CII_ICTE Panel Report

Creating Roadmap for
Developing Value Chains in
ICTE industry
A report on the CII-EY event held on 27th
July 2016 at New Delhi
Creating Roadmap for Developing Value Chains
in ICTE industry

in ICTE industry

in ICTE industry
Foreword
Foreword by Mr Vinod Sharma, Chairman, CII National Committee on ICTE Manufacturing
For countries like India having large potential market and consumption levels Information
Communication Technology and Electronics (ICTE) manufacturing has special significance in
terms of contributing to the Manufacturing component of GDP, job creation, reaching out to
masses, empowerment and inclusive growth. ICTE is thus not just a major part of a better
future, but more importantly, is the key instrument in realizing it.
The share of ICTE production which presently accounts for about 10% of the manufacturing
GDP is amongst the verticals which could significantly contribute in meeting the national
objective of raising the share of manufacturing sector to 25% of the National GDP by 2022.
With global major investors looking out for setting up production bases closer to the markets
and at the same time seeking alternatives to China, ICTE manufacturing presents a huge
investment opportunity.
Following the Make in India initiative and the ambitious vision of Net Zero Electronics Import
by 2020, Government has introduced several provisions in the Union Budget 2015-16 and of
2016-17 for making the domestic manufacturing industry competitive with respect to imports
.The industry has been enthused with the initiatives and number of investments have been
announced by both domestic and overseas investors for growth driving products like Mobile
phones, LED lighting, PCB Assemblies (EMS), Set Top Boxes, Displays.
Initially the production would be based on imported inputs due to limited availability of
domestically manufactured components. The growth in volumes of end product production is
a pre-requisite for investments in the component sector. Development of domestic supply
chain is important for sustaining the competitive advantage of domestic manufacturing. In
the present day intensely competitive global scenario rather than the companies the
competition is between their supply chains.
As the gestation periods for components manufacturing are longer than the finished/box
build products and stabilization of the process and yields takes time, it is opportune to create
a Roadmap for attracting investments in the raw material/parts /components and share
with stakeholders in advance.
In the above context the CII National Committee on ICTE Manufacturing organized a
Brainstorming Session on Creating Roadmap for Developing Value Chain on the 27 July 2016
for the three product categories namely, Mobile phones, LED lighting, PCB & PCB Assemblies
(EMS). Session for each product was moderated by representative from E&Y.
These three product categories have been identified amongst the Champion Sub-sectors, in
the CII Study on Manufacturing Champions, which have the potential to contribute
significantly to manufacturing.
The Brainstorming Session was well represented by participants from manufacturing
companies from the key industry sectors as well as the component manufacturers.
This report captures the deliberations and recommendations of the Session.

in ICTE industry
Index
Executive summary
LED Lighting
1
3
Electronic Manufacturing Services4
Mobile Phones2
References5
Appendix – CII FSI Survey6

in ICTE industry
Executive Summary
Over past 4 years, Indian electronics manufacturing has seen a upsurge. From 2012 to 2015
production of electronics hardware as % of GDP has increased from 1.6% to 1.8%1,
cumulative FDI inflows have increased from $1.16 bn to $1.49 bn2, and projects comprising
investments of more than $450 mn have been approved and are under progress3,9.
However, most of the local production is low value add and is based upon imported
subsystems and components. Components have a heavy reliance on imports with import
share being 76% of domestic demand in 20154. As a result, the value add in Indian
manufacturing remains minimal, as low as <20% in product segments like mobile phones
which remains to be largest electronic product segment in India5.
Therefore, development of domestic supply chain is critical to increase domestic value add in
order to decrease the pressure on exchequer, and for domestic manufacturing to sustain a
long term competitive advantage. However, to build a sustainable domestic supply chain
India must overcome a few key challenges:
1. High cost of finance : The effective interest rate in India remains to be 14-16% as
compared to 2-7% in developed countries like China, Japan6
2. Low ease of doing business : India is ranked a dismal 142 among 189 countries in
World Bank’s Doing Business 2015 rankings as compared to Korea (Rank 5) and
China (Rank 90)7
3. Lack of clarity on taxation : Component players cite lack of clarity on taxation to be
a major hurdle to set up manufacturing in India. 8 Lack of clarity also exists on
extension of existing tax incentives post implementation of GST amongst domestic
manufacturers8
4. Infrastructure inefficiencies : Logistics cost as % of GDP in India may go as high as
13%–14% as compared to 7%-10% globally18.
5. Limited Op-Ex subsidies : Although government of India provides Cap-Ex subsidies
to manufacturers through M-SIPS3, Op-Ex subsidies are limited. As Indian players
strive to be more competitive, resulting pricing pressure is expected to be passed
on backwards in supply chain
Apart from the challenges daunting the sector listed above, manufacturers across the supply
chain also face challenges specific to each product category. Challenges specific to each of
the 3 key segments are listed below
• Mobile Phones
• Lack of clarity on extension of existing incentives and duty differentials for
mobile phone manufacturing post GST implementation
• LED Lighting
• Falling prices : The LED prices have reduced by 30-40% in past year, EESL
Tenders in 2016 saw prices as low as INR 5510,8
• Lack of national standards to curb low quality imports
• EMS
• Inverted duty structure for multiple end products (e.g. solar products) 8
• Lack of component supply chain in India. Majority of component
consumption (>75%) is from imports4

in ICTE industry
Recommendations emerging from the Brainstorming Session to address these issues are
as follows:
Key recommendations for central and state governments
1. Extend all existing tax incentives and duty differential to domestic manufacturers post
implementation of GST
2. Declare PCB as a focus product and design a policy for development of PCB ecosystem in
India. Promote investment by global component manufacturers with a focus on PCBs and
passive components to set up facilities in India. Provide a helpdesk for global and domestic
investors.
3. Improve Ease of Doing Business (EoDB) by reducing the documentation required especially
for the incentive schemes.
4. Provide ‘Op-Ex’ subsidies to manufacturers to reduce backward margin pressures on supply
chain. Production subsidy to be extended to other focus products
5. Support housing and development projects near Electronics Manufacturing Clusters (Green
& Brown field).
6. Create a 5-10 year plan for a committed tax regime (duties, income tax, VAT etc.) to address
lack of clarity amongst foreign component suppliers
7. Set up industrial estates in the identified focus states and provide plug-and-play
manufacturing facilities
8. Provide capital incentives to both new and existing domestic manufacturers
9. Formation of coastal eco-zones mooted by the NITI Aayog to be supported in the nature of
extended EMCs in order to make Indian manufacturing competitive
10. Create a common set of national standards for LED lighting industry
11. Provide additional incentives to Joint Ventures(JVs) formed by foreign players, which involve
transfer of technology.
12. Provide export incentives under MEIS (FTP for growth driving products be raised to 5%)
Mr. Vinod Sharma and Mr. Sunil Vachani

in ICTE industry
Key recommendations for the industry
1. Collaborate with universities to promote innovation in the sector
2. Explore possibility of shared design houses to make technology more affordable
3. Mobile phone manufacturers should implement a ‘Phased manufacturing program
under the domestic input-content of products is increased over next 3 years
4. Set up shared LED R&D centers
5. Focus on JVs involving transfer of technology
In spite of structural challenges, the manufacturing opportunity in India remains to be highly
lucrative. With efforts from government and industry together towards developing value
chains, India can become a leading manufacturing and export hub for ICTE by 2020.
Panel for mobile phones session
Panel for LED lighting session
Panel for EMS session

in ICTE industry
Mobile
Phones

in ICTE industry
Although Indian mobile phone market is growing rapidly, domestic
manufacturing value add remains low
Key challenges
Declining average selling price (ASP) of smartphones is driving large scale replacement in the
Indian mobile phone market. The ASP of smartphones declined from INR 9500+ in 2011 to
INR 8350 in 20154.
In volume terms, mobile phones market (TM) grew from 245 million units to 280 million units
between 2013-2015. Although the domestic demand of this market is growing rapidly, but
almost 63% of this demand was met via imports in 20155. Domestic manufacturing (TDM)
witnessed de-growth in 2014 however gained traction in 2015 with various OEMs setting up
manufacturing facilities in India.
However, most of these manufacturing facilities perform final assembly and hence the
effective value addition in India remains low (approx. <20%) 8
High Cost of
Finance
Lack of robust
component ecosystem
Infrastructure
inefficiencies
GST
► The effective interest rate in India remains to be 14-16% whereas it is
approx. 2-7% in developed countries like China, Japan etc. 6
► The added cost of capital makes the domestic products non-
competitive against imports by at least 10%6
► Although GST is expected to increase ease of doing business, there is
limited clarity on its impact on the existing taxation incentives provided
to local manufacturers
► Uncertainty also remains to exists on how GST will affect differential
duty structure, and whether the duty advantage will continue to exist
for domestic mobile phone manufacturing post GST regime
► The logistics/transport in the country have significant scope for
improvement. A longer supply chain of components results in high
inventory-carrying and freight costs.
► These inefficiencies are estimated to cost the economy USD 45 billion
or 4.3% of GDP every year9.
► Local sourcing of components remains to be low as almost 80% of the
Bill of Materials (BOM) of mobile phones are imported
► The local sourcing takes place only for a few components such as
chargers, mechanical parts and data cables
► Small domestic component suppliers (e.g. plastic moulding,
mechanical parts) find it difficult to scale up; hence the supplier
market in India is heavily fragmented

in ICTE industry
Drawing on parallels from leading mobile phone industries of the world, a 4 step roadmap is
suggested to achieve our vision to meet 100% local demand domestically and become a export
hub for mobile phones
Promote and encourage local production
Following recommendations need immediate consideration by the central and state governments
to continue the growth of domestic mobile phone manufacturing
 Extend all existing tax incentives and duty differential to domestic manufacturers post
implementation of GST
 Support housing and development projects near mobile phone manufacturing zones to
ensure talent availability
 Mobile phone manufacturers should implement a ‘Phased manufacturing program’ under
which they will be required to increase the domestic input-content of their products in a
specified time period
Recommendations
1

in ICTE industry
Development of Value Chain
The next logical step for India would be to move to the higher end of the
value addition spectrum. This will in turn groom the component supplier
base, that this industry is currently lacking in. Key recommendations for
the government are:
 Provide extensive policy support towards bringing tier-1 and tier-2 vendors
into the domestic market
 Central government should identify focus states for mobile phone
manufacturing (e.g. Andhra Pradesh, Maharashtra, UP & Tamil Nadu) and
work closely with central government to create conducive policies for
component suppliers
 Create a 5-10 year plan for a committed tax regime which focuses on
duties, income tax, VAT etc. to address lack of clarity amongst foreign
component suppliers
 Set up industrial estates in the identified focus states and provide plug-and-
play manufacturing facilities
Ramp up exports
India has potential to become one of the leading mobile phone exporters by
2020. To ensure the same, following recommendations may be considered
 Consider the formation of ‘Coastal Eco-zones’ as suggested by NITI Aayog
 Provide ‘Op-Ex’ subsidies to make domestic manufacturing cheaper with
respect to competition
Focus on R&D/Innovation
R&D and innovation remain to be the key win enablers in mobile phone
segment. To fuel R&D further:
 Government should focus on developing design capabilities; This can be
achieved by setting up JVs with established foreign players in India to aid
technology transfer
 Provide tax incentives to outsourced R&D, similar to incentives given for in-
house R&D
 Develop mechanisms to ensure IP produced as result of outsourced R&D is
vested with the Indian company
2
3
4

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LED
Lighting

in ICTE industry
The Indian LED market is emerging as one of the fastest growing industries over last few years.
Retail demand for LED lights has gradually increased in India driven by the increased
awareness around long term savings. In the last one year, the price of LED bulbs has declined
by 30-40% and is expected to reduce further in coming years12.
Government has also revised investment estimate for energy efficient electrical equipment to
INR1.5 trillion, of which INR350 billion has been allocated to efficient lighting and street
lighting13.
LED manufacturing in India is gaining traction with increasing demand from consumer and the
capacity build up by the industrial players. However, majority of manufacturing in India is
limited to final assembly.
Need for
standards
Limited testing
infrastructure
Margin
pressure
across the
value chain
► Indigenous sourcing of component is limited to as low as <20%.
Domestic suppliers also face challenges in scaling up. 8
► Even though globally Indian products can be competitive in terms of
prices, the lack of supply chain for PCBs, wires, packaging is a major
hurdle for India becoming a manufacturing hub.
► The price of LED bulbs has drastically declined by 30-40 % in the past
year. (e.g. EESL Tenders in 2016 saw prices as low as INR 55 10)
► As OEMs look to reduce costs, the cost pressures are passed down the
value chain onto the component suppliers
► India also lacks in testing facilities and protocols necessary to ensure
quality products.
► There were only three major accredited labs with LED testing capacity
currently operating in India in 201514.
Dependence on
imported components
Indian LED lighting market is amongst one of the fastest growing
product segments
Key challenges
► The absence of national standards for LEDs makes the industry prone
to the import of sub-standard products from other countries

in ICTE industry
Drawing on parallels from leading LED lighting industries of the world, the above roadmap is the
suggested to achieve our vision to become one of the leading destinations for LED
manufacturing and exports by 2020.
Increase Penetration of LED
‘The increasing penetration of LED in the country is primarily because of the
government focus on efficient lighting both in the industrial and consumer segments.
 Government has launched DELP, a program for LED-based home and street
lighting, which focuses on replacing the 350 million conventional streetlights 15
 The central financial assistance given to CFL-based solar lighting system would
be stopped and the same would be provided to LED-based systems19
 The government is steadily progressing towards their target of phasing out
incandescent bulbs by 202012
 Sustained buying by Government and subsidizing final product could lead to
distortions in the market. For a sustainable business environment, it is suggested
that the government shall do away with the Demand Aggregation model in a
phased manner
1
Recommendations

in ICTE industry
Ensure market for domestic players
Ensuring a market for domestic players has been the focus and through an
extension of Preferential market access (PMA). At policy level, the
Government of India provides 50% access to tendered LED products quantity to
companies which do at least 50% value addition domestically16. This needs to be
implemented both at the Centre & State level.
Develop manufacturing capabilities
To develop manufacturing capacity in India, the government has announced
a grant of 20 – 25% capital subsidy under M-SIPS to companies that set up
LED fab/ATMP unit in India17. Further recommendations include
 Ensure sustainability of available incentives like MSIPS and duty benefits in
future via stable long term policies
Make domestic players competitive
Domestic players are already becoming competitive with their global
counterparts on the aspects of pricing and quality.
 Create a common set of national standards for industry
 Standardize components specifications to reduce cost of imported
components
 Ensure sufficient advocacy for anti-dumping duties
 Promote investment by global component manufacturers to set up facilities
in India
 Reduce pressure on domestic value chain due to falling prices of end
product
Encourage Innovation
The industry in undergoing rapid design changes, and hence R&D remains
key to winning in the global market over long term . To fuel R&D further:
 A plan should be put together to pursue the protection of innovation and
design in the industry
 Government should actively invest in LED R&D
 Facilitate shared LED R&D centres
2
3
4
5

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EMS

in ICTE industry
Increasing cost of manufacturing in China is largely driven by rising labour costs (the labour
costs in China are almost 2.5X that of in India4) and growth in mobile handset domestic
manufacturing are driving immediate EMS demand in the country.
Domestic manufacturing growth in other verticals such as consumer electronics, industrial,
automotive, medical, defence, aerospace is also expected to drive steady EMS demand.
However, India is still facing challenges in terms of under developed supplier base,
infrastructure/logistics (roads, airports) and ease of doing business.
Cost of Finance
Absence of closely
knit Supply chain
Lack of Technology
/Design
► Cost of finance in India is higher than some of the manufacturing
destinations such as Taiwan, which affects the cost-competitiveness of
EMS providers in India
► Indian firms suffer a major disadvantage in terms of high interest rates
on electrical equipment and other capital goods which adds to the cost
of Indian capital
► Complexity of Indian tax laws has become a barrier for many foreign
players to set up business in the country
► There is limited clarity on duty structure and incentives post GST
► Although availability of quality talent is not an issue in India, but not
enough Intellectual property is being developed by the Indian players.
► High R&D investments are required for technology upgradation
► India has very limited component supplier base. EMS players in other
countries such as China, Taiwan are able to offer high cost savings and
quality by leveraging their strong supplier base
► Huge amounts of component import leads to increased turn-around
time affecting the competitiveness of EMS providers in India
Lack of clarity
on Tax laws
Lack of focus on
subsidies
► Although M-SIPS provides CAPEX subsidy, the margins in EMS are very
low, and there is a lack of focus on Op-Ex subsidies
► Subsidies are made available only to new investments, and the existing
players are devoid of these incentives
► Lack of awareness about government subsidies and required
documentation amongst smaller EMS players
India is emerging an as attractive destination for the EMS industry
Key challenges

in ICTE industry
Based on strategies of countries with leading global EMS ecosystems, above roadmap is
suggested to achieve our vision to become one of the leading destinations for EMS
manufacturing and amount to more than 5% of global production by 2020”.
Focus on PCB and High value addition
India is in the nascent stage as far as EMS industry is concerned and the
first step would be set up clear goals for the industry backed by a strong
policy. However, following recommendations need consideration by the
government to focus the efforts towards creating an EMS roadmap
 PCBs have a unique position among the product components of the EMS
industry. Therefore, it should be declared as a focus product to develop
the PCB & PCB assembly ecosystem
 Industry focus should shift to high value add activities like software
development, design, packaging and brand (OEM), where high scope for
domestic value addition exists.
Provide Easy Access to Financing
The government has introduced M-SIPS and Electronics Development Fund to
empower the accessibility levels of domestic players. Further
recommendations to ease the access of finance are
 Provide capital incentives to both new and existing players.
 Provide dedicated helpdesk to facilitate investments from existing as well
as new players
 Extend same benefits to SME as being extended to large companies that
are committing significant investments. The huge employment generation
potential of SMEs can be a key criterion for extending such benefits to
SMEs
1
Recommendations
2

in ICTE industry
Technology transfer
The government should support local players to form JVs with foreign entities to
facilitate transfer of technology.
 Government should provide additional incentives to Joint Ventures(JVs)
formed by foreign players, which involve transfer of technology.
 All EMS players may not have capability to buy design services/technology
individually, however they can pool in together to buy design/technology.
Shared designed houses for EMS should be explored.
Make domestic players competitive
Government should make efforts towards making domestic players competitive
in terms of cost, quality and Turn around time. To ensure this following
measures are recommended:
 Inverted duty structure needs to be corrected for more products
 More OPEX subsidies should be provided to empower the domestic
production
 The industry is facing lack of supply chain in EMS. Incentives should be
provided for those players to set up facilities in India so as to strengthen the
backward supply chain
Encourage Innovation
R&D is the key factor in EMS to increase value addition. Therefore, long
term focus should be to encourage innovation in EMS:
 Government should create funded industry-university collaborations for the
development of shared design houses
 Indian firms should invest in design and explore the ODM opportunity
3
4
5

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References
1. D&B sectoral risk outlook 2015
2. http://www.ibef.org/industry/electronics-presentation
3. http://www.msips.in/MSIPS/ ; conversion @ 67.21 Indian rupees to 1 US dollar
4. EY Research
5. http://www.business-standard.com/article/companies/indian-handset-companies-import-
most-of-their-devices-114042800022_1.html
6. http://www.dsir.gov.in/reports/isr1/Capital%20Goods/5_9.pdf
7. World Bank’s Doing Business 2015 rankings
8. Primary research - Interviews with CII panelists for the ICTE panel discussion
9. Conversion @ 67.21 Indian rupees to 1 US dollar
10. http://articles.economictimes.indiatimes.com/2016-04-5/news/72598714_1_20-crore-
eesl-bulbs
11. http://www.dqindia.com/lava-started-making-in-india-in-2015-with-1-mn-phones-a-month/
12. http://bizled.co.in/india-phasing-out-edison-bulbs-led-bulbs-prices-falling-sharply/
13. http://articles.economictimes.indiatimes.com/2015-11-16/news/68326208_1_rs-500-
crore-90-crore-surya-roshni
14. “ELCOMA VISION 2020,” ELCOMA India, September 2014
15. http://bizled.co.in/led-lighting-projects-open-up-huge-business-opportunity-in-india/
16. http://www.ledinside.com/interview/2014/1/led_market_in_india
17. http://deity.gov.in/sites/upload_files/dit/files/MSIPS%20Notification.pdf
18. http://timesofindia.indiatimes.com/business/india-business/Indias-logistic-costs-higher-
than-BRIC-nations/articleshow/14151707.cms
19. http://articles.economictimes.indiatimes.com/2015-12-01/news/68688400_1_led-bulbs-
cfl-new-and-renewable-energy

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Appendix
541
450
423
378
354
333
320
268
256
Differential duty
Inverted Duty abolished
Production Subsidy
Integrated Policy framework - SEZ+SBIT+Phy
Status for DTA sales
Direct Tax - Weighted exemption on account of
High cost of Finance + Power + Logistics
10 year tax holiday
Interest Subvention
Deferred 7 year duty retention
Coastal Eco Zones
About the CII FSI survey
The survey was conducted by CII during the Brainstorming Session on Creating Roadmap for
Developing Value Chain held in New Delhi on 27th July 2016.
The survey captures opinions of 30 participants from the industry on multiple recommendations
discussed during the session. Each recommendation was scored on a scale of 1-10 on Feasibility,
Speed of implementation and expected Impact. A consolidated FSI score was hence calculated by
multiplying the scores across each of the 3 parameters.
Average FSI Score
Differential duty
Inverted Duty abolished
Integrated Policy
framework -…
Direct Tax - Weighted
exemption on account…
Production Subsidy
Interest Subvention
10 year tax holiday
Deferred 7 year duty
retention
Coastal Eco Zones
Average Speed Score
Differential Duty
Inverted duty abolished
Integrated Policy
framework -…
Production subsidy
exemption…
10 year tax holiday
interest subvention
Coastal eco zones
retention
Average Impact Score
Differential Duty
Integrated Policy
framework -…
Inverted duty abolished
Production subsidy
exemption…
10 year tax holiday
interest subvention
Coastal eco zones
retention
Average Feasibility Score

in ICTE industry
Creating Roadmap for Developing
Value Chains in ICTE industry
A report on the CII-EY event held on 27th July 2016 at
New Delhi

CII_ICTE Panel Report

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