Obsolescence Insurance, a New High-Margin Business for EMS Companies
by 
Lisa Cairns
India presents a very interesting opportunity for the semiconductor and electronics industry: it is the most recent Cinderella Story among the emerging market economies, benefitting from global economic shifts -- low oil and strong dollar, especially, are enhancing the strong and sustainable growth plan of Prime Minister Narendra Modi.
As discussed in a recent EPS article, foreign exchange (forex) rates and low oil prices present both economic opportunities and challenges from consumer through manufacturing points globally. For India, the opportunities outweigh the challenges as we see by the significant investment occurring in the manufacturing sector, particularly favoring electronics, telecommunications, and medical.
Recently, the Financial Times noted: “Expectations are high that India will finally realise its full economic potential through a combination of Modi magic, its abundant young labour force and a more liberal policy regime. A recent adjustment in the country’s accounting has led to claims that it may already have replaced China as the world’s fastest growing economy.”
So what does ‘Modi magic’ mean for semi?
There are a couple of key opportunities for global semi, and especially for electronics manufacturers, as a result of the economic changes and growth in India. For the semiconductor and electronics industry, there are both supply chain push and pull events driving strategic manufacturing capital expenditures (capex) locally. Specifically, Modi’s economic policies are addressing poverty and financial inclusion issues to address poverty while increasing the 2016 national budget by 1.5 trillion rupees to go towards infrastructure and land reform while also spurring execution from India’s infamous bureaucracy, as Vinod Kumar, MD & Group CEO for Tata Communications, recently discussed with Credit Suisse.
What these events mean for semiconductor and electronics manufacturers is (finally) a solid and sustainable economic opening and stabilization, a “cyclical sweet spot,” as Kumar pointed out, where capex and manufacturing numbers are increasing in India and that will lead to additional momentum as businesses are attracted to, and settle in India. Modi’s policies of “Make in India” further call electronics manufacturers to ensure production in India through special (and very attractive) incentives. Since January, a number of leading electronics, telecom, and related global manufacturers have announced investments of more than $65 billion, as India Inc News reported.
The localization trend of manufacturing moving into India is having wider supply chain effects. We see a shift turning India into Modi’s envisioned hub supporting local Indian markets as well as regionally local, non-Chinese markets. In turn, the manufacturing shift to India is a push-pull chain wherein it both provides local products to the rapidly growing Indian consumer and enterprise markets, and provides new, higher-skilled and professional employment. These high-tech, manufacturing jobs, in turn, are a basis for growing, positive economic sentiment that drives consumer and enterprise spending on technology products.
Combining all these variables, there are positive growth drivers for electronics manufacturing and electronics consumption. As David Mulford, Former U.S. Ambassador to India, recently offered during a briefing for Credit Suisse, “India, among all of the emerging market nations, over the next three to five years, is going to be the leading grower, and will occupy its place in the sun, because other countries have slowed down […]. India is going to have a real advantage, and I expect it to move back up into the seven to eight to eight-and-half percent range.”
Regional shifting to India
There are strong, market synergies pointing toward new capex spends in India for electronics manufacturers: Modi’s economic agenda is backed by serious incentives for electronics manufacturers; cyclical synergies from forex events due to a strong U.S. dollar and low oil prices (freeing additional revenue from the reduction of subsidies for oil); and finally the increased consumer and enterprise confidence that comes from the increase in white-collar and high-tech manufacturing jobs that have moved to India. Couple these strong indicators with a large, well-educated, emerging middle class, and the opportunity to strategically diversify regional hubs, the calls for India to rise as a new global powerhouse are not unrealistic.
So, as we continue to see M&As realign the global semiconductor and electronics supply chain, these consolidations will lead to shifts in where and how manufacturing capex will be spent. India’s compelling economic incentives and ripening market is attracting strategic global and local market repositioning. The localization momentum is further enhanced by Modi’s goal of Make in India goals that target electronics manufacturing. The shift to India for manufacturing is happening, and with that move and the promise of the Indian emerging middle class consumers, the electronics supply chain is shifting as well, bringing other supply chain partners including distributors, design engineering, among others.
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