Dixon Technologies India Limited is the largest home-grown electronics manufacturer in India. It has a diversified product portfolio, including consumer electronics like LED TVs, home appliances, lighting products, DVRs, and smartphones.
The company is a fully integrated end-to-end product and solution suite to OEMs, Original Equipment Manufacturers ranging from global sourcing, manufacturing, quality testing, packaging, and logistics.
If you have not heard of Dixon Technologies, you would have surely encountered its top clients such as Samsung, Philips, Havells, Godrej, etc. Yes, the company manufactures and supplies these products to well-known companies in India, distributing the products under their brand names.
Even though Dixon never made a fuss about building its brand name, you may remember Weston, once a popular TV brands of its promoters. It was one of India’s first color TV that the company started commencing in 1994. The leading electronic manufacturer and service provider has now expanded its operations to several electronics sub-segments since its foundation in 1993.
Its clients include some of the leading global and domestic brands that it serves as OEM, Original Equipment Manufacturer, and ODM, Original Design Manufacturer. The company claims that its healthy relationship with its clients in the domestic and international market, backward integration of key segments, cost-effective pricing strategy, and global sourcing has set it apart from its competitors.
Notably, the shares of Dixon Technologies rose nearly 4% after its arm, Padget electronics, received approval as a mobile manufacturing partner under the PLI scheme for Large Scale Electronics Manufacturing of the Indian Government. Under this scheme, the company would get 4% to 6% incentives on incremental sales on the base year of goods manufactured in the country.
In early 2019, the Indian government designed a new policy with a lofty aim to take Indian mobile phone manufacturing to the next level and ramp up assembly operations by several measures.
However, the Production Linked Incentive Scheme for Large Scale Electronics Manufacturing or PLI for short started to fizzle out by March 2020, as COVID-19 had hit every major market across the globe. However, the government remained firm with its goal.
The final notification of the scheme came in October 2020, where it offered a 6 to 4 percent incentive for five years on the sales of manufactured devices in 2019-20. Moreover, high-end, multinational mobile phone manufacturers or those producing phones worth more than 15,000 INR or 200 USD have to sell goods worth more than 4,000 crores INR in 2020-21 for the prize.
The government approved a total of 16 firms, both Indian and multinational, for the scheme. These companies would have about four months to crack the first year’s target, considering that many of these firms, especially contract manufacturers, would take one to two months to prepare their machinery, plants, and customer contracts.
While there are murmurs of discomfort among these 16 firms, most of them are putting up a brave face. The local contract makers such as Dixon Technologies India Ltd and mobile manufacturers such as Lava International Ltd stated that they could meet the 500 crore INR target in 2020-21 for the domestic firms.
The policy would appear seductive for the next four years if these firms can make through the first difficult year. The government promises to tap 5.5 billion USD or approximately 41,000 crore INR during the scheme’s five-year tenure.
The mobile phone assembly business is a rare make in India success story. Notably, India only had two mobile manufacturing units in 2014, and by 2019, there were more than 200.
Consequently, the number of mobile phones produced surged from 60 million to 290 million in the same period. At the same time, the handset valued also jumped ten times to 30 billion USD.
India has resorted to importing substitution strategy with mobile handset assemblers to cater to the low-end local market. However, that market is likely to saturate soon. And Indian phone makers need export to grow and expand.
“No matter what we say about the Indian market, our GDP is less than 4% of the world. India’s mobile phone consumption is 4.5% of the world in value and 15% in volume. Import substitution is not a good model for India because it is a small market. We can grow by exporting to the world.”
– Hari Om Rai, chairman and managing director of Lava International Ltd (1).
The Indian government believes that the PLI scheme, along with other smaller schemes for component manufacturing, the Scheme for Promotion of Manufacturing on Components and Semiconductors, and infrastructure, the Electronics Manufacturing Cluster Scheme would increase the exports of both high-end and middle-range handsets.
According to a recent report, the co-head of Equity Strategy of Asia Pacific, Neelkanth Mishra, wrote that if the PLI targets are met, additional handset manufacturing of 10% global market by volume and value could move to India by 2023 to 2024.
Moreover, India would also observe an improvement in its trade deficit by 24 billion USD. He added that the plan might see some delay as the coronavirus could push out timelines and the policy uncertainty, including at the state level among global makers.
There are other clear concerns about the incentive disbursement, which is expected to be a direct wire transfer after submitting their claims. Next, a project management agency would verify the allegations and get approval from a committee of secretaries of key central departments and ministries.
“We are happy with the design of the scheme. We are only hoping that the disbursement is as promised. Once the central government starts disbursing the money, we will get clarity about the budgets they have. Budgets are stressed for all incentives right now.”
– Bipin Sapra, a Partner at Ernst and Young and former Indian Revenue Service bureaucrat (2).
To a large degree, the scheme’s success depends on the efficient handling of the disbursement process.
The Need for More Creative Structure
If India aims to fire up its export plans, it will face China and Vietnam, the two huge mobile phone exporters. In 2019, China had exported handsets worth more than 100 billion USD, whereas Vietnam over 35 billion USD. At the same time, India exported less than 3 billion USD in 2018-19.
Indian manufacturers get disadvantages on different counts. Their conversations are filled with the word “disability.” It ranges from unreliable power supply to poor logistics. According to a study by Ernst and Young and ICEA, the India Cellular and Electronics Association, called “Mobile manufacturing in a post-COVID-19 world.” The study compared manufacturing costs in these three countries. It assumed that 100 USD is the cost of making a handset without subsidies; China can make it at 80 USD after including its country’s support. At the same time, Vietnam can make it in 89 USD.
Even though the PLI scheme bridges some of the country’s deficit, after factoring PLI and other offers, the total manufacturing cost in the country still stands at 92 to 93 USD.
“The disability stack runs deep in the economy—for example, the taxes on fuel. Second, electricity is not subsumed under GST (goods and services tax). So how do you become competitive? While the PLI policy had to strike at some of these disabilities, it also had to be the World Trade Organization (WTO) complaint.”
– Pankaj Mohindroo, Chairman of ICEA (3).
Notably, WTO doesn’t allow export subsidies, and hence, the country needs a more creative structure based on production.
Moreover, the policy largely tried to attract high-end phone manufacturers. However, it can’t ignore mid-range and low-end handsets.
Besides Dixon Technologies and Lava, other domestic manufacturers that received approval for the scheme include Micromax, Neolyncs, Padget Electronics, and Optiemus Electronics. In the 200 USD and above category, Samsung, Foxconn, Wistron, Hon Hai, and Pegatron proposals were approved.
The scheme is likely to generate more than 300,000 direct jobs. A government’s advisor estimated the annual wage bill for these firms participating in the system would be about 6,000 crore INR. In the next five years, it is likely to rise to 30,000 crore INR.
If we consider the government’s incentive outlay for five years, which is 41,000 crore INR, it would effectively subsidize the wage bill. Furthermore, PLI is also supporting capital expenditure. Entities participating in the system would have to invest around 11,000 crore INR in meeting their sales target.
The scheme is also offering a massive discount on value-add currently in India. Notably, Indian manufacturers import most of the components, and the assembly value ranges from 8 to 15 percent. If the assembly price is 15%, an incentive of about 6% is almost a 50% discount.
Increasing the Local Production
The report had stated that more than 80% of handset revenues are split between five firms; Samsung, Apple, Vivo, Oppo, and Huawei. For India, to increase local production and participate meaningfully in the export market and global supply chains, it is crucial to tap these entities.
Samsung started to assemble its phones in India in 2017. Recently, it has also set up a manufacturing unit for its smartphone display.
Over the last few years, Chinese entities such as Vivo had also boosted local assembly operations; however, they are no longer in the season because of geopolitical issues.
Apple, one of the largest companies across the globe by market cap, is manufacturing locally but at low volumes. It started manufacturing in India in 2017 with the first generation iPhone SE. The giant’s made-in-India portfolio subsequently added iPhone 6s and iPhone 7 in 2018 and iPhone XR in 2019, and iPhone 11 and the new iPhone SE in 2020.
In India, the giant’s contract manufacturers and suppliers make these phones in India’s eight locations, whereas, in China, the firm’s supplier manufactures them from more than 350 locations.
The Apple representatives and the Indian government were negotiating incentives since 2016. And the wooing has increased in the past 15 months. According to an executive, the central government’s special groups have shortlisted more than 50 top global manufacturers. They are individually reaching out to each one of them.
Notably, Apple is also keen on diversifying its global supply chain. As per reports in June 2019, Apple wanted its suppliers to evaluate the cost implications if they shift 30% of its production out of Chine. However, it is not easy to move over to India since transitions like that take years.
PLI would play a crucial role in this transition since three of the four companies approved in the 200 USD phone and above category, Foxconn, Hon Hai, Pegatron, and Wistron, are Apple suppliers.
Booster for Dixon Technologies
The Indian government has announced the scheme as part of its recent slew of economic reforms. According to the new stratagem, companies would gain a 4% to 6% incentive of their total sales from the government.
It means that a 10,000 INR mobile phone, assembled by a foreign company, Indian companies can manufacture it for only 9,500 INR, assuming that the raw material costs and operating costs are the same for both.
At present, foreign companies like Lenovo and Xiaomi establish and run India’s local manufacturing of smartphones. Indian brands such as Micromax and Lawa also manufacturers smartphones in the country; however, their shares are ever-shrinking.
On the other hand, Dixon Electronics, which makes 15% of all televisions in India and more than 27% of all semi-automatic washing machines in the country, has done little work in the smartphone manufacturing space. The primary reason is that smartphone brands such as Oppo and Xiaomi don’t see the need to hire a local firm like Dixon Technologies. They can set an assembly unit and do it themselves.
However, the new incentive scheme linked with 41,000 crore INR could change Indian smartphone manufacturing space dynamics.
Notably, in the scheme, there is one category for foreign companies and another for local companies. Even though the incentives are similar at around 4 to 6%, there are some crucial differences in the eligibility criteria.
“For foreign companies, the threshold for investments and incremental sales is much larger, and that incentive is applicable only for mobile phones above $200. However, in India, more than 75% of the market is for mobile phones below Rs 15,000, and for that, only domestic companies are entitled.”
– Atul Lall, CEO of Doxin Technologies (4).
Atul further stated that the firm bid aggressively for it since it is a significant team growth area. India’s government had informed that it would select a few “marketing champions” for the scheme.
He highlighted that the company would have to invest 50 crore INR in expanding its operations. Notably, once a firm reaches a certain incremental turnover of 500 crore INR, it can be confident that you would start getting the incentive. The incentive for the first year is 6% of your revenue. It means if a firm started cracking it, it would reflect in the next fiscal quarter.
Indian manufacturers have started the scaling up talks and are planning for since a rise in tide lifts all boats.
“Indian companies and multinationals are competing in a different space. It gives us room to emerge stronger over some time; the threshold under PLI is an investment of 200 crore INR over four years for domestic companies, but we would invest at least 350 crores INR.”
– Sunil Vachani, Executive Chairman, Dixon Technologies (5)
At present, Dixon Technologies can manufacture 30 million phones in a year. And over the upcoming months, it is planning to triple its capacity to 80 million and employ over 4,000 workers in the forthcoming five years. Moreover, the firm is also expanding its operations in Noida, and the new facility is to be ready by January 2021.
According to Saurabh Gupta, the CFO of Dixon Technologies, they are excited about the opportunity to have large contracts with global brands for serving domestic and export markets.
The company’s expansion strategy would contribute to 18 to 20% of the country’s smartphone requirements. Gupta added that the company is likely to generate 25,000 to 30,000 crore INR revenues in the upcoming five years.
Notably, mobile phones currently contribute approximately 12% of Dixon Technologies revenues. Post PLI, the company expects that it would contribute about 40% of the overall revenue by the next fiscal year and increase yearly. Gupta added that it would start with 40% in the first year, and the profit would gradually increase to 50 to 60% over the years.
Simultaneously, other Indian entities are hoping that they can leverage the multinational setups of the supply chain. Notably, large contract makers typically push the suppliers to set up domestic stores as it shrinks the cycle times.
According to industry insiders, the scheme targets global biggies by positioning the country as an export-based. Domestic manufacturers like Dixon Technologies would get exclusive incentives for producing smartphones under 150,000, which gives it a short-term edge.
However, the scheme is only for five years, and most of the Chinese brands have assembly units in India and only import some of their models as whole units. It means that competition with Chinese firms is not going to disappear.
New Clients for Smartphones
At present, Dixon Technologies’ primary client in mobile phone manufacturing is Samsung, which can onboard last year. Even though it manufactures 2 million phones a month, it gives the firm an almost 30% market share in India’s feature phones. However, its presence is insignificant for the smartphone segment, the mobile phone market’s lucrative part.
But the scenario is most likely to change as it has already signed three new clients for smartphone manufacturing. First is Samsung, which has agreed to expand its existing agreement to cover smartphone marketing. The other two brands include LG and Infocus. Interestingly, Foxconn owns InFocus, which is the largest electronics contract manufacturer globally, which makes phones for the likes of Apple.
In the beginning, it would make around 300,000 to 400,000 smartphones monthly for these new clients. The company has officially stated that they are trying to attract global players who may have never thought of India as their manufacturing base and look at what Dixon Technologies offers.
It talks about companies that include those who have significant market share in India and those who are targeting other markets. India is likely to emerge as a global manufacturing hub for the second case.
The move also coincides with foreign government’s efforts such as Japan, the US, and America to diversify their supply chain and be less reliant on China.
However, a contract manufacturing firm like Dixon Technologies needs to be valued at a discount to the brand it serves, considering the business’s uncertainties and challenging nature.
Dixon already sees a transaction in smartphones with the PLI schemes. Other segments like appliances and TVs are also benefiting because of fresh investments and higher import duties. However, the big question is how much value it can create in the long term?
A company like Dixon can build its brand or find niches to exploit its expertise for better margins. Investing in Dixon technologies may not be the best play for the growth of the Indian mobile sector. The best way to play it is via brands because that’s where the profits are.
The big risk for players like Dixon, who are eying the 15,000 INR smartphone market opportunity in India, can be upended as soon as Reliance would take entry in the space.
So, is there any way to play the gains of the PLI scheme? A report of Bank of America suggests looking at companies in the power, infrastructure, and logistics segment to ride the move. Moreover, the government is also likely to unveil such schemes in more sectors, and there may be better plays there. Hence, be patient and look beyond the obvious short-term benefits for investments that could result in India’s manufacturing resurgence.