Foxconn's second coming could spur a 'Make in India' wave

Bengaluru: Foxconn Technology Co. Ltd, the world’s largest contract electronics maker, is evaluating plans to build several manufacturing facilities in India including one in a tie-up with Japanese telecom company SoftBank Corp., which is also one of the biggest investors in Chinese and Indian start-ups.

A re-entry into India by the Taiwanese company, which exited the country earlier this year, may spur other electronics makers to set up shop here and start the process of building a comprehensive, ground-up electronics supply chain that is essential for Prime Minister Narendra Modi’s ‘Make in India’ push, experts said.

An eager, business-friendly government and the Indian consumption story, which had lost its sheen over the past three years, may finally attract wary manufacturers.

Rising labour costs in China, which dominates manufacturing, and an eagerness to reduce dependence on that country are pushing manufacturers to new destinations. One such place could be India, which has a massive labour force, a large domestic consumer market and a government that has promised to promote manufacturing.

In February, India increased customs duty on imported phones and handed out larger benefits for domestic producers of these phones and tablets to encourage local manufacturing.

“Talk of Foxconn’s entry has generated a lot of enthusiasm and interest among SMEs (small and medium enterprises),” said M.N. Vidyashankar, president of the India Electronics & Semiconductor Association, an industry lobby group.

“They can play a key role in building the ecosystem that is missing to build a massive electronics manufacturing supply chain in India. Because of their size and reputation, suppliers and vendors will get a strong comfort level to make investments. They can either bring their international suppliers to India or help build capabilities with Indian suppliers, which would be more cost effective.”

Foxconn didn’t respond to emails seeking comment.

Foxconn, which counts top consumer electronics brands such as Apple Inc. and Sony Corp. among its clients, operated a facility in Chennai during 2006-2014, supplying exclusively to Nokia Corp. Oyj. The Nokia factory closed down on account of a tax dispute (which meant it wasn’t part of Nokia’s deal to sell its handsets business to Microsoft Corp.) and Foxconn had to follow suit.

The market for smartphone sales, however, is surging. Indians may have as many as 650 million smartphones by 2019 from 140 million, according to a February study by Cisco Systems Inc. This potential is the reason why smartphone makers such as Samsung Electronics Co. Ltd, Micromax Informatics Ltd and Gionee Communication Equipment Co. Ltd have all promised to set up manufacturing units in India.
Chinese handset maker Gionee is looking to set up its manufacturing plant in the country this year and will invest close to $50 million in the plant over the next three years, said Arvind Vohra, India head at Gionee.

Micromax, which sources devices from China with Foxconn’s help, has now started making phones in India at its plant in Rudrapur. The company plans to double the monthly production volume of the plant to 2 million units within the next eight months.

“With China’s labour costs rising, India can be a great alternative given the right incentives and development of the ecosystem,” said Micromax founder Rahul Sharma. He added that Foxconn’s expertise in manufacturing and processes will help grow the entire manufacturing supply chain.

To be sure, Foxconn and SoftBank have yet only announced their intent. They will need to apply for clearances, which can take more than a year.

The network effect

Foxconn’s rapid re-entry can be attributed to the network effect.

The company’s chairman Terry Gou and SoftBank chairman Masayoshi Son are friends and these companies, along with China’s Alibaba, in which Son is a large investor, often invest together in new ventures.

That seems to be the case in India, too. Foxconn and Alibaba are in talks to invest in online marketplace Snapdeal, which is backed by SoftBank, Mint reported on 16 June. Alibaba may also invest in smartphone maker Micromax, according to people familiar with the matter.
Optimists are hoping that this network effect will spill over to the larger ecosystem.

However, the jury’s still out on whether India can build a large manufacturing base.

Land acquisition and labour laws remain difficult for businesses.

The National Democratic Alliance (NDA) may not be able to push through its new land acquisition and rehabilitation bill because of opposition from the Congress and other parties.

If land acquisition remains as complex as it is and labour laws inflexible, large companies will be reluctant to bet billions of dollars on India’s manufacturing potential, experts said.

Even Foxconn is expected to start only assembling of parts initially, people aware of the company’s plans said.

“Foxconn’s entry will certainly be a shot in the arm for the local manufacture of solar panels but not necessarily for every type of electronics manufacturing,” said Ravi Venkatesan, former chairman of Microsoft India and Cummins India. “The biggest challenge for electronics manufacturers is the lack of an ecosystem in India. This ecosystem takes time to develop. But the good thing is that India is a huge market and with the appropriate policy environment we should be able to pull this off in 5-7 years.”

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.