Import duty hike impact: Assembly firms to have an edge over makers

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Increasing import duty hikes on electronic goods has left the sector in limbo. The surge in rates in recent months, once in December last year and another in the Union Budget in February, has put pressure on vendors, and traders fear it may affect margins. And with no new proposals on the cards to set up component manufacturing units, Chinese firms assembling locally in the country are expected to be at an advantage against their Indian counterparts.

Since last December, import duty on electronic goods, including cellphones, smart watches and wearables, have gone up to 20 per cent from 10 per cent. For key components such as printed circuit board assembly (PCBA) for handsets and LCD, LED and OLED panels for televisions, the rate has been hiked to 15 per cent from almost zero. 

The duty hikes are in line with the government’s Phased Manufacturing Programme (PMP), which aims to increase domestic manufacturing of smartphones to 500 million units a year by 2019. Since the thrust on local production has increased, handset imports have come down significantly — from over 80 per cent in 2014 to 26 per cent in 2017, according to Counterpoint Research. It is likely to fall further to 10 per cent in 2018.

Around Rs 340 billion worth of handsets are being imported this year, compared to Rs 1.32 trillion worth of phones produced locally, according to estimates of the Indian Cellular Association. The number of local manufacturing units have gone up to over 120 in 2017 from three in 2014. There is a catch though.

None of these units are meant for manufacturing components, but for availing the benefits of assembling in the country, which saves marketers from paying a 20 per cent import duty on finished handsets. 

According to the first phase of the PMP, the government had targeted production of different components for three financial years. Mechanics, die-cut parts, microphones and receivers, keypads and USB cables in 2017-18; Printed circuit boards, camera modules and connectors in 2018-19; Display assembly, touch panels, vibrator motors and ringers in 2019-20. 

The government is in the process of formulating the second phase of the PMP, which is expected to boost value addition to 58.3 per cent in feature phones and 39.6 per cent in smartphones. However, local value addition was still at a meagre 10 per cent in 2017, according to Counterpoint Research.

 
To push the sector towards CKD (completely knocked down) level of production, duty on key components, including printed circuit board, camera or display, should have been raised, said Tarun Pathak, associate director, Counterpoint Research. “Duty has been hiked on smaller components, which form less than 10 per cent of the cost of a mobile phone. A lot remains to be done to reach the goals of the PMP. Currently local value addition remains much lower than China’s 70 per cent.” 

While the government expects manufacturers to invest heavily in component manufacturing, firms want more incentives from the government. According to Syed Tajuddin, CEO, Coolpad India, the government hasn’t done much to develop the local ecosystem for manufacturing spare parts, which may pose a problem for mobile handset brands. “A brand is compelled to import most of the spare parts and customers have to bear the burden,” he said.

To address the rise in input costs, Chinese cellphone manufacturers, including One Plus and Lenovo, plan to increase local procurement. According to sources, market leader Xiaomi is working on a plan to generate additional revenue from content tie-ups.

The situation is similar for TV makers. The cost of production has gone up by 8-10 per cent since flat panel constitutes over half of the cost of a TV set. But the absence of any flat panel manufacturing unit in India compels firms to solely depend on imports from China and Taiwan. According to Kim Ki Wan, managing director, LG Electronics India, the firm is trying to bring an Indian company on board for setting up a unit locally. But for now additional costs are likely to fuel price hikes across sector. Before raising duties, the government should have offered companies time to set up facilities, Wan said. “Setting up a flat panel plant requires huge investments and government support,” he added.

The Anil Agarwal-led Vedanta Group has announced plans to set up a plant to manufacture flat TV panels, but its progress remains unknown.

To incentivise firms that set up manufacturing units in the country, the Ministry of Electronics and Information Technology (MeitY) runs the Modified Special Incentive Package Scheme (M-SIPS). But according to sources, the scheme is yet to see any fund allocation after the exhaustion of the initial Rs 100-billion corpus. 

As firms continue to reel under margin pressure due to rising customs duty and raw material prices, retailers and distributors in the unorganised market fear a cut in their commissions. According to Sanjay Kalra, owner of Sargam Electronics in Delhi’s Laxmi Nagar, companies are planning a one to two per cent cut in dealer commissions. “Price of electronics like smartphone and TV are expected to go up by five to 10 per cent. But companies are also considering a cut in our margins, which will lower the rate of price hikes”, he said.

Gautam Shukla, manager at a Vijay Sales outlet in the capital, is concerned about the impact of the new rates. “Another round of price rise, after the one in September, may impact purchase decisions. We are trying to chalk out a plan to mitigate some of the additional burden through special offers,” he added.

Traders at west Delhi’s Gaffar market, a popular hub for cheap electronic goods, are unmoved. “Chinese firms are unlikely to hike prices soon since they have the advantage of sourcing directly from large-scale component makers back home,” said Noor Mohammad, a handset dealer.

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