PLI 2.0: Will it achieve self reliance in IT hardware?
India’s PLI 2.0 scheme for IT hardware, with over twice the allocation as its predecessor, has drawn substantial interest, with over 38 companies proposing investments exceeding ₹4,000 crore. The scheme has garnered an additional buzz recently due to the new import licensing regime to encourage greater localisation.
But will PLI 2.0 achieve its intended objectives of self reliance, especially with the lack of a component manufacturing ecosystem? We explore the possibilities.
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The Indian government approved a six-year PLI 2.0 scheme in May, 2023 with a ₹17,000 crore budget to attract top IT hardware companies like HP, Dell, and Apple. The previous scheme launched in 2021 with ₹8,000 crore budget had a tepid response, with most global players staying away. So far, 58 applications have been received for the IT hardware PLI scheme, with the application deadline being August 30.
Under the new IT hardware PLI 2.0 scheme, the government committed to offer a 5% incentive on net incremental sales over the 2023 base year for goods manufactured in India, compared to the earlier 2%.
Interest in the revised scheme has surged following India’s recent decision to implement a licensing regime for laptop imports starting from November 1, 2023. This measure is driven by national security concerns and is also seen by some experts as a push to promote local manufacturing through the PLI scheme. Companies are now required to obtain licenses for importing devices or alternatively, increase their manufacturing operations in India.
India boasts a substantial US$ 10 billion IT hardware market, with an annual sale of approximately 20 million units, making it an attractive and expanding market. However, the government’s decision came as a surprise to major players in the industry, including Lenovo, HP, Dell, Acer, Apple, and Asus, among others.
Given this development, how is the second phase of the scheme expected to perform? Why has the scheme for IT hardware not experienced the same kind of response as the smartphone sector?
Understanding PLI 2.0
The updated PLI scheme for IT hardware has garnered interest from 38 companies. This list includes global giants like HP, Dell, Lenovo, and Foxconn, alongside domestic manufacturer Dixon Technologies. Collectively, these companies have put forth proposals for incremental investments surpassing ₹4,000 crore. These investments are aimed at facilitating additional production valued at around ₹3.35 lakh crore over the next six years.
Within the framework of the PLI 2.0 scheme, companies are required to invest Rs 500 crore over a six-year period, whereas hybrid and domestic companies need to make investments of Rs 250 crore and Rs 20 crore, respectively. Additional incentives are available for each component localization, and there is an added clause wherein underperformers’ incentives shall be given to overperformers based on a rating system.
The scheme offers flexibility by extending the investment period to six years from the previous four. Companies choosing this scheme can receive an additional 3% incentive if they utilize India-made and designed components, sub-systems, or inputs. Furthermore, they can involve Indian contract manufacturers and qualify for incentives, if these contractors exclusively produce for a single company.
It also allows investments from Chinese manufacturers in compliance with existing regulations. The government anticipates that the revised scheme will motivate global players to relocate their production capacities to India, resulting in an incremental production value of around ₹3.35 trillion and an incremental investment of ₹2,430 crore. This, in turn, is expected to create 75,000 direct employment opportunities.
Source: Ministry of Commerce and Industry, HS 84713010
The graph above reveals a consistent upward trend in imports of Personal Computer (Laptop, Tablet, etc) by India from US$ 2.9 billion in 2018-19 to US$ 7.4 billion in 2021-22, growing at a CAGR of 15.81% for the period of 2018-23. However, in 2022-23, there was a notable decrease in imports to US$ 5.4 billion. This can primarily be attributed to the operationalisation of the Production-Linked Incentive (PLI) scheme.
During April-June, FY ’24, a notable 78.1% of personal computers and laptops were imported from China, 15.11% from Singapore and 4.5% from Hong Kong, according to the Ministry of Commerce and Industries, a decline by 29.23% YoY.
Pull factors, such as anticipated domestic demand and government policies aimed at boosting electronic exports (e.g., the PLI scheme), played a pivotal role in export growth. Additionally, trade tensions between the US and China acted as a push factor, prompting businesses to diversify their production locations. This dynamic shift resulted in the substantial export growth observed during this period.
Source: Ministry of Commerce and Industry; HS 84713010
What is meant by true self-reliance?
According to a research, the market size of laptops and tablets in India is estimated at US$ 6 billion in 2023. It is projected to grow at a CAGR of 7% by 2028 to reach US$ 8.4 billion. But only about 30% laptops are assembled in India.
Leading global IT and electronics manufacturing companies, such as Apple, Intel, Google, Dell Technologies, HP, and more, have urged the US government to leverage all available channels to encourage India to reconsider its implementation of import restrictions on IT hardware. They have called for a formal stakeholder consultation process to gather industry recommendations.
While companies express a willingness to expand their manufacturing activities in India, they point out several challenges, including the absence of a local semiconductor ecosystem, inadequate supply chains, and costly logistics. These hurdles are seen as obstacles to the “Make in India” initiative.
A spokesperson from one of the top five manufacturers, speaking anonymously, “Ground-up manufacturing with local sourcing of parts might take another two years as suppliers set up base in India. Till then it will largely be assembly-line operations.” Challenges such as the licensing regime and the need for a local semiconductor ecosystem pose significant hurdles.
A blog by Sidharth N, Director – Strategic Initiatives, Intel India, highlights some of the practical challenges in localisation for a product like laptops. A typical laptop Bill of Materials (BOM) contains several components – PCB/Motherboard, CPU/Processor, Display, Storage, Memory, Battery, Housing + Keyboard, camera, antennas, etc. A lot of these components are sourced at high volume from China and Taiwan.
Localisation is not just dependent on manufacturing but also on design. If designed from India, it should have a comprehensive understanding of the components that can be sourced from India. And if designed outside, the Indian component makers have to be part of the approved list of vendors. Extensive qualification and testing is required. Sidharth opines that we need to define priorities based on what is practically possible to localise. For instance, PCBA can be assembled at an Indian Electronic Manufacturing Service (EMS) provider’s Surface Mount Technology (SMT) line but all components will continue to be imported. Display is possible with imported panel sheets, memory and storage assembly will be possible with imported memory modules, etc.
His suggestions include creating Independent Design House capabilities to develop products with Indian BOM and creating product companies for BOM components. Just like in the case of automobiles, the assembly operations can expand under schemes like PLI and component companies can come up progressively. The PLI scheme’s success will depend on how effectively these challenges are addressed, ultimately determining the future of India’s role in the global IT hardware industry.