As electronics manufacturers like Foxconn move their factories to India, they are running into some cultural differences. 'We are taught not to mention religion or politics, and to say please,' one Chinese engineer training Indian workers says, 'Chinese people talk in a blunt way. But with Indians, we should be more polite.'

The Foxconn engineers also complain that Indians take too many holidays and are late to meetings. But that's not stopping companies from investing.

The winds of manufacturing, which have long blown east towards China, are changing direction. As China grows more assertive - some would say argumentative - under Xi Jinping, US and Europe are scrambling to curb its growth through sanctions. These sanctions have already had the effect of slowing down China’s annual exports of electrical and electronic equipment, valued at $955 billion.

Enter India. With China losing favour, countries like India, South Korea and Vietnam are receiving new investments in semiconductors, electronics and technology.

Recent data shows China’s FDI turning negative in Q3 2023 for the first time since 1998, with more money flowing out than coming in. This shift is evident in the latest iPhones coming with a “Made in India” tag rather than “Made in China”.

While other manufacturing centers like South Korea are more advanced in electronic and electrical manufacturing, India lags due to technological and infrastructural hurdles. The Indian government has implemented the National Electronic Policy (NEP) and production-linked incentive schemes to fix this. 

India’s electronic system design and manufacturing  (ESDM) industry is expected to grow at a remarkable 32% CAGR over the next five years, driven by increased per capita spending, higher rural penetration of electronics, shift to electric vehicles and increased use of electronics in the medical field.  

In this week’s Analyticks:

• India’s Electronics Industry: Preparing for a major growth leap
• Screener: Electric and Electronic companies that are benefiting from PLI schemes

Let’s get into it.

India’s electronics industry is on the cusp of dramatic growth

As India’s rural population adopts technology, growth in the electronic industry is expected to be exponential. 37.2% of India's new smartphone purchases in Q1 2023 were by rural families. As electronics buying rises across consumer groups,  India’s electronics industry is expected to far outpace its global peers.  

And let's not forget the talking fridge. Modern versions of refrigerators and washing machines are changing from mechanical devices to ‘smart’ machines, equipped with sensors and user memory. India’s huge population is a rising consumer base for these. 

India’s electronics industry is set to grow at 18% CAGR for the next five years. However, if we look at the overall ESDM sector (including outsourcing and exports), the expected growth rate is at an even higher 32.5%. 

India’s ESDM industry poised for a CAGR of 32.5% by FY27

Valued at $34 billion in 2023, India’s ESDM industry is expected to reach $80 billion by 2026, with most of the growth coming from auto (29.4% CAGR), aerospace and defense (38.3%), and the medical field (40.3%). Auto industry growth will be driven by new sensor and technology-based features. For example, an electric two-wheeler has 9X more electrical components than a regular internal combustion engine (ICE) two-wheeler.

But compared to its global peers, India’s electronic consumption is still low. India’s per capita electronic consumption is $78 per annum, while the global average stands at $324 per annum. 

India has the lowest per capita consumption of electronics

India has never been a manufacturing powerhouse. Can that finally change?

India is being celebrated as the 'next big hub' for electronic manufacturing. But if we look at India’s GDP, only 17.7% comes from the manufacturing sector, while China’s is nearly 27.7% as of 2022.

India’s low manufacturing growth has always been a problem. The lack of skilled labour, high product costs (raw materials, land costs, taxes), bureaucratic hurdles, local politics, and labour unions make it difficult for foreign firms to invest in India.

The government is battling these problems with PLI schemes, special economic zones, and relaxation of FDI criteria. Nearly 98% of mobile phones shipped locally are now being manufactured in India.

The government has also provided incentives to high-end mobile phone manufacturers to boost local production. For instance, it provided tax breaks to Foxconn to set up Apple’s manufacturing unit in India, and Karnataka revised the permitted number of working hours from eight to twelve. 

Mobile phone production drives Indian electronics industry

India is also looking at custom policies to attract specific investors. Elon Musk's Tesla is in talks with the government to invest $2 billion in India, provided the government drops the import tax on Tesla vehicles from 70% (for cars priced below $40,000) to 15% for the first few years. 

No startups here: Opportunity is mainly for Indian players with deep pockets 

The electronic industry in India has so far, been limited to manufacturing low-end devices. Some Indian manufacturers are collaborating with foreign companies to implement high-tech manufacturing As Indian companies build tech expertise and foreign market access, the Indian electronic industry, is expected to turn export-positive in FY25.

The Indian electronics industry is set to become a net exporter by FY25

Indian companies have been buying foreign-owned manufacturing units or developing partnerships to boost their production capabilities. For instance, Tata Electronics has taken over Wistron’s (Taiwan-based Apple iPhone manufacturer in India) manufacturing facilities to gain access to Apple’s technology. 

Dixon Technologies has partnered with China’s Xiaomi and  Reliance Jio to manufacture smartphones, while Kaynes Technologies has partnered with Intel to produce laptops. The trend suggests that global electronics majors are partnering with established Indian manufacturers.

Large manufacturers who have the ability to quickly upscale are the winners in India's current electronics manufacturing boom. This route takes many risks out of the equation for global manufacturers. But the real success for India will come with better infrastructure and easier rules for everyone, so that new entrants and smaller players are able to ride the wave and compete.  

Screener: Electric and electronic companies benefiting from government PLI schemes

Blue Star leads in quarter change among stocks benefitting from PLI schemes

Keeping with the manufacturing theme, this week we have a screener that shows Indian-listed companies from the IT hardware, consumer electronics, heavy electrical equipment, other electrical equipment and electric utilities industries that are benefiting from the Indian government’s PLI schemes. Production Linked Incentive schemes provide incentives to companies as a percentage of their net incremental sales from the base year.

Major stocks from these industries that appear in the screener are Blue Star, Bharat Heavy Electricals, Kaynes Technologies, JSW Energy, Dixon Technologies, PG Electroplast.

Blue Star has risen by 37.9% over the past quarter and 42.2% over six months since the announcement of the government's PLI Scheme 2.0 for the IT hardware and electronics industries. Under this scheme, the government has given an incentive of Rs 16,939 crore for the next six years. 

Dixon Technologies is another consumer electronics company that has risen by 17.7% over the past quarter post the announcement of the scheme. The company was declared eligible under the PLI scheme after it promised on November 19 a total production value of Rs 45,000 crore over the next six years. 

You can find more popular screeners here.