Back in the summer of 2014, Chinese smartphone maker Xiaomi was chartering flights to bring in cellphones to sell in its newest market, India. Every week it flew in around 10,000 phones to be sold in its so-called ‘flash sales’. Today, the company sells about 10 million phones per quarter, practically all of which have been assembled in India.

This all started out with a small shed that Foxconn Technology Group, Xiaomi’s manufacturing partner, rented out in Sri City in the southern Indian state of Andhra Pradesh. It now has four manufacturing partners and five campuses where phones are being manufactured for Xiaomi.

“When we started off, we were importing everything,” Xiaomi’s global vice president Manu Jain tells fDi. “Today, more than 99% of the phones are locally assembled here in the country.” 

Xiaomi was among the first mobile phone brands to ask its contract manufacturer to move production to India — which in turn would lower the company’s working capital and help it hang on to its “wafer-thin margins”, says Mr Jain. 

Many others were pushed into making that move by the Indian government, which hiked import tariffs in a bid to boost local manufacturing, in the hopes of creating jobs for the millions of people joining the workforce every year.

Since 2016, India has introduced new tariffs on different mobile phone components every year for five years, forcing companies to manufacture those products domestically or face taxes as high as 20%. It started with low-hanging fruit such as chargers and adapters, and moved up to pushing companies to assemble printed circuit boards (PCBs) in India.

These policies, as well as trade agreements dating back to when the economy opened up in the 1990s, have helped in building the country’s manufacturing muscle, says Priya Joseph, an analyst at Counterpoint Research. The country now has more than 250 manufacturing units, up from just two in 2014.

However, although imports of fully manufactured phones are now mostly limited to a handful of high-end varieties, manufacturers are still importing components; electronics are now second only to crude oil in India’s import basket, at about $53bn per year.

Most of the imports today are to make the more sophisticated — and high-value — parts of smartphones, including camera sensors and PCBs. While analysts agree that that what follows is more assembling than manufacturing, it is a distinction that most of the companies in the country are loathe to admit.

For now, the Narendra Modi-led government is pushing to move the country up the manufacturing value chain. With that goal, it wants India to be a global hub for electronics system design and manufacturing, and has set a target of sales of $400bn by 2025, including exports of $110bn. India exported electronics worth an estimated $14bn in the last 12 months (Feb’21-Jan’22), according to Barclays figures. To achieve this, it is offering cash incentives to encourage domestic production — the so-called production-linked incentive (PLI) scheme.

However, that is easier said than done.

In a June 2020 report, industry body India Cellular and Electronics Association and consultancy EY said that since the country has fewer manufacturing firms in the ecosystem than China, that has “translated to limited production of parts, components and sub-components”. It also meant that India’s overall production was lower than China’s.

That aside, for India to capture some of the export market share from its competitors China and Vietnam, it will have to resolve issues that make it harder to do business in India, including taxes and expensive electricity, the report said. 

Right direction

While India has made some gains in manufacturing, they are not enough to say it is competing with China, says Barclays’s chief India economist, Rahul Bajoria. “With that caveat, India is moving in the right direction,” he notes.

What the country needs to boost its manufacturing prowess, he says, is access to intellectual property — “most of which is with a smattering of firms and, as a result, India will need to look for partners to help with design and manufacture.”

That said, as the world tries to diversify from China, especially in the wake of trade tensions with the US and the supply chain disruptions caused by the Covid-19 pandemic, India is “in a position to take advantage”, says Mr Bajoria.

One potential area of opportunity, he says, is the production of 5G phones, especially for exports as billions of users across the world get ready to upgrade their phones to that technology in the next couple of years.

When we invested in plants and machinery, we wanted our equipment to be good enough to make 5G phones also.

Pankaj Sharma

Dixon Technologies (India) Ltd, which is based in Noida on the outskirts of the Indian capital, is one of the 250 firms jumping on the bandwagon. The homegrown electronics manufacturer has been around since 1993, but only started assembling phones in January 2016, initially for the domestic market for clients like Gionee and Panasonic. Since 2020 it expanded its client base to other brands like Nokia, Motorola and Phillips under the Indian government’s PLI scheme and is now producing 5G phones as well.

“We knew that 5G migration will happen,” says Pankaj Sharma, chief executive of the group’s mobile phone business. “When we invested in plants and machinery, we wanted our equipment to be good enough to make 5G phones also.”

The company is also one of the suppliers of 5G phones to telecom companies in the US; all new clients that it has added because of the US-China tensions. 

As a result, the division is expecting to clock sales of up to Rs30bn ($400m) in the current financial year, up from Rs5.3bn two years ago. Currently 30% of those sales come from exports, predominantly to the US. Next year, Mr Sharma expects both exports and revenues to double. The Indian smartphone manufacturing sector is “achieving huge things” he adds. 

In December, the government announced a push for chip components when it promised a $10bn support package to help develop semiconductor fabrication plants, display labs, packaging and design in the country. 

With just a tiny handful of global suppliers of chips right now, it is “very critical not to be dependent” on those select few companies, says Ms Joseph, and the December announcement is the first step in that direction.

This article first appeared in the February/March 2022 print edition of fDi Intelligence.