In order to curtail the share of hardware imports and simultaneously promote local manufacturing, the Union Government has wielded a ‘carrot and stick approach.’
In yet another significant stride for the Modi government’s efforts towards ‘Atmanirbhar Bharat,’ as many as 38 hardware manufacturers have applied for licenses under the renewed Production-linked incentives schemes (PLI 2.0) to set up manufacturing bases in the country. Looking at the sheer pace at which things are moving, it would be but common knowledge that PM Modi means business. If the momentum continues, very soon India will not only be able to emerge as a global hardware manufacturing hub but give tough competition to China as the preferred global destination of IT hardware manufacturing.
Last month, I had analyzed how the Modi government’s move to impose restrictions on the import of laptops, tablets and PCs would prove to be a shot in the arm for local manufacturing and how it is going to impact the channel business and the wider IT industry.
An extension of PM Modi’s vision of ‘Make in India’ and ‘Vocal for Local,’ the import restrictions were aimed at promoting domestic manufacturing of these products under PLI 2.0 for IT hardware. The policy changes also ordained upon companies planning to bring laptops and computers for sale in India to seek government license for their inbound shipments.
“Overwhelming response received for the production of laptops and PCs under the hardware Production Linked Incentive Scheme (PLI) scheme. Companies that will be manufacturing laptops include HP India, Dell, Acer, Lenovo, Thomson and others. Servers will be made by HP Enterprises.”
– Ashwini Vaishnaw, IT Minister, Government of India
In line with our past forecasts and barely after three months since the PLI 2.0 came into force, the initial results on the ground are there for all to see. The unique scheme, whose application window will close on coming Wednesday, received robust response from the hardware manufacturers. By 31st August, it had received as many as 38 applications for the production of laptops and PCs under the hardware Production Linked Incentive scheme (PLI 2.0).
Hardware Biggies Making a Beeline
“Overwhelming response received for the production of laptops and PCs under the hardware Production Linked Incentive Scheme (PLI) scheme. Companies that will be manufacturing laptops include HP India, Dell, Acer, Lenovo, Thomson and others. Servers will be made by HP Enterprises,” said Union IT Minister Ashwini Vaishnaw.
The revised production-linked incentive (PLI) scheme for IT hardware has so far attracted positive response from 38 companies, including leading hardware giants HP, Dell, Lenovo, and Foxconn, as well as local manufacturer Dixon Technologies. The companies together add up to investments to the tune of over ₹4,000 crore to produce goods worth ₹3.35 lakh crore over the next six years.
What’s the Big Fuss
The PLI scheme 2.0 for IT hardware offers manufacturers opting to set up manufacturing bases in India lucrative incentives of up to 5% on incremental sales, more than double the roughly 2% being offered under the first phase. This roughly translates into a whopping USD 2.1 billion up for grab for the manufacturers. Not just this, the scheme even allows applicants to choose 2023, 2024 or 2025 as the base year for starting production. With incentives of up to 5% on incremental sales up for grab now, it was expected to attract fence sitters to join the Make in India story.
PLI 2.0 alone may or may not have succeeded in yielding the desired results, but when it was combined with last month’s import restrictions on Laptops and PCs, it did the trick in huddling hardware makers to file applications.
A ‘Carrot and Stick Approach’
The government’s import restrictions on laptops, PCs and tablets were long felt to build up domestic hardware manufacturing in the country. While companies have been looking at India as a great market, they have always kept China as the chosen destination for hardware manufacturing. A bird’s eye view of the Indian market will tell you that over 76% IT products are directly procured from China. This is an unacceptably high number, which almost kills the prospects of domestic hardware manufacturing, while greatly sustaining Chinese manufacturing.
At a time when we tout ourselves as a global IT powerhouse, it’s a misnomer to see shelling out billions on IT hardware imports to choke our local manufacturing.
Currently, the IT industry is contributing nearly 10% to our GDP, which has grown 7.8% this quarter. At this backdrop to pump fresh life into domestic manufacturing, the move was badly needed.
In order to curtail the share of hardware imports and simultaneously promote local manufacturing, the Union Government has wielded a ‘carrot and stick approach.’ On the one hand, it imposed restrictions on hardware imports, on the other it has not just provided production-linked incentives even raised to a lucrative level of 5%. Under PLI 2.0, the government aims to achieve 34 billion manufacturing target by 2025 — 50% out of which should be export oriented.
Although, in the short run, a licensing regime would mean prolonged wait times for each new models from current manufacturers to be launched, in the long run. It would be advantage India.
Boost to ‘Aatmanirbhar Bharat’
As part of its Aatmanirbhar and Make in India plan, the government launched PLI schemes in varied sectors to make Indian manufacturers globally competitive, attract investments, enhance exports, integrate India into the global supply chain and reduce dependency on imports.
“We are likely to see expected incremental production of Rs 3.35 lakh crore. The expected direct employment is going to be 75,000. Production of PCs, laptops, servers will increase in months to come. India is emerging as a trusted supply chain partner and value-added partner,” said Vaishnaw at a media briefing.
As a result of this move, it has been reported that even Apple Inc is in talks with the government to manufacture its iconic iPads in India. Let’s not forget, Apple is already assembling its iPhones in India. with the help of three contract manufacturers — Foxconn, Wistron and Pegatron. All these manufacturers are part of the Indian government’s production-linked incentive scheme for mobile manufacturing. Although, the company has been making the lower-end models since 2017, it started to produce the latest iPhone 14 in India shortly after its launch.
Why PLI 1.0 Failed
The government had also earlier launched many schemes, which were export oriented. Most notably, PLI 1.0. During PLI 1.0 — the first version of the scheme for IT hardware — only two companies including Dell and Bhagwati (Micromax) out of the total 14 approved companies were able to meet the first year’s (FY22) targets. That’s why PLI 1.0 failed to take off. Companies have cited inadequate sops as the main reason for the failure of first version of the scheme. Big players like Samsung, Lenovo, and Apple gave the scheme a miss altogether.
PLI 2.0 was dependent on how much was being invested. But this time, the government has made a shift in mindset. In the form of PLI 2.0, it has come up with an output-linked scheme. The government is keen to see companies perform and then get incentives. It wants disperse the incentives in an automated way. The idea is to create champions, or anchor companies. This is likely to trigger a ripple effect, helping other companies to grow. The scale of interest it has elicited so far looks encouraging.
Will PLI 2.0 Mirror Past Success in Mobile Sector
To replicate its earlier success in mobile manufacturing, the government is leaving no stone unturned. Whether it’s making policy changes, or impose import restrictions or rolling red carpets to the ones agreeing to “Make in India” or declaring even lucrative schemes laden with cashbacks.
To encourage companies to manufacture in India, the government declares incentives to the tune of $2.1 bn. If a manufacturer exceeds an annual target, it will receive even a cashback on total goods produced.
Essentially, the government’s previous tactics to shift mobile manufacturers to India and set up bases in the country, which was a robust success, is being replicated in the laptop, tablet and PC segment. Let’s not forget that even Apple capitalized on the scheme and the result is there for all to see. 7% of all iPhones today are made in India.
Now to build upon that success, India has mandated licensing for laptop and tablet imports and rolling out incentives for local manufacturing on the other hand.
And these 38 applicants are a direct byproduct of these efforts.
Big Brands Join the Local Chorus
While the policy changes bring in good news for domestic manufacturing, this created fresh challenges for leading IT manufacturers like Dell, Acer, Samsung, Panasonic, Apple, Lenovo, or HP. As most of these companies rely heavily on imports from countries like China to meet the demands in the India market, they were the ones to be heavily impacted. These tech giants have two options: to either start manufacturing their laptops in India or stop importing their gadgets to India.
Due to the policy changes, biggies like HP India, Dell, Acer, Lenovo, Thomson have already applied under PLI 2.0 to manufacture locally.
How Would It Benefit Channel Business
In the past few years, organizations have begun to see the benefits of local manufacturing amid rising costs and the need for sustainability.
So, how would the local manufacturing impact channel business in India. Here are some tangible benefits:
Short-term Blessings for PC Channels
When big brands will struggle to import or would have to go through the license regime triggering a price rise, it will yield temporary benefits for the channel businesses. Till their stocks last, the partners are all set to reap significant profits.
Post Covid, channels had seen a situation of supply surpassing the demand. With reports of 30% Y-o-Y decline in the PC market , challenges seemed to increase in PC business. Channel profitability took a hit as well owing to inventory carrying costs and increased competition, coupled with low demand.
Shortening the Supply Chain
Since the pandemic began, the supply chain has seen multiple disruptions that have slowed manufacturing. The supply chain disruptions made the supply chain much more complex. This has compelled businesses to figure out how to make their supply chains agile. Setting up local manufacturing bases as required by the proposed policy changes would take care of irrational cost escalations due to supply chain disruptions. This would significantly help channel business growth in the country. “Produce here to sell here” seems to be the governments clear message to the market players.
Building up an IT Ecosystem
keeping production at home will spur economic development in the country. The move comes in the backdrop of the government’s declaration and conclave on setting up a semiconductor hub in Gujarat. This should be seen as attempt to build up a complete IT ecosystem. The low-hanging fruits of the activities would be fostering innovation inside the country and boosting up the economy and preparing the country as a net exporter of IT items and devices.
Local Manufacturing Means Lower Price
Local manufacturing means lower price and lower price means bigger sales. And bigger sales means higher revenue for the channel business. The past few years have taught us why domestic production is critical. A pandemic-like situation and other supply chain disruptions can cripple companies. And the way out is obviously local manufacturing – a lesson so well grabbed by the union government.
If things go as per plan, the high number of big hardware applicants under PLI2.0 signals the rise of India as a strong contestant to China, well-equipped to challenge the Chinese hegemony in IT hardware manufacturing.
Do let us know what you think on the newer policy changes. I can be reached at firstname.lastname@example.org