India is to be Apple’s second significant global hub
The crucial issue is the government’s restrictions on Chinese foreign direct investment, which could impact the creation of a component base for Apple’s OEMs
The next 12 months could be make or break for both Apple Inc in India and the government’s ambitious flagship Productivity-Linked Incentive (PLI) scheme to encourage multinationals to manufacture locally. India is to be Apple’s second significant global hub. If the iconic brand, as analysts expect, shifts around 10 per cent of its mobile device manufacture from China to India, it could become the poster boy for India’s bid to emerge as a global export powerhouse.
Apple’s three principal original equipment manufacturers, who are eligible for the PLI scheme, have started shifting more production to India. Hon Hai, a unit of Foxconn, and Wistron, which has a unit in Bengaluru, have been importing capital equipment and assembly lines from China since last October. So far, Apple vendors have hired over 15,000 employees and are looking for more, and building millions of square feet of new space in their factories in readiness for a massive increase in production. The two players’ investments of around Rs 500 crore have already exceeded first year expectations. Pegatron, Apple’s third major supplier, will set up its factory mid-year, though the location has not been identified yet.
The question is whether Apple can replicate the same impact that Samsung has achieved in Vietnam. That country has become the South Korean chaebol’s largest exporting base after it slowly moved out of China, shipping one out of every two Samsung smartphones. This is the result of a steady shift by Samsung to reduce its dependence on China by investing a staggering $17 billion in the country. As a result, Vietnam’s global share in telecom equipment (mobile devices being a large part) went up from 0.4 per cent in 2010 to 4.6 per cent in 2019. In the same period, India’s share grew from 0.2 to 0.3 per cent.
According to sources privy to the projections, Apple’s three original equipment makers (OEMs) have committed to touching Rs 3.5 trillion or a third of the Rs 9.5 trillion of incremental sales value of mobiles that they will manufacture in five years. Vendors eligible under the PLI scheme (five global players, including Samsung, and five Indian companies) are being given 4-6 per cent on the sales value if they meet specified production and investment targets (for phones with an invoice value of $200 each).
That apart, the three Apple vendors have committed exports of over 80 per cent of total sales value (which comes to Rs 2.8 trillion) in five years or an average Rs 56,000 crore a year. That is much higher than the government’s expectation that all the mobile players put together will export 60 per cent of the total value of their sales. So Apple’s three vendors will take a higher burden than other players, accounting for 45 per cent of total exports of mobile devices committed under the PLI scheme.
Apple’s vendors have also committed to direct employment under the PLI scheme of over 120,000 people — 60 per cent of the 200,000 jobs that the government expects to generate from mobile manufacturing.
In 2021-22, the three have to make phones with an incremental sales value of a minimum Rs 24,000 crore under the PLI scheme, which is no small task. That is almost double the company’s current sales in India of around Rs 13,700 crore in 2020. An Apple India spokesperson declined to respond to queries.
Apple and the government’s relationship has been tough. In 2016, Apple Inc CEO Tim Cook made his maiden visit, promising to set up Apple stores but also asking the government for duty exemptions on manufacturing and repair units, capital equipment and components for 15 years. In 2017, Nirmala Sitharaman, then industry minister, told the Rajya Sabha that the government had not accepted any of Apple’s demands.
Apple’s hopes of entry into manufacturing in India never looked worse. But they were rekindled in 2018 and the engagement increased in 2019 when the Prime Minister’s Office pushed for a PLI-type scheme. Apple was one of the key stakeholders to offer inputs.
To put Apple’s India story in perspective, the Indian market is looking up, especially now that it is manufacturing more models here (it has started making the iPhone 12 recently), which could help reduce price. In the quarter ended December 2020, Apple sold over one million phones compared to 1.8 million between October 2019 and September 2020. But analysts suggest this number could go up to just about one per cent of Apple’s global sales. So the main reason for Apple’s India plans is exports, unlike China where it has a large domestic market too.
But there are challenges that could derail the PLI programme, which depends heavily on Apple’s success. One is that, thanks to Covid-19, the PLI targets for the first year of 2019-20 cannot be met. The government gave the go-ahead to eligible players only in October, leaving just five months to get production rolling. Pegatron has not even set up a factory.
Talks are expected soon with the government on extending the five-year PLI for another year or adjusting the first year’s target over the next four years. Niti Aayog has been wary of extensions because it believes speed is of the essence.
The other more crucial issue is the government’s restrictions on Chinese foreign direct investment, which could impact the creation of a component base for Apple’s OEMs. “Seventy per cent of the components are made by Chinese companies either in their country or in Vietnam, but if you don’t allow them to make in India through FDI, it will take years before an Indian supply chain can make up the shortfall,” said a component supplier to all leading mobile players. He points out that Vietnam does not have this problem.
The vendors could import the components, but that, too, is a sub-optimal solution. That is because the government also expects value addition in mobile devices to increase from 20-25 per cent to 35-40 per cent to save the burgeoning import bill for electronics.
There have been murmurs about the lack of a stable policy regime as well. For instance, the Indian Cellular and Electronics Association has complained that the imposition of 2.5 per cent duty in the latest Budget on certain components (such as camera modules) is uncalled for, especially when they are not even manufactured in the country.
The government is well aware of the multiplier effect if Apple Inc succeeds, especially now that it has announced PLI schemes in IT hardware (it is targeting Dell, Cisco, Quanta), components and sub-assemblies and looking at similar programmes for semiconductor and display fabrication plants. With 10 new PLIs announced to boost production and exports, Apple Inc needs to be the game changer.