially industrial and infrastructural that include commercial and residential corridors, are presently witnessing substantial rise in investments. The electricity meters market in India is expected to grow at a compound annual growth rate (CAGR) of 5.3 per cent by 2015. All the energy meters in the Indian market are manufactured locally. Import and export volumes are also negligible, although few companies do small level exports and the industry caters to the unique end-user requirements of distribution companies. The Restructured Accelerated Power Development and Reform Program (R-APDRP) implemented by the governmentendeavourstoimplementefficientenergymeteringanddemonstratesustainedlossreduction.Adoptionofprepaidand smart meters will further support the growth of the market in the medium term.

0.35 0.35

0

0.05

0.15

0.10

0.25

0.20

0.35

0.30

20112010 2012 2013 2014 2015

Energy Meters Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

100%

100%

100%




CAGR (2011 - 2015)

TM: 4.8%

TDM (overall): 5.3%



0.33 0.330.31 0.31

0.29 0.290.28 0.280.300.30


Energy Meters: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 22.41 22.41 0.7

2011 23.75 23.75 0.72

2012 25.41 25.41 0.75

2013 27.19 27.19 0.78

2014 29.87 29.87 0.82

2015 32.85 32.85 0.87


Industry SWOTThe energy meters value chain comprises various component and subsystem suppliers, assemblers and the downstream consumers. The outstanding fact is that almost the entire local demand is met through local manufacturing with some companies doing a considerable level of exports to countries like UK and Australia. The Indian market is flooded with a number of players who are into product manufacturing with one foreign player being one of the top 5 players and the remaining being local manufacturers. All the top competitors do high local value addition with only the electronics parts being imported.

The energy meters value chain is depicted in the figure below.


Transformer

Copper wires

Power supply

System on chipEnergy Meters -

OEM

Energy Meters - EMS

Utilities

Government

Housing / Packaging

Memory

Microcontroller

LCD driver

Microprocessor

Super capacitor

Sheet metal

Plastic





All the players carry out product design locally and most of the top competitors also have IP protection for the same. Contract manufacturing plays a huge role in terms of component placement on bare boards which are utilized by some of the top OEMs. Other than the electronic parts, all the other raw materials are sourced locally and developed indigenously. All of the mechanical, electronic hardware, firmware and calibration design and testing areperformed indigenously.

The table below captures the capability in India across the Energy Meters value chain.





Remarks


System on chip

Only Sales Offices; Total

ImportsNo No

Texas Instruments, STM, Freescale

NA


realization of IP, No semiconductor fabs

Active components


ImportsNo No

Texas Instruments, STM, Freescale

NA


realization of IP, No semiconductor fabs

Bare boardsLocally

developedYes Yes Many local players High

Passive components

Locally done Yes Yes Many local players High

Energy Meters


addYes

Securemeters, Landis+gyr, L&T

High


addYes

Flextronics, Foxconn, Jabil

High

In the Energy meters value chain, the main challenge is that the country is highly dependent on advanced electronics imports for which we do not have a capability in the country. Although chip design for energy meters is carried out by some of the leading semiconductor players in India, the country doesn’t have the manufacturing capability of the same. India, with an expertise in this segment for two decades, is one of the very few countries that have developed anti-tamper metering devices. With the design capability of the engineers and a robust technology, Indian meters are looked upon as best in class devices in the global industry. The presence of numerous companies that take reference designs from semiconductor suppliers and build products on them without any R&D efforts are a threat to the core suppliers. With no IP capability, they become a huge hindrance in the tendering system where companies with real IP and design capability are forfeited due to the low cost meters offered by these companies.The SWOT chart below captures the analysis for the energy meter market.

STRENGTHSTwo decades of expertise in handling energy meters

High consumption demand, Well developed EMS industry, Complete product design capability and IP realization

Anti tamper technology is unique to the Indian meters

Manufactures the best meters that stand against harsh electrical environments with accuracy in measurement

OPPORTUNITIES

Government policies such as R-APDRP propelling the tariff meters market

Accelerated industrialization, focus on energy conservation driving demand for panel meters


Smart meters, the next replacing product in this market

WEAKNESS

Reliance on imports for some of the critical components – System on chip, LCD display, Memory

The Indian bureaucracy does not help in component manufacturing

Lack of incentives for electronic component manufacturing

Complex tendering system at the Utilities department

THREATS

Mushrooming companies that use public reference designs to offer cheaper products

Lack of local IP for the semiconductor companies

Growing shift towards Smart meters, an expected phase out of electronic meters by 2020, although this creates other new opportunities

SWOT


Component SWOTThe component ecosystem for energy meters is quite simple with a certain set of components that are present across all types of Energy meters. The top 4 components that contribute to majority of the Energy meters bill of materials (BoM) irrespective of the type or price are:

1. System on chip

2. Current transformer

3. LCD display and backlight

4. Super capacitor

It is to be noted that all the top 4 components constitute about 60 per cent of the product value. Semiconductor companies like Texas Instruments and Freescale do chip design at their design houses in Bangalore and Noida. Copper for transformers is available, but we are dependent on countries like Germany for the capsule, giving rise to a volume and cost issues and making it easier to import the same. An important factor to be noted is the turnaround time. Although there are a few good quality local suppliers of capacitors and resistors, manufacturers predominantly import to benefit from the faster turn-around time when dealing with high volume suppliers from overseas.

Strategic ConclusionsGeneralIn terms of tendering process, tenders must be evaluated both on technical and financial aspects in order to produce standardized, robust meters. In due course, such processes can be made internet friendly to cut down high documentation processes which is highly challenging to the manufacturers. A regional level single-point testing laboratory can conduct all tests, which can save time and deliver authenticity. Also, the imported meters can be tested to check if they meet Indian standards thereby enhancing safety and environmental protection.

Development of standards for communication and band allocation is one of the top priorities in this market. Involvement of regulatory bodies and WPC for band allocation and creating standards (like the ones adopted in Europe, Korea, Japan) will help strengthen the product ecosystem at a large scale.

Component EcosystemWith the evolution of smart meters, itis the most opportune time for Government to bring about standards for manufacturing of smart meters, create a R&D fund for innovations in smart meters and also create opportunities for manufacturing of components like communication module, transceiver etc., which are key to the smart meters.

IP developmentThe Indian energy meters market is competitive enough with design strengths at a product and component level especially in the electromechanical parts. With an expected shift towards smart meters, preparing for the future by investing in R&,especially in development of relays by leveraging R&D tax credits, will lead to the establishment of the entire product ecosystem.

Product developmentGiven our strengths in high value add energy meter manufacturing, product modifications suiting international requirement can be effected to drive exports in huge volumes. Incentivizing export duty can boost exports as Indian meters are one of the most cost competitive having anti-tampering features incorporated.


Component Ecosystem


b. Demand Volumes

c. Price factor

a. Incentivize and Leverage local sourcing of capacitors and resistors

b. Increase R&D efforts to reduce price further and gain technological competence

Policy Initiatives

a. Lack of policies for testing laboratory and imported meters

b. Complex tendering system

a. Policy initiatives to set up single point testing labs and also testing of imported meters to bring about standardization

b. Tendering system to be evaluated on a technical basis; in the long run to make it available on the Internet

c. Concession on export duty to encourage exports leveraging the low cost of Indian energy meters



Digital Instrument Clusters (DICs) - Product and Ecosystem Analysis

SUMMARY


2W – Design, testing, manufacturing all done in India4W – Only 28% imported for high end cars


2W: 8.6 million (2012); CAGR (2012-15) 13.6%4W: 2.64 million (2012); CAGR (2012-15) 15.0%

Local Value Addition High – Local Sourcing, Manufacturing, Design IP held in India

Top 4 Components Stepper motor (20%), PCB (15%), MCU (10%), LCD (7%)

Component Ecosystem 90% of Electronic components imported


High


a. Domestic manufacturing to be promoted using preferential excise duty rates or greater rates of CENVAT

b. Using MSIPS and EMC, setting up electronics manufacturing clusters for automotive applications should be encouraged and subsidized.

Market and OpportunityAffordable two-wheelers and cars have become increasingly popular in emerging markets such as China, India and Brazil, and further growth is projected. This growth is directly proportional to the growth of ICs, especially digital ICs in the 4W segment due to their functionality, reliability and accuracy.

For 2011, the analog to digital ratio of IC stood at 50:50; however, the transition to digital IC is projected to be well pronounced over the forecast period. This trend promises a positive impact on consumption of electronics. The growth of the digital IC market follows the growth of the two-wheeler market, backed by an expected increase in growth of local manufacturing capabilities.

The market for 2W and 4W Digital ICs in 2012 was 8.6 million units and 3.7 million units respectively. 2W ICs are expected to grow at a CAGR of 13.6 per cent from 2012-15 to reach 12.6 million units in 2015 and the 4W ICs is expected to reach 5.5 million units in 2015. Digital 4W IC market is expected to grow as a result of more foreign players entering the Indian market.


0.14

0.10

0

0.04

0.02

0.08

0.06

0.12

0.10

0.16

0.14

20112010 2012 2013 2014 2015

Instrument Clusters Market (4W Digital): TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

100%

100%

100%




CAGR (2011 - 2015)

TM: 6.2%

TDM (overall): 9.3%

TDM (Low/Med value add) : 0


0.13

0.100.11

0.12

0.090.08

0.10 0.100.11

0.07

0.19 0.19

0

0.02

0.06

0.04

0.10

0.08

0.20

0.12

0.14

0.18

0.16

20112010 2012 2013 2014 2015

Instrument Clusters Market (2W Digital): TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

100%

100%

100%




CAGR (2011 - 2015)

TM: 12.2%




0.18 0.18

0.150.16 0.16

0.15

0.12 0.12 0.12 0.12



Instrument Clusters (2W Digital): TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 6.33 6.33 0.00

2011 6.54 6.54 0.00

2012 8.60 8.60 0.00

2013 9.70 9.70 0.00

2014 11.20 11.20 0.00

2015 12.60 12.60 0.00


Instrument Clusters (4W Digital): TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 3.04 2.89 0.00

2011 3.30 2.34 0.00

2012 3.66 2.64 0.00

2013 4.14 3.04 0.00

2014 4.76 3.50 0.00

2015 5.47 4.02 0.00



The table below captures the capability in India across the digital instrument clusters value chain.


SupplyLocal


CapabilityCompany

NamesLevel of Local

Value AddRemarks


Stepper Motor

Import No NoSonce Boz, VID, Switec

NAImporting has proven to be a cost effective option as well; apart

form inadequate local capability

MCU Import No NoFujitsu,

Freescale, Renesas

NA

LCD Import No NoChinese

companiesNA

PCBLocal

supplyYes Yes

Many small companies

High

Digital ICsOEM Yes

Yes- High Value Add Assembly

YesINEL,

VarrocHigh

EMS No NA NA NA NA None

Industry SWOTLeading manufacturers of ICs in India are Pricol, Visteon, Minda, Continental and Stoneridge. While both analog and digital IC for 2W are entirely manufactured in India, about 35 per cent of 4W digital ICs that are mostly used in high-end carsare imported. Pricol & Visteon are the dominant players in the instrument clusters market in India. Pricol, with seven manufacturing plants across the country, also has its own design and testing facilities. Denso has recently acquired a 51 per cent stake in Pricol Components to manufacture ICs in India at Pricol’s two plants, in Coimbatore and Manesar. Visteon also has three design centres and four manufacturing facilities in the country.

The digital ICs value chain is depicted in the figure below.


MCU

PCB

LCD

Stepper Motor

Digital ICs OEM’s




The SWOT chart below captures the analysis for the Digital Instrument Clusters market.

STRENGTHSHas a well developed ecosystem

Design IP held in India

Companies have in-house design, testing and manufacturing facilities

Demand for Digital IC’s growing

OPPORTUNITIES

Investment opportunities – recent M&A activities


Increasing semiconductor content in vehicles to drive digital IC market

WEAKNESS

Reliance on imports for most of the critical components

Underdeveloped electronics manufacturing ecosystem

Limited indigenous IP generation

THREATS

Currency depreciation affecting vehicle market, that could in turn impact IC market in the short term

SWOT

Component SWOTThe top 4 components that contribute to majority of the digital ICs bill of materials (BoM) are:

• Steppermotor

• PCB

• Microcontroller

• LCDdisplay

Except for PCBs—there are indigenous players that manufacture PCBs—the other components are imported since there are no indigenous capabilities present in the Indian electronics ecosystem for the manufacturing of these components. Microcontrollers are sourced from companies such as Freescale and Fujitsu while LCD displays are easily sourced from a lot of Chinese companies that manufacture small LCD displays. Stepper motors are sourced from overseas from companies such as VID and Sonceboz.



Market/ Value chain

Component market is very import-heavy; all major components being

imported

a. Manufacturing of PCB and LCD displays to be incentivized using preferential excise rates or greater rates of CENVAT credit

b. Fab policy could foster manufacturing of microcontrollers, due to existing design competencies and automotive manufacturing competencies.

c. Using MSIPS and EMC, automotive electronics manufacturing clusters could be setup in the south, near the Bangalore-Chennai region.


This is a mature product market which only relies on less than 30% import of digital ICs for high end cars, and has seen exceptional growth all through these years. With constant innovation, technology change and aesthetics, the market holds great scope for exports and as global automotive hub. The industry can gain if provided with export-friendly policies and support structure from the Government.

IP development: The enormous availability of design and software skills in the country can be leveraged as the IP for instrument clusters is not held locally in India; global OEMs possess design, testing and manufacturing facilities in the country though. Government can promote the development of IP locally by setting up an R&D corpus and promoting tax exemption in R&D activities for these companies.


The country is entirely reliant on import of the most critical parts used in manufacturing of digital ICs. The Indian electronics ecosystem already possesses a fair amount of competency with regard to the manufacturing of PCBs and smaller sized LCD displays. The manufacturing of these components could be further incentivized through preferential excise duties or offering greater rates of CENVAT credit.

However, the other important components such as microcontrollers and stepper motors are imported. With the setting up of semiconductor fabs and the existing semiconductor design competencies in India, the manufacturing of microcontrollers could present a justifiable business case for willing investors.


The MSIPS and EMC policies could be taken advantage of to set up an automotive electronics manufacturing cluster near the Bangalore-Chennai area; Bangalore possesses the desired design expertise while a lot of automotive manufacturing happens in and around the Chennai region.



Smart cards - Product and Ecosystem Analysis

SUMMARY


Local design, assembly and manufacturing


Nil

Local Value Addition High- Local souring, local assembly, local manufacturing

Top 4 Components Chipset, Plastic body, Software, Printed ink antenna





a. Top 2 Components do not have much potential for indigenization (global capacities, lack of local infrastructure, IP etc)

b. Incentives to encourage exports

c. Encourage passive components manufacturing locally to encourage assembly level activity

Market and OpportunityGovernment ID programs, social welfare schemes and telecom SIM applications are the prime influencers of demand for smart cards. Smart cards technology, with its security and versatility, is being increasingly adopted for social and commercial applications in telecom, transport, driving license (DL) & registration certificate (RC), access control and Government projects. The annual shipment of smart cards in 2012 was estimated at 670 million units. Dominated by the telecom market, the future of the Indian smart card market is expected to be driven by the segments of government, banking & loyalty programs and transportation.

Contact smart cards currently dominate the market, but going forward a proclivity for contactless cardsis expected. The equation which stands at 75 to 80 per cent in favour of contact cards currently is expected to drop to equal proportions by 2015. The government is driving the adoption of smart cards by planning smart chips in in ration cards, UID, NREGA, RSBY etc., thus creating a huge opportunity for the local market.


0.52

0.57

0

0.1

0.3

0.2

0.5

0.4

0.6

20112010 2012 2013 2014 2015

Smart Cards Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

62%

70%

100%




CAGR (2011 - 2015)

TM: 25.4%




0.44

0.4

0.310.27

0.21

0.13

0.2

0.1

0.16

0.23

0 0 0 0 0 0

Smart cards: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 550 300 0.00

2011 600 375 0.00

2012 670 450 0.00

2013 620 540 0.00

2014 680 621 0.00

2015 650 714 0.00




Industry SWOTThe smart cards value chain comprises various material and component suppliers, system integrators, and the downstream segments like government, IT, transportation, banking etc. The Indian market is currently dominated by around 5 to 6 players who hold the majority of the market share for smart cards. All the top players in this product market have their own manufacturing facilities locally where assembly activity is carried out. The electronics components are imported while the on-card and off-card technologies are done locally. The software and integration part is carried out in-house and the plastic sheets are partially imported and partially sourced locally.

The smart cards value chain is depicted in the figure below.


PETG

PVC

Plastic body

Chipset

Smart cards - OEM

Smart cards - EMS

IT / ITes

Government

Banking

Telecom

Softwares

Memory

Substrates

Connector

Microprocessor

OS

RoM Softwares



The top players in this product market are Syscom, Madras Security Systems, Gemalto, Orga, VCT, Manipal technologies, Oberthur and G&D. Oberthur and G&D execute the majority of their projects in for banking applications. The greatest strength that lies in India with respect to this product market is that we have enormous software developing capabilities. On-card and Off-card technologies, interoperability, operating system development, hard mouse chips, embedding and milling capabilities are available in India. These are carried out by most of the top players locally which contributes to a high value addition in the manufacturing ecosystem.






AddRemarks


Chipset Imports No No

NXP, STMicroelectronics,

Infineon, Renaissance, Atmel

NA

Antennasubstrates

Imports No NoAFK, French and US

companiesNA

France and US holds the highest number of patents; no design

capability

Software Local Yes Yes In-house High

Plastic body

Partial Imports,

Partial Local supply

Yes No

Madras Security Printers, Manipal

Press, Syscom, Bayer, United Tech

Star

HighLocal manufacturing capability exists, but many OEMs prefer to

import from China, HongKong etc

Smart cardsOEM Yes Yes No

Syscom, VCT, Oberthur, MSS,

Gemalto, Oberthur, G&D

High

EMS No No No No NA

The table below captures the capability in India across the Smart cards value chain.

The challenges that the industry is currently facing is demand. Most of the announced new projects will take a few years to be operational and therefore capacity building will gradually rise when volumes go high. With respect to product design, the country lacks intellectual property in this field and most of it is owned by French and US companies on a technology front. The foreign companies dominate the patent environment with respect to chip and antenna substrates design. In spite of these challenges, smart cards still continue to be a high value add product which are also exported by the top players.

The SWOT chart below captures the analysis for the smart cards market.

STRENGTHSHuge consumption demand, Government and Banking are the high growth end user segments

Software – OS development, chip management, on-card and off-card technologies are well established

Well developed EMS industry to carry out assembly activity

Continuous R&D to reduce overall cost and enhance customization

OPPORTUNITIES

High Growth potential in the planned Government projects

Increasing manufacturing and labour costs in China driving manufacturers to invest in facilities in India


PMAS for smart cards to help boost local manufacturing

WEAKNESS

Reliance on imports for the electronics – System on chip

Lack of product design activities locally; No IP generation. Most patents held by French companies

Constant pressure on manufacturers to reduce the powerunitsizeandincreaseefficiency

High risks in terms of security and hacking

THREATS

Well established manufacturing ecosystem in countries like China, Japan, Korea etc.

Well explored technology – France and US hold the highest number of patents for chip and substrate technology


SWOT



Component SWOTThe component ecosystem for Smart cards is quite simple across all types. The top 4 components that contribute to majority of the smart cards bill of materials (BoM) are:

1. IC

2. PETG/Polycarbonate body

3. Software OS

4. Antenna (wire or printed)

It is noted that India possesses design capabilities for the chip at the local design centres of MNCs such as NXP, Infineon and STM. However, lack of chip fabrication facilities results in negligible value addition contribution from design. Plastic is the second most expensive component in a smart card which is partially sourced locally and majorly imported from China, HongKong etc. Although there are numerous players in India who provide equally competitive PETG at competitive prices, many players still prefer to import owing to volume issues. Printing and personalization is thoroughly local. We do have personalization capabilities but lack of demand prohibits from exploring the same.

Strategic ConclusionsGeneralSmart cards are a high growth market possessing a huge export potential. Leveraging export subsidies and considering product manufacturing under the EPCG scheme will benefit manufacturers in importing machinery at subsidized prices and exporting huge volumes. Large presence of unbranded products in the grey market calls for a consideration of CVD tax on finished goods imports to prevent dumping of the same.

IP/ Copyrights developmentThe Indian market has enormous skillset availability in the software and integration part of smart cards. The software development is largely outsourced or developed in-house which are copyrights protected. Colourful designs, attractive smart chips and high end customization is achievable, but there is a lack of demand in this segment. Exploration in personalization of smart cards paves way for an opportunity in the export market where it is highly preferred. In terms of component design, the integrated chip is entirely imported which does not undergo any local value addition. In this case, fabrication can be outsourced to dedicated foundries which will bring down the cost and encourage local fabless design companies to develop chip by granting capital subsidy, possibly through the mooted EDF corpus. The application of regional language software could provide opportunities considering the expected penetration of computing and connectivity in semi-urban and rural areas; the idea of setting up central government grants for such software development activity at the NITs should be considered.

Component ecosystemPlastic (PETG),one of the major raw materials in smart cards,is available in plenty locally. In spite of this, many manufacturers still prefer to import from the neighbouring countries. The PETG available locally is price and quality competitive. The government should encourage sourcing of such components locally by bringing smart cards under Preferential Market Access (PMA).

Product developmentThe ecosystem for smart cards is currently at a modest level with large amounts of local sourcing and manufacturing by a number of global OEMS and indigenous players. Chip, which is the most important component of a smart card, is majorly imported and all other components are available locally. Smart cards adoption is increasingly growing with its massive adoption in social and commercial applications in telecom, transport, driving license (DL) & registration certificate (RC), access control and Government projects. To cater to such demands at a quicker rate, investments in local chip fabrication facilities would be required. At least 4 dedicated chip fabrication units for smart cards manufacturing will ensure constant high local value addition and volume shipment. Such a situation in the long term will facilitate export activities as well. The coupled strength of software, design and chip fabrication gives rise to an uninterrupted ecosystem with export opportunities to the neighbouring countries.



Value Addition

a. Absence of Product Design/IP Generation

b. Lack of demand in terms of Personalization

a. Global companies who own IP elsewhere can set up local design houses with appropriate support from the Government

b. Promote new and colourful designs which will increase the uptake of smart cards in the export market as well

Component Ecosystem

a. Reliance on electronics imports

b. Demand Volumes

a. Awareness programmes for sourcing of components like Plastic

b. Subsidize capacity scale up to aid exports



GPON ONT - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design Local design and manufacturing capabilities exist


ONT: 0.08 M units (2012); CAGR 132.1% (2012-15)

Local Value Addition High – design, development, manufacturing

Top 4 ComponentsOptical Modules (35-40%), SoC (15%), Power Supplies (8%)

and Memories (5%)

Component Ecosystem 70% of product BoM entirely imported


Huge; GPON as a technology is more efficient and last-mile solution in Indian terrain


a. CDOT has indigenously developed GPON technology

b. Top 3 Components do not have much potential for indigenization (global capacities, lack of local infrastructure etc.)

Market and OpportunityFibretothehome(FTTH)isaneffectivetechnologyforefficientdistributionoffibrenetworkstoservesmallbusinessesandhomes.Among the various FTTH technologies, GPON is the strongest contender for widespread deployments, and thus, has attracted the interest of the Indian Government to reach out to the rural interiors of the country. The merits of GPON technology prompted the Indian Government to start developing the technology indigenously through CDOT, resulting in the filing of patents and licensing of the technology by 7 Indian companies (ITI Ltd., Bharat Electronics Ltd. (BEL), VMC Systems Ltd., Sai Infosystems Ltd., SM Creative Electronics, United Telecoms Ltd. (UTL) and Tejas Networks India Ltd.) to develop the hardware. Also, the proposed government outlay of INR 20 crores, for the construction of the National Optical Fibre Network (NOFN) to build a countrywide OFC network of 250,000 km covering 2.5 lakh gram panchayats is expected to greatly increase the demand for GPON deployments in the coming years.

The demand for GPON customer premise equipment, called the ONTs has been steadily growing . Registering a CAGR of 132.1 per cent, GPON ONTs are expected to grow from 0.4 million units in 2012 to 5.00 million units in 2015. The domestic manufacturing of GPON ONTs was 0.08 million in 2012, which is expected to reach 1 million units by 2015.

244.3

0

0

50

100

150

200

250

20112010 2012 2013 2014 2015

GPON ONT Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 126.4%




48.90

207.9

54.7

05.5

23.0 009.306.3 1.3 3.0 4.6 26.0


GPON ONT: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.10 0.02 0.00

2011 0.16 0.05 0.00

2012 0.40 0.08 0.00

2013 1.00 0.10 0.00

2014 4.00 0.50 0.00

2015 5.00 1.00 0.00


Industry SWOTTouted as one of the technologies that can boost broadband penetration in the country, the GPON value chain is quite elaborate, consisting of the R&D, design and technology licensors, the manufacturers, the sub-part suppliers and the consumers. The major suppliers of GPON hardware in the country are Alphion, Huawei, NSN and Alcatel Lucent, along with CDOT and ITI, BEL, VMC Systems, Sai Infosystems, SM Creative, UTL and Tejas Networks.

The GPON value chain is depicted in the figure below.


Optical Module

System on Chip

Memories

Semiconductors

Mechanical Items

Power Supplies

GPON ONT Customers




With regard to domestic capability in R&D, designing and developing GPON technology, CDOT has designed and developed ONT and OLT, the hardware as well as the software part of both. With five patents already filed, the license to develop the hardware has been given to seven domestic companies mentioned previously. In terms of component ecosystem, the raw materials/components available locally are more expensive in comparison to those imported from China or Taiwan, prompting import of nearly 60 per cent of the BoM which comprise the entire semiconductor and electronics components, including certain electro-mechanicals components. However, power supplies are sourced from the local market. It is believed that the reference designs for the components are provided by the OEM’s to the components manufacturers and the reference designs are followed as such during manufacturing.

The table below captures the capability in India across the GPON ONT value chain.



CapabilityCompany

NamesLevel of Local

Value AddRemarks


Optical Module Imports No NoDelta, Ligent,

Source Photonics

NA1. Local capability unavailable

for Optical module, SoC and Memories

2. Volume imports is cost effective than local procurement

3. Also zero customs duty for electronic components makes it a sweet deal

System on Chip (SoC)

Imports No NoBroadcom, PMC Sierra,

Marvel, LantiqNA

Power supplies Yes Yes YesVMC, Acme

Tele, GE PowerHigh

Memories Imports No NoMicron, Hynix,

SamsungNA

Mechanical items – cables,

etc.Yes Yes Yes Low

GPON OEM

Imports as well as local

supply Yes Yes

Alphion, Huawei, NSN,

Alcatel Lucent, Teracom,

Utstarcom

Low

Field-trials on-going for indigenously developed

GPONs, thus domestic demand is fulfilled by imports

EMS No

The SWOT chart here captures the analysis for the GPON ONT market.

STRENGTHSIGPON technology designed and developed by CDOT, IP’s filed

Indigenous development of GPON equipment by domestic companies and field trial on

R&D activities are 100% tax exempted in the country

Indian skill-sets at par with global standards

OPPORTUNITIES

An advanced wire-line technology, best option to cover the last-mile customer; offers 2.5 GBPS compared to 3G’s 75 MBPS

Government projects – NOFN and NKN – to increase demand of GPON

WEAKNESS

Demand failed to meet expectation and thus eroding profitability of suppliers

Poor infrastructure limits deployment to new and planned locations

Reliance on import of raw materials and components

Higher Indian price points in comparison to imported equipment

THREATS

Infrastructure inadequacy creates business uncertainty with regard to investment decisions

Implementation delays and conviction level further alienate users

Still developing component ecosystem limits manufacturing abilities currently

SWOT


Component SWOTGPON consists of both hardware and software. With regard to hardware, there are a large number of PCB manufacturers in India who supply boards pre-loaded with ICs, resistors, capacitors, optical modules, etc. With over 60 per cent of BoM entirely imported, domestic manufacturing of the products does not make for a viable business proposition as the volume demand is heavily skewed. On the other hand, large volume orders that are fulfilled by the Chinese and Taiwanese companies allow them to price their product at a much lesser value due to economies of scale. Sourcing of power supplies is however done in India from companies such as VMC, Acme Tele, GE Power, etc.

The top 4 components that contribute to majority of the GPON ONT bill of materials (BoM) are:

1. Optical module

2. System on Chip

3. Power supplies

4. Memory

Strategic ConclusionsGeneral: The GPON technology and its advantages over other competing technologies have overseen its domestic development in the country. Although the domestically manufactured price points are still higher than imported units, supportive policies like reduced excise duties for the domestic manufacturers will promote the local industry.

IP development:

India has advanced itself with the design, development and manufacturing of GPON hardware as well as software technology. With the help of CDOT, the Government undertaking, India has filed 5 Patents and the licenses to use the indigenous technology to develop the product has been already granted to seven of the domestic telecom equipment manufacturing companies.


Of the top 4 components, the electronic and semiconductor components are entirely imported while the power supplies are sourced from India. Considering that telecom sector serves critical functionalities, it is desirable that the Indian electronics ecosystem developmanufacturingcompetenciesinthisareatobecomeself-sufficienttoanextent.Thiscouldpossiblybeachievedthroughthe setting up of the two semiconductor fabs, possibly devoting capacity towards the manufacturing of electronics components needed for GPON ONT.

Product manufacturing: The MSIPS and EMC policies could be taken advantage of to set up a telecom electronics manufacturing cluster near the Bangalore-Chennai area or in Delhi-NCR region.


Market / Value chain

a. 60% of BoM currently imported.

b. Only assembly done in India; only power supplies sourced indigenously

CDOT is already building on developing GPON technology indigenously. 5 patents have already been

filed and licenses to develop hardware been granted to 7 companies. The government has also started various programs to use GPON as the base technology like in National Knowledge Network (NKN), National Optical Fibre Network (NOFN), etc. The upcoming fabs might

also help develop relevant electronics component manufacturing competencies.



Tablets - Product and Ecosystem Analysis

SUMMARY

Product Local Manufacturing/Assembly/Design No; some amount of assembly


1.05 million (2012); CAGR 40.0% (2012—2015)

Local Value Addition Low – Negligible sourcing; negligible assembly

Top 4 Components Display, Memory, Processor, Battery





a. Reimbursement of tax credit to be made easier for encouraging investment in manufacturing

b. Motherboard, LCD display, and enclosure manu-facturing to be offered preferential rates of cus-toms and excise duty

c. Emerging technologies to be thoroughly evalu-ated for feasibility to stay ahead of technology curve in the future

Market and OpportunityThe Indian tablet was estimated to have been worth about US$ 190 million in 2012 and is estimated to grow at about 33 per cent during the period 2011 through 2015. However, unlike rest of the tablet markets in developed countries, the Indian market is not dominated by either Apple or Samsung, the clear leaders in the global market. Affordable 7 inch tablets offered by domestic players like Micromax and HCL are also going toe to toe with Apple and Samsung in the local market. Samsung and Micromaxare the top 2 players in the Indian market though, holding close to 40 per cent of the market cumulatively, followed by Apple which holds about 10 per cent. The year 2012 was an interesting year for the tablet market as a number of Indian players entered this market such as Karbonn and Lava. In terms of operating systems, Android is the dominant OS followed by iOS, with Windows 8 tentatively making inroads into the market.

Tablets have taken over the mantle from laptops of being devices that are portable and can be used on-the-go. This has become increasingly relevant with development in wireless technology and rising pervasiveness of wireless networks and data connections. The tablet market is expected to witness increasing demand from various industries such as small and medium businesses, educational institutes, hospitality industry and food service industry. The market for tablet PCs in the education sector is already growing extremely well as a result of government initiatives aimed at providing affordable tablets to students at schools and educational institutes.


688

0

0

100

200

300

400

500

600

700

20112010 2012 2013 2014 2015

Tablets Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 33.0%




469353

0

453

289 0

265

1900

200140

0

220

021

Tablets: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.10 0.00 0.00

2011 1.10 0.70 0.00

2012 1.00 1.05 0.00

2013 1.60 1.47 0.00

2014 2.64 2.06 0.00

2015 4.22 2.88 0.00




Industry SWOTThe tablet market has huge potential for both domestic consumption and export opportunities. Parallels can be drawn with the mobile phones market; Nokia saw the great potential in the Indian market and set up local manufacturing value addition in Tamil Nadu—albeit, mostly box assembly and packaging—which helped the local economy tangibly. They also manufactured ‘Made for India’ mobile phones by closely studying the dynamics of the local market and these products also gained widespread acceptance in certain export markets. Likewise, the table market could also present huge potential in this regard. Given that tablets have a disruptive form factor and are poised to be a mainstay in the electronics product industry and the daily lifestyle of people, the government should definitely incentivize local value addition in the manufacturing of tablets. The tablet as an educational tool could have phenomenal spinoff applications and create disruptive innovation in the delivery of education as we know it. However, the manufacturing of tablets—like the manufacturing of laptop and desktops—has already been commoditized by East Asian nations. Instead of trying to compete with such entrenched capabilities, there could be a case for investing in futuristic manufacturing techniques like flexible electronics, and the like. Since the country already possesses considerable design skills, Indian electronics design could lead the world in that particular field if the lead were taken on such innovative and futuristic techniques.

The tablets value chain is depicted in the figure below.


Touchscreen display

USB / Ethernet ports

Input / Output

Processing moduleTablets Consumers

Enterprises

Government

Software


Battery

Video card; Sound card; Nerwork card

Operating System

Applications



Minimal design activity happens in India with respect to the manufacturing of tablets. There is considerable Indian participation in populating each OS app ecosystem though; there are a number of start-ups that have introduced innovative apps spanning the fields of productivity, entertainment, lifestyle, health, etc. Bigger enterprises and organizations have also commissioned apps of their own as a new way of interacting with their customers and also as a new trade channel. There are a few indigenous companies that are currently limited to board level assembly. However, the setting up of the semiconductor fabs has the potential to spawn supporting activities and foster the growth of a holistic ecosystem for the manufacture of tablets. A few independent design houses as well as public sector companies are involved in creating indigenous designs of tablets for specific target applications. However, these design activities are sporadic and scarce. It would be beneficial to create a consortium for consolidating these different design efforts and develop world class indigenous designs.


The table below captures the capability in India across the tablets value chain.





Remarks


DisplayOnly Sales Offices;

Total ImportsNo No

Samsung, Sharp, AOU

NA

LCD panels are exempt from basic duty, and

this could seed greater assembly activity

Memory Imports No NoToshiba, Samsung,

Micron, HynixNA

Battery Imports No No Samsung, LG, NAThough design

capability exists there is no local realization of IP

ProcessorOnly Sales Offices;

Total ImportsNo No

all-Winner, Freescale,

Qualcomm, Rockchip,

Marvel, Nvidia; Samsung and

Apple proprietary processor

NAThough design

capability exists there is no local realization of IP

OS No NA NoApple, Google,

Microsoft, Blackberry

NA

Apps Yes NA Yes High

Tablets

OEM No No No Nokia, Samsung NA


Value Add Assembly

No Low

Recently, companies have begun coming out with tablet-hybrids: phablets, offering functionality and appearance of a phone and a tablet like the Samsung Galaxy Note, and tablet-laptop hybrids like Microsoft’s Surface Pro. These devices have found takers among the demographic segment that prefers convergence in functionality to owning multiple devices. The tablet-laptop hybrids are yet to receive mass appeal. The relative lack of manufacturing and assembly activities, if not addressed, could add greatly to the country’s import due to the exponential growth forecast for the market. It is highly imperative that tablet manufacturing and assembly be addressed by government policies, especially the aspect of the National Policy on Electronics that envisages the setting up of Electronics Manufacturing Clusters. With regard to tablets, there is huge potential for an EMC to be set.



The SWOT chart below captures the analysis for the tablets market.

STRENGTHS

Huge domestic demand for tablets

Presence of design skill with regard to app development for tablet OS

Nascent manufacturing/assembly facilities present that should be developed further

Active government support for electronics products with domestic and export potential

OPPORTUNITIES

Impending 4G roll out to drive sales of tablets, making for easier online access

Escalating manufacturing and labour costs in China could driver investment to India

India could potentially be an export hub for North Africa, ME, and other regions


WEAKNESS

Reliance on imports for most of the critical components - chips, displays and PCBs

Limited or negligent product design activities locally; limited IP generation

Absence of semiconductor fabs that could foster growth of supporting activities

Wireless penetration is fairly low outside of Tier 1 cities

THREATS

Well established manufacturing ecosystem in China and East Asia


Emergence of a disruptive form factor could supersede tablets potentially, for e.g., wearable electronics

SWOT

Component SWOTThe biggest contribution to the BoM in terms of dollar value in a tablet is accounted for by the display which could cost up to US$ 80 approximately. Next come the processor, memory modules and the battery, that could cost anywhere between US$ 15 to 20. In short, the top 4 components that contribute to majority of the tablet bill of materials (BoM) are:

1. Display

2. Memory

3. Battery

4. Processor

Since tablets are imported in finished product form for the most part, none of these components are locally sourced. As is the case for laptops and desktops, the Indian electronics ecosystem possesses very nascent capabilities in manufacturing, such as PCB assembly and box assembly and packaging. However, with the advent of the semiconductor fab units and government policies such as M-SIPS and the intention to set up EMCs, the country could potentially witness the development of a wholesome manufacturing ecosystem for tablets.


Strategic ConclusionsGeneralThe reimbursement process for claiming tax credit should be made easier and faster so that companies do not have to contend with uncertainties of receiving reimbursement.The reimbursement process should be moved to an online portal, there should be no restrictions on the number of times reimbursement can be claimed in a particular period of time, and reimbursements should be directly transferred to merchants’ bank accounts.

IP developmentThere is a lot of on-going independent design activity on tablets across various private independent design houses as well as public sector enterprises. The lack of visibility into these various activities and the absence of financial support, in some instances results in the design efforts not culminating into a commercial product. There is a pertinent need to setup a centre of excellence for mobile and tablets within one of the proposed EMCs to consolidate all of these design efforts and create a platform for taking these designs from lab to fab. Leveraging the strengths of the local EMS industry, these indigenous designs can see the day of light as ‘Made in India’ tablets that could have wide appeal in the export market too.

Component ecosystemThe manufacturing of motherboards and LCD displays for tablets should be incentivized by exempting individual components from basic customs duty and excise duty or offering preferential excise duty. Sheet metal fabrication and plastic moulding are fairly mature technologies in India; hence, the manufacturing of tablet enclosures could also be incentivized too. It is also important to note that the pace of technological change in the IT industry is rapid, and hence there is a need to ensure that investment in a particular technology is sustainable in the medium to long term. For e.g., shift to SSDs, flexible electronics, etc.

Product manufacturingThe tablet industry in India has certain competencies in assembly that could be leveraged to make it a favourable destination for value-added assembly of tablet computers for both domestic and export markets. Since this is a fairly new product market, developing design competencies will gradually lead to organic development of the product ecosystem, especially since nascent manufacturing capabilities are present along with a holistic policy basket for the electronics ecosystem. Organic development of the product ecosystem will be inevitable once design activities and component manufacturing gain traction, since the demand for tablets is projected to grow steeply in the next few years and hence the business case for making indigenous investment will be fairly straightforward.


Tax Structure Convoluted process of claiming tax creditReimbursement process should be made easier to encourage investment in manufacturing and

ensure peace of mind for manufacturers

Value Addition Lack of feeding activitiesManufacturing of motherboard and LCD displays

should be offered preferential basic duty and excise duty rates; also enclosures

Ecosystem Awareness of technological trends

Emerging technologies should be thoroughly evaluated for their feasibility and appropriate investment made in order to get ahead of the

technological curve in the future



SUMMARY


Local Manufacturing, Design and Assembly


5.2 million (2012); CAGR (2012—2015) 57.6%

Local Value Addition High – Some components imported, some sourced locally, Local Assembly

Top 4 Components LED, Drivers, Heat Sink, Thermal Interface material

Component Ecosystem Partial Imports, Partially sourced locally




a. Focus on technical standardization

b. LED and Optics do not have much potential for indigenization (global capacities, lack of local infrastructure etc)

c. Attract leading manufacturers to invest in India and have a co-benefit of reduced cost

d. Appropriate fiscal incentives (tax, duty, tariff ) to manufacture in India

e. Set up testing facilities and labs at a national level

LED Lighting - Product and Ecosystem Analysis

Market and OpportunityTheLEDlightingmarketinIndiahasgainedprominencewithincreasingenergyefficiencyawarenessandagrowingGreenenergydrive. The Indian LED Lighting market generated revenue of $ 168.6 million in 2012 and is expected to reach a market of $ 440.7 million by 2015 growing at a CAGR of 38 per cent.

Street lighting and commercial lighting are slated to be the next biggest applications for the next few years. The residential segment could become significant in 5 to 7 years’ time. Although households still prefer compact fluorescent lamps (CFL), the demand for LED lighting is increasingly rising in the commercial segment. Despite the growing consumption volumes, absence of indigenous LED fabs results in complete reliance on imports. Indigenous manufacturing volumes of LED lights in 2012 were estimated to be 5.2 million units in 2012 and are poised to scale to 20.35 million units by 2015 growing at a CAGR of 57 per cent.


0.44

0

0.05

0.15

0.10

0.25

0.20

0.45

0.30

0.35

0.40

20112010 2012 2013 2014 2015

LED Lighting Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

33%

39%

45%




CAGR (2011 - 2015)

TM: 38.4%




0.20

0.32

0.23

0.09

0.17

0.120.09

0.03 0.040.06

0.14

LED Lighting: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 7.03 2.11 0.00

2011 10.20 3.06 0.00

2012 14.79 5.20 0.00

2013 21.45 8.48 0.00

2014 31.10 13.57 0.00

2015 45.09 20.35 0.00




Industry SWOTLED Lighting value chain comprises various material suppliers, component and subsystem suppliers, assemblers and the downstream retailers, distributors and consumers. The industry in India is highly fragmented, with a large number of small players, and is also capital intense, with a high level of entry and exit barriers especially to setup infrastructure. Most of the components required for manufacturing LEDs are imported. In order to get white light from LEDs, yellow phosphor has to be used as a coating, which is an expensive rare earth metal currently imported from China. Rare earth export restrictions applied by China have had companies exploring other rare earth sources such as Indiaand also attempt recycling. The number of patents filed in the LED lighting space has increased steadily year-on-year, from approximately 600 in 2000 to over 2,500 in 2010.


Heat Sink

Thermal Interface Material

Housing

TestingLED lighting - OEM

CertificationLicensors

LED lighting - EMS

Commercial

Residential

Government

IndustrialOptics

Driver

LED

PCB

Lens

Diffusers



The LED Lighting value chain is depicted in the figure below.


The Indian LED lighting market is a complex network of more than 350 players including assemblers, traders, distributors, resellers and importers along with an equally big unorganized sector which has a share of around 55 per cent of the entire LED lighting market. As LED is a highly expensive technology, in the absence of an ecosystem in the country, not many lighting suppliers in India have been able to manufacture LED light source in India. Heat sink and drivers are manufactured in India whereas the light source with lens, reflector and chip is entirely imported.

The table below captures the capability in India across the LED lighting value chain.





AddRemarks


LEDOnly Sales Offices;

Total ImportsNo No

Philips Lumileds, Cree, Nichia,

Osram, EpistarNA

No semiconductor fabs, No IP realization

Heat SinkPartial Imports, Partial local manufacturing

Yes NoOEMs, Lot of

Chinese playersHigh

Design registrations is encouraged, but no IP

realization

DriverPartial Imports, Partial local manufacturing

Yes No TI, NXP, STM HighDesign registrations is encouraged, but no IP

realization

Optics (lens, reflectors, diffusers)

Imported Yes No NA

PCB Locally done Yes No

OEMs. Lot of EMS players, unorganized

players

High

LED Lighting


addOnly design registrations

Philips, Havells, Osram, Wipro

HighDesign registrations is encouraged, but no IP

realization


addOnly design registrations

Instapower, Promptec, VIN

High

The semiconductors, reflectors and lens are entirely imported as their manufactureinvolves high level of technology and expertise. The critical challenge is that there are no semiconductor fabs to manufacture the semiconductor material or develop the ICs. The bigger players either import the individual components or assemble locally in-house or through a contract manufacturer. There are some traders and small players in the unorganized market who import the entire LED light as a finished product.




Replacement sales of CFL in driving demand for LED lights

Product Design – Many companies do complete product design locally

R&D activities aimed at futuristic value addition, cost reduction and better performance

Well developed EMS industry – capabilities for entire product manufacturing

OPPORTUNITIES

Unfurling opportunities in Street lighting, Commercial and industrial segment

LEDEfficiency(Lumen/Watt)increasingatarateof20%per decade, is reducing the payback period for LED, ultimately ensuring quick ROI



WEAKNESS

Lack of testing protocols, facilities, and accredited labs at the national level

High initial cost even after carbon finance assistance

Absence of National technical standards leading to import of sub standards LED lights

Lack of testing protocols and laboratories

Lack of incentives to attract major LED firms to manufacture in India

THREATS


Emergence of other low cost manufacturing destinations like Vietnam


No incentives to set up manufacturing facilities in India

SWOT

The SWOT chart below captures the analysis for the LED lighting market.

Component SWOTThe component ecosystem for LED Lighting is extremely diverse in line with the wide range of prices of LED Lights. While components such as driver, heat sink, LED, reflectors, lens, etc., are common for all types of lights, the cost and capacity of these componentsvarydependingonthewattageandefficiencyofthelight.Thetop4componentsthatcontributetomajorityoftheLED Light bill of materials (BoM) irrespective of the type or price are:

1. LED

2. Driver circuit

3. Heat sink

4. Thermal interface material

The light source/ LED are entirely imported and India currently does not have LED fabrication facilities. This is due to lack of infrastructure and incentives and high investment costs. Driver circuits and heat sink are very well manufactured locally by a lot of players. Lack of IP protection and skill training prohibits the market from carrying out indigenous activities. Aluminium, an important raw material for heat sink, is very expensive. In order to promote local manufacturing, the government should offer incentives on raw materials purchase for domestic manufacturing.


Strategic RecommendationsGeneral Restrictive tax structure with a high VAT of 14.5 per cent obstructs LED lighting penetration. Reduction and a uniform VAT structure across all states will increase penetration. Exemption for capital goods for LED light manufacture will encourage manufacturers to enhance the manufacturing ecosystem

IP developmentWith approval from the Ministry, 3 more testing facilities are to be established in three regions in the country. Setting up of design houses, both for product and components, will create a labour pool and also enhance design capabilities locally. Product awareness across the value chain is an immediate necessity to promote adoption and penetration and thus bypass the volume issue for manufacturing.

Component ecosystemConsidering the market size of Led lighting in India, local design activity of driver circuits, heat sink and LED can be incentivized by granting R&D credit. Photometry is a crucial part in product development and can be encouraged through academia-industrial collaborations. With a large presence of local PCB development, thr driver circuit board itself has the potential to be indigenized. Grant of tax credit for local sourcing will further strengthen high value addition in the value chain.

With the growing shift from CFL to LED, especially in the B2B segment, there is going to be a tremendous demand for this market. LED chips being the most expensive component in the product, there arises a need for setting up LED wafer fabs in the country. LED wafer fabs, along with the testing facilities, will not only prevent the import of sub-standard light fittings but also increase the local value addition.

Product development

DeitYmust mandate technical specifications in order to manufacture standardized lamps. The imported LED lamps (finished goods) also must be tested to prevent dumping. The Government could extend support to mandate new or secondary roads to be replaced with LED fittings. All Government projects can include self-ballasted LED lamps. The Ministry of Power (MoP)can provide at least one LED lamp under the “electricity to all villages” scheme. These initiatives will bypass the volume issue and lead to constant high value add manufacturing which can be considered for exports in the long term.


Tax Structure

a. High VAT of 14.5%

b. Restrictive tax structure obstructs LED lighting penetration

a. Capital subsidy, grant and rebate

b. Investment and production tax credits

c. Reduction in sales tax, VAT

d. Exemption from SAD

e. Exemption for capital goods for LED light manufacture

Value Addition

a. Lack of testing facilities and product awareness

b. Absence of IP Generation

a. Immediate setup of 3-4 trusted testing facilities

b. Create labour pool to encourage component design capabilities, set up design houses

Component Ecosystem

a. Reliance on imports for electronics and optics

b. Demand Volumes

a. Set up chip fabrication facilities

b. Subsidize raw materials cost for manufacturers

Policy Initiatives

a. Absence of National standards for LEDs

b. Lack of incentives to set up manufacturing facilities

a. Recommendation to MoP to provide at least one LED lamp under “electricity to all villages” scheme

b. Technical standards to be mandated by BIS

c. Mandating phased domestic manufacturing to be integrated in the policy framework



Payment Terminals - Product and Ecosystem Analysis

SUMMARY


Only Assembly (Only by local players who hold a share of 5%)


0.035 million (2012); CAGR (2012—2015) 16.3%

Local Value AdditionLow – Mostly finished good imports, local manufacturers source some materials

locally while most components are imported

Top 4 Components Communication Module, LCD/TFT, Printers, Processors





a. Incentivize EMV certification costb. Top 4 Components do not have much potential for indigenization (global

capacities, lack of local infrastructure etc)c. Reduce excise duties d. Encourage semicon fabrication initially through BEL, BHEL, etc

Market and OpportunityOne of the defining characteristics of the electronic payment market in recent years has been that it grows steadily year on year. Ease and convenience of purchase for cardholders drives the market wherein the merchant is also ensured of a safe and secure transaction, thus offering a wide range of payment options to consumers. In 2012, the credit, debit and other electronic payments grew at a rate of 30 per cent from the previous year with 1.2 billion transcations. POS systems shipment volumes in the country are anticipated to grow from 0.7 million units in 2012 to 1.1 million units by 2015 growing at a CAGR of 16.3 per cent.

India is currently the 13th largest non-cash payment markets in the world with a high potential to grow significantly as more merchants install POS systems and accept card payments. The government has announced that it will setup nearly 14 lakh Aadhar linked Micro ATMs across the country which will deploy PoS terminals to read cards and communicate with the bank’s core banking system. Despite the high consumption volumes, there is very minimal local manufacturing or assembly activity. There are only a few local manufacturers who indigenously produce terminals, however, limitations of huge investment cost and certification costs do not make it viable for mass production.


0.22

0

0

0.05

0.15

0.10

0.25

0.20

20112010 2012 2013 2014 2015

Payment Terminals Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

0%

0%

0%




CAGR (2011 - 2015)

TM: 18.9%




0.0110

0.18

0.16

00.008

0.14

00

011

0

0.10

0.0058 0.007 0.0090.005

Payment Terminals: TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 0.50 0.025 0.00

2011 0.58 0.029 0.00

2012 0.70 0.035 0.00

2013 0.80 0.04 0.00

2014 0.90 0.045 0.00

2015 1.10 0.055 0.00




Industry SWOTThe Payment terminal value chain comprises various component and subsystem suppliers, assemblers and the downstream retailers and consumers. While local manufacturing is restricted to just assembly activities, the country is highly reliant on imports for all the electronics components in the product. The cost of investment involved in component manufacturing and also the EMV certification act as huge barriers for local manufacturers to explore local value addition.

The Payment Terminals value chain is depicted in the figure below.


Processor

ROM

Processor Module

Battery Circuits

Interfaces

Communication Module

Software

Dial Up

Printers

Displays

GPS

Operating System

Applications


Payment Terminals - OEM

Banking/Financial Licensors

Utilities

Retailers

Payment Terminals - EMS

Certification Licensors

Government



In this product market, prominent players like Ingenico and Verifone together account for 95 per cent of market share. The remaining is accounted for by very small local manufacturers like Visiontek, Analogix who offer customization services to serve applications like utilities reading, transport, bill generation etc., which do not require an EMV certification. This is because the cost of certification is huge and is unaffordable for smaller manufacturers. The indigenous manufacturers import all of the electronics components required and execute assembly activities while packaging and integration, and casing manufacturing is done locally. There are design houses present in Bangalore which develop product design and also have IP capability. The very minimal local sourcing in this product market results in a very minimal local value addition. With regard to components, the electronic modules, processors, communication modules, interfaces, battery circuits, displays and printers are imported. Local capability exists for the casing, packaging and integration. The table below captures the capability in India across the Payment Terminals value chain.



CapabilityCompany

NamesLevel of Local

Value AddRemarks


CPU ModuleOnly Sales


No No NAProduct design exists, involves

high setup cost for Foundry

Communication Module and

Interfaces


ImportsNo No NA

Product design exists, involves high setup cost for Foundry

Battery CircuitsOnly Sales


No No NAProduct design exists, involves

high setup cost for Foundry

Displays and Printers


ImportsNo No NA

Product design exists, involves high setup cost for Foundry

Integration and Casing (Packaging)

Developed locally

Yes No HighSheet metal and Plastic produced locally, including electrical cables.

Payment Terminals

OEM YesYes, Low value

add

Yes, at product design

level

Ingenico, Verifone,

G&D, HCL, Visiontek, Analogix

Low


Value Add Assembly

Yes, at product design

level

Flextronics, SGS, Kanes

Low

The proportion of the retail market that employs POS systems is still less than 15 per cent. The use of plastic money is still nascent and the conversion rate is very high;this acts as a huge opportunity for POS installations. The first step to encourage the use of plastic money is to create awareness amongst the citizens to have banking facilities and hence own a transaction card. Also, it is noted that there is lack of standards which necessitates manufacturers to make customized terminals for clients. Lack of client demand leads to a volume issue, hence manufacturers are unable to manufacture in mass thus leading to many cheaper product imports.




Continuous improvement to reduce product cost

Various design houses present locally who carry out entire product design

Good skillset availability and reasonable labour cost

Other raw materials like sheet metal and plastics is made cheaper

OPPORTUNITIES

Increasing average online spend per person

Escalating manufacturing and labour costs in China driving manufacturers to invest in facilities in India

Increasing adoption of debit and credit cards, significant rise in online transactions, Micro ATMs

Mobile phones: Best medium for cashless payments


WEAKNESS

Reliance on imports for most of the critical components – Processor, Communication and interfaces module, battery circuits, display, printers

High certification costs prohibits local manufacturers to invest

Volume demand of certain raw materials is very low and hence rely on imports to get it cheaper. Penetration of PoS systems is still very less; Retail not more than 15%

THREATS

High cost of manufacturing; capital intense


Incentives on sales and excise duty in certain pockets of India thus attracting industries to one particular geographic location


SWOT

Component SWOTThe component ecosystem for payment terminals is diverse in accordance to the application segments it caters to. The cost of certain components varies depending on the application that it performs. Modules such as processor, communication and battery circuits are common for all types of systems whereas the high end terminals may have smart chips, Bluetooth, GPS, etc. The top 4 components that contribute to majority of the payment terminals bill of materials (BoM) irrespective of the type or price are:

1. Communication module

2. LCD/ TFT

3. Printers

4. Processor

Analysing the payment terminals component value chain in India, it is observed that sustained and growing demand for POS systems is a key strength for the industry. Key strengths include design capability, EMS services and also PCB development, but the critical challenge is that there is no feeding industry present and most of the components are imported. This creates a lack of basis or fundamentals for developing the local manufacturing for this market. Huge investment costs to set up foundry, fabs and certifications acts as a major challenge for local manufacturers. Another major challenge is the volume; the demand is very high and outstrips the indigenous manufacturing capacity. Hence, the market is import-heavy and incidentally importing in large volumes from China and Taiwan also presents cheaper acquisition costs for companies.

The SWOT chart below captures the analysis for the Payment terminals market.

Strategic ConclusionsGeneral The current customs duty for terminals is 12 per cent on 80 per cent of the product price against a 14 per cent excise duty on the product price. This makes it economical for OEMs to import rather than produce locally especially when there is lack of incentives for component sourcing. Reduction in sales, VAT and excise duty would attract more manufacturers to consider local manufacturing. A notable issue is that although the Indian Governments gives a tax rebate of SAD for local manufacturers, the complexity of the process is a major challenge. Making the whole system as an Internet Online portal (similar to Income Tax) and creating awareness of the same would act as a boon to manufacturers. Allocation of funds by the Government for providing domain training in the payment industry would be of great help for people in the manufacturing sector of POS and payment enabling products.



Tax Structurea. Excise duty varies from state to stateb. Current duty is at 12% on 80% of the

product price

a. Reduce excise duty, sales and VATb. Incentivize tax on component imports

Value Additiona. Lack of Feeding Industriesb. High EMV certification costs leading to a

halt in progress for local manufacturers

a. Promote design through setup of design housesb. Collaborate with academia to carry out design activities,

both product and component levelc. IP generation for local designd. Incentivize certification costs for local manufacturers

Component Ecosystem

a. Reliance on importsb. High demand volumes – makes it

cheaper while importing

a. Offer incentives to source raw materials locallyb. Set up Semiconductor fabrication, packaging and

testing facilities

Policy Initiatives

a. Lack of policies to encourage citizens to have banking facilities

b. Lack of standardization policies leading to many cheap imports of terminals

a. Create awareness to attract citizens to have bank accounts

b. Bring about standardized protocols for local manufacturing and component quality

IP development

EMV certifications, which are a mandate for PoS system authorization incurs huge cost. This is a huge roadblock for local manufacturers. This is where the need for an expansion of a national switch like NPCI comes in. The expansion will act as huge clearing houses and will abrogate the current VISA/ Master/ Maestro certifications thereby reducing the cost for local PoS system manufacturers. The brand name of the NPCI switch is called “RuPay” which currently is applicable only for ATM cards, and few debit cards is much cheaper when compared to the EMV costs. Their expansion to all debit cards, credit cards and merchant sites will encourage manufacturers to invest in local manufacturing and also help the entire value chain (banks, merchants and customers) to move towards plastic money.

Any certification like EMV/ product or component import is very complex. The number of processes and signatory documents involvedistoocomplexthusmakingitdifficultformanufacturerstoconsiderthisoption.Simplificationoftheprocessbyhostingthe certification online with upload of scanned documents will make the process simple and easy to adopt. With software development being one of our core strengths, allocation of funds by the government to enable the Indian IT entrepreneurs to develop the ‘EMV Kernel’ targeting various emerging platforms including Android will help in strengthening the ecosystem.

The end customers’ requirements are very niche and are very specific to this market, thus creating a volume issue for manufacturers. Manufacturers are unable to produce in bulk due to this customization issue. Lack of standards or policies for product design paves way for cheaper product imports as substitutes. Devising an appropriate manufacturing standard will help in manufacturing of quality products and will forfeit the volume issue.

Component ecosystemIndia is largely dependent on imports for most of the critical electronic components which constitute about 60% of the BoM value. Incentivising component imports by providing tax rebates for local manufacturing and encourage fabless design companies by providing seed capital will promote higher local value addition. Setting up local design houses and leveraging R&D tax credit will attract global OEMs to invest in local manufacturing of components.

Product developmentThe Micro ATMS once established will quicken the process to a plastic economy. The Indian cash economy has to be encouraged to get converted to plastic economy. Encouragement for the usage of no frills debit cards with no surcharge and creating awareness about usage of the same is pertinent. Tax rebate to merchants, if at least 50 per cent of transactions in value terms are through cards, needs to be mooted. The NPCI (National Payment Corporation of India) must be brought to force thereby creating an infrastructure for “RuPay” as clearing houses and ultimately enabling the use of plastic money and necessitating a PoS implementation.

The government has to initiate steps to fund and encourage the indigenous development of EMV Kernel and setup EMV and PCI-PTS test facilities to help the indigenous product manufacturers. Setting up of labs is an urgent need to prevent dumping of sub-standard devices. The Indian government should consider setting up of Accredited Labs for EMV Certification and PCI-PTS test facilities which are easy and cost effective for device manufacturers.



2W Ignition - Product and Ecosystem Analysis

SUMMARY


Done in India


16.83 million (2012); CAGR (2012-15) 12.3%

Local Value Addition High – Local Sourcing, Manufacturing, Design IP held in India

Top 4 ComponentsMicrocontroller (20%), Power Semiconductor (20%), CDI Capacitors (10%),

Transformers (10%)

Component Ecosystem 90% of Electronic components imported


Medium; An ECU for 2W on way, which will replace CDIs by 2015-16

Steps to Promote Ecosystema. Constantly increasing Petrol pricing a dampener for the growth of

the 2W industry

Market and OpportunityThe double-digit growth of Indian two-wheeler industry, especially the scooter segment, followed by motorcycles and mopeds respectively at 25 per cent, 14 per cent and 12 per cent, has led to the steady growth of 2W ignition market in the country. The growth in demand for 2W ignitions, also known as CDI (Capacitor Discharge Ignition), has been reciprocated by auto-part manufacturers adding capacities to their existing manufacturing facilities and plans of subsequent capacity expansion in the coming years. This product, which is entirely manufactured in the country, is is expected to exhibit greater demand in the coming years. The total market for CDI’s in 2012 was 16.8 million units, which is expected to reach 23.9 million units in 2015 growing at a CAGR of 12.4 per cent. The entire demand generation is accounted for through high-value add domestic manufacturing of the CDI’s in the country, which is expected to grow at 12.4 per cent in the period 2012 to 2015. Of the total domestic production, a small proportion of CDI’s is also exported to suppliers across the globe.

308.1 308.1

0

100

50

200

150

300

250

350

20112010 2012 2013 2014 2015

Capacitor Discharge Ignition Market: TM, TDM Forecasts (2010-2015)

HVA-TDM : TM

2011

2013

2015

100%

100%

100%




CAGR (2011 - 2015)

TM: 10.2%




280.7 280.7

231.0 231.0

255.8 255.8

190.8 190.8210.4 210.4


CDI : TM, TDM Volumes Forecasts

ProductTM Volumes



(Million units)

2010 13.23 13.23 0.00

2011 15.03 15.03 0.00

2012 16.83 16.83 0.00

2013 19.02 19.02 0.00

2014 21.30 21.30 0.00

2015 23.86 23.86 0.00


Industry SWOTThe 2W ignition value chain is quite elaborate as this product is manufactured in the country with high value addition activities undertaken by different stakeholders. With players like Denso, INEL (India Nippon Electricals) and Varroc present in the country and their manufacturing facilities dedicated to serving the local demand, India is in a dominant position with regard to the CDI manufacturing ecosystem.

The 2W ignition value chain is depicted in the figure below.


Connectors

Diodes, ASIC’s Capacitor, Resistor

Power Semiconductors

Microcontrollers

Semiconductors

Transformer

Plastic casing with Potting

chemical

PCB

2W Ignition OEM’S




The growth of the two-wheeler market in comparison to that of the 4 wheeler market has indeed seen more new players venturing into this space, thereby leading to the commoditization of the product and eroding of profit margins of many players. This is also the reason why EMS companies have not ventured into manufacturing of CDIs despiteIndian OEMs having shown higher capabilities in design, engineering, assembly and manufacturing of CDIs.

The table below captures the capability in India across the 2W ignition value chain.


SupplyLocal




Remarks


Microcontrollers Imports No No Microchip, Renesas NA

Power Semiconductors

Imports No No IR, Onsemi NA

Passives Imports No NoSamsung, Panasonic,

NA

Transformer Yes Yes YesMany small companies

High Made by numerous small scale companies as they are

very low value productsPlastic casing with Potting chemical

Yes Yes YesMany small companies

High

Connectors (water-proof )

Yes Yes YesMolex, Besmac,

Vinay, MothersonHigh

CDIOEM Yes

Yes – high value added

manufacturingYes INEL, Varroc, Denso High

EMS No No No NA NA

The SWOT chart below captures the analysis for the 2W ignition market.

STRENGTHSMature product market

Established ecosystem in place

Design IP held in India

Domestic companies have excellent R&D, testing and manufacturing processes and capabilities

Good availability of machineries and skill-set

OPPORTUNITIES

Indian still has a hugely un-tapped rural segment


Growing demand of 2W following fuel deregulation and price rise

WEAKNESS

Reliance on imports for most of the critical components – chips, displays and PCBs

Export numbers not impressive

Market becoming commoditized

Low entry cost encouraging smaller players entering market

THREATS

Release of Next version of emission norms will make the existing models obsolete

Deficient power situations in states like Tamil Nadu impacts production cost

An ECU for 2W may make CDI’s redundant in 4-5 years time

SWOT


Component SWOTCompanies in the 2W Ignition space are focusing their efforts on localising the sourcing of raw materials to keep the cost of the product low.

The top 4 components that contribute to majority of the 2W ignition bill of materials (BoM) are:

1. Microcontrollers

2. Power semiconductors

3. CDI capacitors

4. Transformers

Microcontrollers and power semiconductors are still imported from East Asia; companies like Fujitsu, Freescale and Onsemi are prominent suppliers. Transformers and CDI capacitors are manufactured and also designed locally.

Strategic ConclusionsGeneral: The India 2-wheeler industry has been witnessing robust growth for an extended period of time. Since the market has matured, the domestic manufacturers can gain a great deal by exporting CDIs. The industry can gain if provided with export-friendly policies and support structure from the Government.

IP development:

Barring the IP capability of electronics components that are used in CDIs, the Indian OEM’s hold IP rights of the other locally sourced components such as the transformers, the connectors, the potting chemicals, etc.


Barring the electronic components, all the other raw materials used in CDIs are sourced from India. By fostering the growth of the Indian electronics manufacturing ecosystem, the manufacturing of 2W ignition units could be completely indigenized. Considering the top 4 components, CDI capacitors and transformers are already being indigenously sourced with numerous small and big players manufacturing varieties of transformers across the country. For the electronics component sourcing, the declaration of the setting of the semiconductor fab in the country hits the right note.


The MSIPS and EMC policies could be taken advantage of to set up an automotive electronics manufacturing cluster near the Bangalore-Chennai area or in Delhi-NCR region.


Tax Structure None Ecosystem already developed

Value Addition None Ecosystem already developed

Component Ecosystem

a. Reliance on imports for 60-75% of BoM value since this is mostly semiconductors

Local fab shall help address this

Policy Initiatives None Ecosystem already developed



Appendix

Definitions

Acronyms

TM: Total Market: Total consumption of electronics in India, in whatever form (can be purchased locally, imported as part of CKD or SKD, imported as a complete product), by whatever source (SourcesaredirectlyfromproductcompanyofficesinIndia,distributorsales,directimportsetc) and in whichever currency (US$ or Indian rupee).

TDM: Total Domestic Market: Total domestic manufacturing including CKD assembling that caters to domestic market consumption; does not include exports.

ESDM Industry Size: Electronics TM + Electronics TE + Electronic Component Market Revenues from Local Manufacturing + Semiconductor Design Market Revenues + EMS Services Revenues

HVA: High local value addition: Value addition > 50%; high level of local sourcing, high level of indigenous design, complete system manufacturing.

MVA: Medium local value addition: Value addition 20%-50%; EMS, CKD Assembling, sourcing of minimal components.

LVA: Low local value addition: Value addition <20%; SKD Assembling, no local sourcing, no local design influence.

ASIC: Application Specific Integrated Circuit

ASSP: Application Specific Standard Product

BTS: Base Terminal Station

CAGR: Cumulative Average Growth Rate

CBU: Completely Built Unit

CDI: Capacitor Discharge Ignition

eBoM: Electronics Bill of Materials

ECU: Engine Control Unit

EMS: Engine Management System

IC: Integrated Circuit

IP: Internet Protocol

LCD: Liquid Crystal Display

MCU: Microcontroller

MPU: Microprocessor

STB: Set top Box

TM: Total Market

TDM: Total Domestic Market

TAM: Total Available Market

UPS: Uninterrupted Power Supply


Import Duty structure Domestic taxes and duties

No Product CUSTOMS TARIFF No./HS Code

Basic Duty CVD

Edu. Cess on

Addl. Duty

Edu. Cess on

Total Duty

Spl. Addl. Duty (SAD)

TOTAL DUTY

Excise Duty CST VAT

(%) (%) (%) (%) (%) (%) (%) (%) (%)

1 Mobile Phones 85171210/85171290 0.00% 1.00% 3.00% 3.00% 0.00% 1.07% 12.00% 4.00% 4 to 12.5%

2 FPD TV 85287116-19 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 12.00% 4.00% 4 to 12.5%

3 Notebooks 84714110 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

4 Desktops 84713010 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

5 Digital Camera 85258020 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 12.00% 4.00% 4 to 12.5%

6 Inverters and UPS 85044010 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 12.00% 4.00% 4 to 12.5%

7 Memory cards and USB drives 85421020 7.50% 16.32% 3.00% 3.00% 4.00% 31.70% - 4.00% 4 to 12.5%

8 4W EMS 84129030 7.50% 12.00% 3.00% 3.00% 4.00% 26.53% 12.00% 4.00% 4 to 12.5%

9 LCD Monitors 84716030 0.00% 10.00% 3.00% 3.00% 4.00% 15.18% - 4.00% 4 to 12.5%

10 Servers 84714120 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

11 Base Stations 85176100 0.00% 12.00% 3.00% 3.00% 4.00% 17.41% 12.00% 4.00% 4 to 12.5%

12 Power Supplies 85044029 7.50% 12.00% 3.00% 3.00% 4.00% 26.53% 12.00% 4.00% 4 to 12.5%

13 Set Top Box 85287100 10.00% 12.00% 3.00% 3.00% 4.00% 29.34% 12.00% 4.00% 4 to 12.5%

14 Printes and MFDs 844332 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

15 Routers/Switches 85176290 0.00% 12.00% 3.00% 3.00% 4.00% 17.41% 12.00% 4.00% 4 to 12.5%

16 Car Radio 85255010 7.50% 16.32% 3.00% 3.00% 4.00% 31.70% 12.00% 4.00% 4 to 12.5%

17 IPPBX 85177090 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

18 Energy Meters 90283010/ 90283090 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 12.00% 4.00% 4 to 12.5%

19Digital

Instrument Clusters

91040000 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 12.00% 4.00% 4 to 12.5%

20 Smart Cards 85235220/ 85235210 0.00% 6.00% 3.00% 3.00% 0.00% 6.43% 12.00% 4.00% 4 to 12.5%

21 2W Ignition 85111000 7.50% 12.00% 3.00% 3.00% 4.00% 26.53% 12.00% 4.00% 4 to 12.5%

22 Tablets 84713090 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

23 LEDLighting 94054090 10.00% 12.00% 3.00% 3.00% 4.00% 29.57% 6.00% 4.00% 4 to 12.5%

24 GPON ONT 85177090 0.00% 12.00% 3.00% 3.00% 4.00% 17.41% 12.00% 4.00% 4 to 12.5%

25 Payment Terminals 84713000 0.00% 12.00% 3.00% 3.00% 4.00% 17.41% 12.00% 4.00% 4 to 12.5%

26 PCB 85340000 0.00% 12.00% 3.00% 3.00% 4.00% 17.42% 12.00% 4.00% 4 to 12.5%

27 LCD Display Panel 85312000 0.00% 12.00% 3.00% 3.00% 4.00% 17.41% 12.00% 4.00% 4 to 12.5%

28 Transformer 85041090 7.50% 12.00% 3.00% 3.00% 4.00% 26.53% 12.00% 4.00% 4 to 12.5%

29 Semiconductor IC 85426000 7.50% 16.32% 3.00% 3.00% 4.00% 31.70% - 4.00% 4 to 12.5%

Tax and Duty Structure for the High Priority Products and Components



Notes

India Electronics & Semiconductor Association Head office: Unit-G-02, Ground Floor; Prestige Terminus II; 901 Civil Aviation Road; Konena Agrahara; (Old HAL Airport Exit Road); Bangalore-560 017. India. Phone: +91 80 4147 3250 Facsimile: +91 80 4122 1866New Delhi office: DBS Business Centre, First Floor, World Trade Tower, Barakhamba Lane, Connaught Place, New Delhi - 110 001 India

www.iesaonline.org

indian esdm market analysis of opportunity and growth

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