Indian ESDM industry likely to grow 9.9 percent CAGR in 2011-15

January 22, 2013

The India Semiconductor Association (ISA), along with Frost and Sullivan, released the 6th ISA-F&S Report on the India ESDM Market (2011-2015). Evidently, the focus is on electronics and semiconductors industries in India.

Only a few economies have exhibited the strength to weather the harsh conditions prevailing in the global environment. Such economies are especially remarkable since they are vulnerable to headwinds given the significant size of their GDP. India, despite its temporary slowdown in the last year, has not only withstood the adverse environment, but has also been witnessing green shoots of recovery.

The Electronics Systems Design and Manufacturing (ESDM) sector ranks high among the various segments that have contributed to creating this bulwark. The ESDM industry in India has continued to chart its journey northwards. While the industry may not have achieved the exponential growth forecast by experts, its performance in the last few years can be termed an achievement in view of the overall slowdown of the Indian economy.

Source: ISA, India.

Source: ISA, India.

The ESDM industry is expected to grow at a CAGR of 9.9 percent between 2011 and 2015 resulting in an industry size of $94.2 billion by 2015. Although the electronics product market is growing a very fast pace, ironically most of the demand is being fulfilled by imports. The growth potential of the services component will be determined to a great extent by India’s ability to undertake higher value-add activities and cost competiveness.

Resolute focus on the ESDM industry and favorable policies to incentivize investment, adoption of new technologies, catalyzing innovation and entrepreneurship, enhancement of skills and addressing the disability cost of developing ESDM products domestically are the key ingredients to elevating India to a leading player in the global arena.

Key drivers and challenges for Indian ESDM industry
The positive factors far outweigh the challenges that impact the Indian ESDM industry. The growth of the product markets is one of the key drivers where mobile devices, consumer electronics and IT/OA products continue to script some of the high growth rates globally.

Financial inclusion programs and rising standards of living have generated demand for new products besides increasing customer-base of existing ones. India is also recognized globally as a key source of high technology skills which are leveraged by global corporations for generating value.

The global economic downturn has had a profound impact on the ESDM industry in the past quarters. This is expected to be temporary, and given the strong domestic growth potential, is expected to be overcome over the next two quarters. Our continuing reliance on imports is impeding growth of domestic manufacturing, which in turn is a major hurdle to the creation of a viable domestic ecosystem. The high cost of developing products including duties, taxation, capital and infrastructure are leading to a slow pace of investment in this sector.

In a developing economy like India, where the government is driving force through its role of policy maker and facilitator, new and evolving policies for ESDM are anticipated to spur the industry into a higher growth mode. The recognition of the ESDM industry as a key contributor to the GDP is a major step forward. The national policies on telecom and electronics have the potential to bring about a major change in the domestic industry. Quick implementation of these policy initiatives will positively impact the development of the domestic product design and manufacturing industry.

The ESDM industry in India comprises of the following four key segments:

1. Electronic Products.
2. Electronic Components.
3. Semiconductor Design Services.
4. Electronics Manufacturing Services (EMS).

The first two represents products, while the others highlight the manufacturing services and design services.

Electronic products
The market for electronic products comprises of domestic demand and products manufactured for exports. This market is expected to grow from $52.4 billion in 2011 to $74.6 billion in 2015.

Declining prices and increasing affordability are anticipated to propel domestic demand. To understand the domestic demand and supply situation, the following chart analyzes the total domestic consumption, total domestic manufacturing and high value-add manufacturing opportunities in the market.

The total market is expected to grow from $41.91 billion to $64.85 billion in 2015. Total domestic manufacturing contributes only 35 percent of this demand and the remaining 65 percent is met through imported products. The anticipated decline on the share of high value added manufacturing to 6.6 percent of total market is a matter of serious concern. Timely policy intervention and incentives must be implemented urgently to increase the scope for local value addition.

Select products from the automotive and industrial electronics segments are the notable contributors to the high value addition activities within India, although their contribution to the total market of $64.85 billion is low. However, products with significant volumes and market size like telecom, mobile devices, consumer electronics and IT/ OA suffer from lack of investment in product development and manufacturing.

Electronic components
The electronic components industry comprise of semiconductors and passive component. As most electronic products are enabled by semiconductor components, it is important to analyse the overall consumption of semiconductors, which is expected to grow from $6.1 billion in 2011 to $9.66 billion in 2015.

Local demand and sourcing of semiconductors is limited ($2.94 billion in 2011 and increasing to $3.69 billion in 2015) due to the

Source: ISA, India.

Source: ISA, India.

import of electronic products and low domestic manufacturing. Since currently there is no semiconductor manufacturing in country, the entire consumption is met through imports.

Continued innovation of semiconductors devices coupled with their enhanced processing capability has led its increased consumption in mobile devices, IT/ OA , telecom, automotive and industrial sectors. The following chart exhibits the total market (consumption) and total available market (local demand and sourcing) for semiconductors over the forecast period.

Passive components had a corresponding market of $3.1 billion in 2011 and is expected to grow to $4.2 billion in 2015.

Semiconductor design
Semiconductor design has traditionally been the strength for Indian ESDM industry

Source: ISA, India.

Source: ISA, India.

generating revenues of $8.8 billion in 2011. There are more than 120 companies in India focused on semiconductor design for global products. This industry has witnessed a robust growth of 17.3 percent since 2009 and today boasts of a 5.1 percent share of the global pie. The chart gives a breakdown and growth trend of  semiconductor design, which is likely to grow at healthy rate in coming years.

Over the years, the Indian semiconductor design industry has developed significant capabilities and currently works on state-of-art products. Growing technical competence combined with stringent IP protection environment and trend toward localization of contents will help this segment to grow.

Electronic manufacturing services
Growth of the electronic products market has led EMS companies to offer lower cost of manufacturing, faster turnaround for designs and quicker time to market. Since the mid-nineties, many global EMS companies have established operations in India and have become a key contributor in enhancing the ecosystem in the country.

Most of them are export oriented and have encouraged local production using the same components and services base for the Indian market. Select electronics companies utilize the services of EMS companies to reduce their own investment and focus on their product development and marketing functions.

These companies face competition from peers in other Asian countries such as China, Malaysia, Singapore, etc. Manufacturing policies

Source: ISA, India.

Source: ISA, India.

such as the Electronics Manufacturing Clusters policy are deemed favorable to the prospects of the EMS industry in India. The burgeoning market for local consumer electronics and select telecom products is also attracting investors into the segment.

Emerging segments like medical and aerospace/defense are also expected to the leverage the existing capabilities of the EMS industry. The growth of the EMS industry services revenue in India is captured in the chart.

The EMS industry services is expected to grow at a CAGR of 27.8 percent from $0.4 billion to $1 billion in 2015. The overall turnover in the EMS industry is estimated to be $3 billion in 2011. The conventional and emerging industry segments are anticipated to maximize the benefits from this industry.

Global best practices and learning for Indian ESDM industry
The global ESDM industry is replete with success stories of planned development in various countries. Those who started late, adopted an aggressive strategy to make up for lost time, and have been successful. Every country invested in the development of ecosystem, infrastructure, manufacturing, skills, funds availability and favorable taxation and duties to encourage domestic and foreign investment.

The role of the government in developing each of these elements is noteworthy. A long term vision with short and mid-term plan has been the bedrock on which these projects were executed.

Notable gainers in the last 25 years have been China, Japan, US and Taiwan. Emerging countries in the last few decades are Malaysia, South Korea, Brazil and Russia, who are attracting significant investment from around the world. All of these countries focused on creating and improving infrastructure to offer the best returns to investors over a short period of time. Many of these countries have placed ESDM among their thrust sectors, thus ensuring every possible support in their development programs.

Focus on industry development
The Indian ESDM industry has proven its mettle by growing against immense adversities. Despite the inherent strengths, the Indian ESDM industry has not been able to realize its potential for a long time and has missed the opportunity to emerge as the world leader while smaller economies went on to march ahead.

With so much time lost, an urgent action plan is required to effect a paradigm shift. Stakeholders – the industry and the government – have to exhibit the highest level of commitment to bring about change immediately.

A number of factors are today working in favor the Indian ESDM industry:
* Significant size of the domestic electronics product market.
* Design and manufacturing capabilities.
* Impetus to entrepreneurship.
* Availability of skilled and semi-skilled manpower.
* Global corporations exploring high growth geographies for investment.
* Recognition of ESDM as a key growth engine for GDP.

These factors may be at different stages of maturity, but the ingredients are right for discarding history and move ahead. The industry needs to ramp up its capabilities to deliver quality and choose the path of innovation to grow and compete in global environment.

This industry also needs a strong helping hand from the government. The adoption of the national policy on electronics is a step in the right direction. However, given the lack of focus on this industry for a long time, the forthcoming years will prove crucial to put the Indian ESDM industry on track of quantum growth. With the right decision making and proactive assistance to the industry, the government and industry should move in unison to help the Indian ESDM industry claim its rightful position under the sun.

Strategic recommendations
It is very encouraging to see the increased focus on the ESDM sector in last couple of years and a significant amount of work was done to bring out National Electronics Policy and National Telecom Policy by the government in consultation with industry. Some of the initiatives outlined in these policies are already in process of implementation such as Preferential Market Access (PMS), Electronics Manufacturing Clusters (EMC) and Modified SIPS. To strengthen current initiatives going further, the following strategic recommendations are suggested for immediate action.

* Goal to achieve 50 percent of demand for high impact products met by local high value added manufacturing, from current 9 percent.
* Expediting implementation of National Electronics Mission to facilitate co-ordination of National Electronics Policy implementation.
* Declaration of Electronics as a ‘Priority Sector’ and Provision of deemed export status to domestic products as they are substituting imports.
* Address >20 percent disability cost in developing domestic ESDM products thru normalizing duty structure and cost of working capital.
* Expedite EDF setup with initial focus on fabless and ESDM start ups. Encourage participation of GOI in focused funds to develop eco-system.
* Mandate preferential market access (PMA) in all Central, State Government and public sector units (PSUs) procurements with immediate effect.
* Establishment of 10 ESDM innovation centers across the country where electronic product ideas can be taken to prototype and end product.
* India specific standards for the key products catering to domestic need.

Key findings and summary
* The Indian ESDM industry on growth trajectory of 9.9 percent CAGR from $64.6 billion in 2011 to $94.2 billion in 2015.
* 65 percent of electronic products’ demand met by imports. Imports likely to grow from $28 billion in 2011 to $42 billion in 2015 in the absence of intervention.
* High value -added manufacturing to decline to 6.7 percent in 2015. There will be a cumulative opportunity loss of $200 billion during 2011-2015.
* Total semiconductor market of $6.03 billion in 2011 and growing to $9.66 billion by 2015. Although local demand and sourcing grows from $2.9 billion in 2011 to $3.6 billion in 2015 due to heavy reliance on imported electronics products.
* Achieving 50 percent total domestic manufacturing by 2015 will create additional direct employment of 2 lakhs.

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