Low profit levels may lead to consolidation of mobile firms in India

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New Delhi, Jul 19: Early this year, executives of a China-based mobile company are reported to have met officials from the Government of India (GoI) with a surprising request. Would the government offer the same tax structure for its ancillary units as the mother company would enjoy? The plea was significant. It would have provided a lifeline for India’s standalone manufacturers of mobile phones, many of whom are densely packed in Noida and Greater Noida regions of the National Capital Region. The data shows many of them are only playing the volume game on razor-thin profit margins. The government has declined to do so, accentuating localisation in possibly the fastest-growing manufacturing sector in India.
It is a question that has re-emerged as last week Prime Minister Narendra Modi travelled to the same area to inaugurate the revamped facility of Samsung, which has made a Rs 50-billion bet on the Indian mobile market.
As India has pushed the US to become the second-largest market for mobiles, the big question is whether it should encourage big players like Samsung to set up shop, riding partly on the higher duties the country has set on imports. Or should it allow the multitude of independent smaller players the space to continue imports of semi-knocked down parts of mobiles to be re-assembled here? Which ones would have a larger knock-on effect on employment creation, for instance? Since most of India’s mobile phone manufacturing business is still one of promise than of actual delivery, these decisions are crucial. While the Ministry of Electronics and Information Technology (MeITY) does not feel it is an either/or choice, the advantage is clearly moving towards the big manufacturers willing to relocate to India and to a small group of independent manufacturers who have invested in developing their own capacity.
The size of the electronics industry, according to MeITY, is already Rs 3 trillion by 2016-17. The finance ministry estimate based on a sample of 2,441 units is more sober. For 2017-18, it estimates profitability for the sector at just Rs 156 billion.
The two ministrys’ estimate gives a profit-to-turnover ratio of less than 5. Making up for corrections most likely in the MeITY figure would still show that most of those players on the list with the finance ministry are just playing for volumes and are therefore highly susceptible to any adverse change in policies or that of the business environment.
Most of them bank on import and assembly of GSM phones that serve the 2G market.
They now face a twin disadvantage. Other than the successive hike in Customs duties, these manufacturers (mostly traders) are hit by the aggressive Reliance Jio campaigns.
Jio is offering consumers to replace their 2G phones with 4G ones that need smartphones or at least high-quality feature phones. Other telecom service providers also reportedly plan to provide the same escalator service for their consumers.
In this market, would lower imports encourage the government’s Make in India policy? Quite likely, says Atul Gupta, partner and executive director at Deloitte.
“An import substitution policy based on tax preference works best when the product is directed at domestic consumers. With a complementary infrastructure facility, the government hopes to create vertical and horizontal integration in the mobile sector”.