Mobile handsets were considered a quick way to kick-start ‘Make in India’, notes Bhupesh Bhandari
Indians were the second largest buyers after the Chinese and all handsets were being imported.
Why not get these handsets made in India?
It was smart thinking.
In other product categories, producers were hamstrung by weak demand.
Here, there was robust demand for handsets with a huge upside.
Thus, in this year’s budget, Finance Minister Arun Jaitley imposed a 12 per cent countervailing duty on mobile handsets and one per cent excise duty without Cenvat credit, while the import of components was free of tax.
Since then, a large number of companies have announced plans to manufacture handsets in India. And, indeed, many have already started operations.
But there is a catch: Most of them import semi-knocked-down kits, or SKDs, and assemble them here.
It more or less amounts to unpacking the phone and repacking the handset on a table.
The value addition is just one or two per cent.
Obviously, the investment required to start such operations is very low -- not enough to give any meaningful boost to manufacturing.
Only a handful, like Samsung, have chosen to import handsets as completely knocked-down kits, or CKDs, the assembly of which causes value addition of eight to nine per cent -- higher than SKDs, but not great.
There is a rule of thumb that 70-75 per cent of the value of the handset is the hardware, while the rest is contributed by processes.
Among the processes, the largest factor is the populating and mounting of printed circuit boards.
When a handset is imported in SKDs, the printed circuit board comes fully populated and mounted. No value is added in India.
As a first step, the government ought to think of ways to encourage handset makers to move from SKDs to CKDs.
One proposal that seems to be gaining currency is to put a countervailing duty of 12 per cent on printed circuit boards, which will encourage makers to populate and mount them in India.
The advocates of this step say there could be another benefit for the government in this: Higher revenue.
More CKDs will lead to a situation where printed circuit boards are designed in India.
At the moment, when handsets are imported as SKDs, all royalty on intellectual property is paid outside India; if it is paid from India, which will happen when chips are designed locally, the government will be able to collect withholding tax.
It is only in the next phase that the government can think of full-blown handset manufacturing -- the real stuff.
That will happen when there is a full ecosystem: A large number of companies that make all the components that go into a handset.
Some handset makers have started to source a few components like charger and battery pack locally, and at least one, Lava, does its own software -- but they still have some distance to cover.
The most vital part of the handset is the printed circuit board which accounts for at least 40 per cent of the total value, and half of it is the semiconductor chip.
These chips are not made in India.
The country has more than once announced its plans to make chips but with little success.
In 2006, a venture called SemIndia had proposed a unit at Hyderabad.
But, in the financial meltdown that followed, the plan got shelved.
Then, in 2013, it was announced that Jaiprakash Associates and Hindustan Semiconductor Manufacturing Company would set up a unit each in Greater Noida and Gandhinagar, respectively.
While Jaiprakash Associates had said it would partner with IBM and Tower Jazz for the project, Hindustan Semiconductor Manufacturing Company had tied up with ST Microelectronics and Silterra.
Not much has been heard of these proposed projects since then.
The Jaypee group, of which Jaiprakash Associates is a part, is in a financial bind: Its debt burden is massive and the cash flows from its real estate projects have thinned to a trickle.
There is actually little hope of a chip plant coming up in a hurry.
It can cost upwards of $5 billion, and how many business groups, Indian or foreign-owned, have the wherewithal to make such an investment, that too when business is tough -- rivals in Taiwan and Korea can ship them to India at zero duty?
However, LCD displays, the second most valuable component in a smartphone after the printed circuit board, could be produced in India in the near future.
Anil Agarwal’s Twin Star Technology has shown interest in an LCD display unit in the country.
It was reported in September that this company, along with AU Optronics Corporation of Taiwan, was keen to put up a facility at Noida with an investment of Rs 6,000 crore (Rs 60 billion).
Some in the industry believe a big investment in LCD is just round the corner -- it could kick off within the next two months.
For the moment, a move from SKDs to CKDs should be good enough.