With a goal to create 5-7 million new jobs, transition “Make in India” from a slogan to a well-developed ecosystem, boost domestic manufacturing, attract global and domestic large investments, reduce imports and ultimately get closer to the USD 5 trillion GDP, the Government in 2020 announced the PLI scheme – production linked incentive for various sectors with electronics being the largest focus.
According to the government, all the PLI Schemes covering 13 sectors with an outlay of Rs 1.97 lakh crore will ultimately lead to a minimum additional production of Rs 37.5 lakh crore over 5 years and the minimum expected additional employment over 5 years is nearly 1 crore. The scheme extends an incentive of 4% to 6% on incremental sales (over base year defined as FY19-20) of goods manufactured in India and covered under target segments to eligible companies for a period of five years since commencement.
The scheme contours involve minimum revenue and minimum CAPEX thresholds every year. Essentially the more you make, the more you get. This is clearly to promote scale and provide an incentive to the largest unlike the age-old thought of providing support to SMEs & MSMEs.
The case study of Suzuki (Maruti Suzuki) in India is an example of how large-scale manufacturers create flow through to small component manufacturers thereby creating jobs, economic growth, and wealth. India entered into a license and joint venture agreement with Suzuki Motor in 1982. The company initially imported cars, then started by the assembly of cars in India. Suzuki imported most of the components in the early years. Due to this, India’s imports of auto parts from Japan increased from USD 4 million in 1980 to USD 155 million in 1986 and accounted for 76% of India’s total auto parts imports in 1986. Eventually, with the development of the domestic auto ancillary ecosystem, imports of auto parts declined sharply. Auto component sector, once a very small enterprise eventually became a bustling industry thereby attracting global manufacturers and making India not just self-reliant, but also an exporter of automobiles.
Among the largest allocation in PLI is the mobile manufacturing industry. The government aims to provide incentives worth Rs 41,000 crores to mobile manufacturers over the next 5 years. Currently, the cost differential between India & China for mobile manufacturing is ~11%. PLI coupled with other schemes like SPECS, RoDTep, EMC 2.0, and concession in income tax can potentially bring down the differential to just under 2%. Manufacturers who are able to create scale, backward integration, and have superior capital allocation can further use their strength to bring down this differential to zero bringing India at par with China.
The international mobile phone manufacturing companies that have been approved under the mobile phone segment are Samsung, Foxconn Hon Hai, Rising Star, Wistron, and Pegatron. Under the mobile phone (domestic companies) segment, Indian companies, including Lava, Bhagwati (Micromax), Padget Electronics, UTL Neolyncs, and OptiemusElectronics, have been approved. Further, six companies have been approved under the specified electronic components segment, which includes AT&S, Ascent Circuits, Visicon, Walsin, Sahasra, and Neolync.
With this PLI alone, the mobile manufacturing which is currently ~USD 13 billion is expected to touch ~USD 120 billion with exports amounting to ~ USD 75 billion. This would bring down the import bill for the national exchequer, increase India’s exports thereby improving the trade deficit. MSMEs played an important role in China’s scale-up in manufacturing, and our research suggests that Indian MSMEs particularly in the component and logistic industry will benefit greatly from the PLI thrust.
At Piper Serica, we believe PLI is a step in the right direction and will take India among the world’s largest manufacturers in electronics. While a large part of the PLI beneficiaries is private entities, we believe Dixon Technologies is the best play on PLI and exponential growth in outsourced manufacturing. Dixon is already a beneficiary of mobile PLI and is rapidly expanding this category by adding newer brands. Apart from mobile, Dixon has also received PLI approvals for IT and telecom hardware, AC PCBs, and LED bulbs. It is in process of applying for a PLI in the wearables category. Clearly, Dixon is a PLI powerhouse. Dixon has strong backward integration and the ability to provide value-added service to its clients apart thereby improving client retention and deepening their relationship. Dixon has already transformed lighting from an imported product to an indigenously manufactured and now to an export product. Dixon’s leadership team has been ahead of peers in their capacity expansion, setting up R&D centres, execution capabilities, and commands a strong relation with most global electronics brands.
To conclude, the PLI is a very progressive scheme that rewards performance, creates scale, and benefits the country immensely. While there will be short-term upheavals in execution and setting the structure, the scheme will eventually create the manufacturing ecosystem that India needs ultimately creating a crore plus jobs and ushering a blue-collar revolution in India.
(Ajay Modi is the Vice President Research at Piper Serica, a SEBI Registered Portfolio Management Service Provider)