After two long decades of jealously watching China rise to become the world’s No. 2 economy, India appears to be finally getting the attention of electronics manufacturers and may be on the cusp of benefitting from OEMs' unceasing search for lower-cost production centers to boost competitiveness and increase profits.
Foxconn International Ltd. is the latest company to insert India into its manufacturing planning. After a recent visit chairman Terry Guo said Foxconn will shift more manufacturing activities to India and that the company expects to build up to 12 new factories in the country. Guo said he sees huge potential for his company in India and announced Foxconn would invest in Indian technology start-ups over the next years, according to reports.
The Taiwanese electronics manufacturing services (EMS) provider isn’t the first to announce plans for a major investment in India but it may be the one with the longest coattail that’s certain to pull in other players in the supply chain, including semiconductor suppliers, passive component vendors and other hardware manufacturers. Foxconn alone can spark a mini-revolution in the Indian manufacturing sector due to its tendency to source locally – to reduce costs – while also establishing its own vertically integrated production system. Foxconn became a top manufacturer for companies like Apple because of its ability to help them reduce costs by either sourcing locally or making essential subassembly systems itself.
Other companies have preceded Foxconn into India although the results have so far been moderate. Starting at least two decades ago, many technology companies invested in India and helped to push up the country’s profile as a hub for information technology processing but the recent report about Foxconn’s India intentions is likely to represent a major milestone in the country’s evolution into a rival production hub for the electronics industry.
The Y2K – Millennium bug – campaign just before the end of the last century catapulted India into the IT services and support market. Indian programmers were initially recruited to help companies avoid the problems identified with the Y2K event with many of them working in Western cities. The services eventually migrated back to India and helped to cement the leading role companies like Infotech, Tata Consultancy and Wipro now play in the global IT services market.
With revenue of more than $100 billion annually, Foxconn is unquestioningly the biggest EMS provider in the world. It’s endorsement of India as an attractive production center for the globe’s biggest OEMs will ripple throughout the entire electronics supply chain.
Could India replicate in the electronics manufacturing sector the success its companies have scored in the IT services market? Not without the support of multinational enterprises like Foxconn, many of which got their own start decades ago with the backing of U.S. and European OEMs. In many ways, India is still virgin grounds for electronics companies who, though present in the country through sales subsidiaries, do not in general have manufacturing facilities there.
Also, the outsourcing waves of the 1990s skipped over India and many of the top global EMS companies ignored India in the rush to establish production facilities in China. Even a few of the Asian Tiger nations benefitted more from the Western OEMs’ outsourcing of production than India, according to observers.
That’s set to change. With labor costs rising sharply in China and amidst continuing concerns about the need to diversify production, even companies like Foxconn that have extensive facilities in the country are beginning to rethink their strategy. Manufacturers are questioningly once-solid assumptions about China and appear more inclined to take actions that could result in a steady shift of production activities from the country to other locations.
Factors on the minds of executives at OEMs, contract manufacturers and designers include the diversification of production to reduce systemic risks that can result from economic and geopolitical developments. They are also concerned about rising wages in China, dangers to intellectual property, logistics and transportation hurdles that could negatively impact time-to-market and recent actions by the Chinese government throttling demand for Western products in favor of local enterprises.
China may have also been tripped up by its own overwhelming success. The country accounts for a disproportionate portion of global electronics production and assembly activities and currently accounts for more than one quarter of worldwide semiconductor demand, according to the Semiconductor Industry Association (SIA). While figures for other electronic components are not readily available it can be easily surmised that China is also the key destination for other parts, including interconnects, passives and electromechanicals. That trend will remain for the foreseeable future.
India would seem like the next natural spot for global production. It has a large, highly-educated population and has been taking steps to make itself better suited to the production demands of global companies. Those actions, which include judicial reforms and a better climate for business registration, management and liberalization of components importation rules and regulations, have dragged on for years but appear to be speeding up under Prime Minister Narendra Modi.
India will not replace China immediately in the electronics supply chain but it will provide an alternative that could make its economically bigger rival review its own competitiveness. That can only be good for manufacturers and, by extension, consumers too.