Karbonn to open assembly lines, factory in India

Mumbai: Karbonn Mobile India Pvt. Ltd, the six-year-old firm that manufactures mobile handsets in China, plans to open an assembly line in Noida, on the outskirts of New Delhi, in the next quarter, add another in Bengaluru and start a factory in Hyderabad over the next 12 months, executive director Shashin Devsare said.

The company, which has said previously that it plans to assemble and eventually make phones in India, is looking to double the sales of phones that it makes over the next year. It wants to do so by manufacturing in India.

“While Karbonn would be looking at developing full manufacturing capabilities eventually, during the initial phases, we would be looking at sourcing components both locally and from China and gradually reducing dependence on imports,” Devsare said in a 26 June interview.

Karbonn, a joint venture between the Bengaluru-based United Telelinks Ltd (UTL) and Noida-based Jaina Marketing and Associates Pvt. Ltd, is seeking to test the waters for a manufacturing push under Prime Minister Narendra Modi’s “Make in India” programme.

“Karbonn is working towards developing local manufacturing and have earmarked an investment of Rs.800 crore over the next three-to-four years for building full manufacturing capabilities,” Devsare said. “We have already set up two assembly units in Noida and Bengaluru, with the Noida unit expected to start by next quarter.”

The Rs.800 crore investment will include the Rs.450 crore-manufacturing facility in Hyderabad, which will include a design centre. The company has also set up a research and development (R&D) facility in Bengaluru.

India is the world’s second largest market for mobile phones with 257 million handsets in 2014, behind only China, according to Cybermedia Research (CMR).

Karbonn was India’s fourth largest seller of smartphones, behind Samsung, Micromax and Lava, in the third quarter of 2014.

To be sure, Karbonn is not alone in seeking to manufacture handsets in India. Micromax Informatics Ltd, Lava International Ltd, Gionee Communication Equipment Co. Ltd of China and LG Corp. of South Korea have similar plans, according to industry veterans.

Karbonn was initially keen on acquiring Nokia’s Chennai plant, which is under freeze over an estimated Rs.10,000-crore tax dispute with the income tax department and was shut in December, but later dropped the idea.

Some analysts are sceptical about the manufacturing plans of phone makers, given that the mobile device manufacturing ecosystem is still immature in India, and these companies are nowhere near to start manufacturing in the country.

“It would be tedious for phone makers to put together an end-to-end ecosystem in India to manufacture mobile devices. Currently, there is a higher probability of manufacturing some parts while importing others and having the end product assembled locally,” said Vishal Tripathi, a principal analyst at research firm Gartner Inc.

“Right now, India doesn’t have fabrication plants to make the chipsets locally and it’s not easy to set up these plants as not only do they need huge financial investments but need expertise, skill sets, etc. While companies can build cases, screens and other components, any thing that is chip-related and fab-related, like processors and circuit boards, cannot be produced in India at present,” Tripathi said.

There are bigger challenges to deal with.

“For component companies to set up shop in India, they need to cater to multiple OEMs (original equipment manufacturers) like how they do it in China or Taiwan. The component suppliers won’t be coming just for one player,” said Jayanth Kolla, founder of Convergence Catalyst, a research firm.

“These are the supply-side of challenges,” said Kolla. “There are challenge on the demand side, too. In Indian market, the phone makers are used to launching multiple versions of a device, although they don’t sell millions of it. It makes more sense for them to import the variants from markets like China and Taiwan as opposed to making all of these versions in India as for every version of a device, a company will need to produce a minimum of a few million devices to reach economies of scale (to reach the level where cost per device can come down),” said Kolla. “If you are producing that many devices, you need to have that kind of consumer base and ability to sell these products, but the companies do not have a robust market share.”

Indian companies including Micromax and Karbonn are vying for market share with bigger rivals like Samsung Electronics and new Chinese entrants like Xiaomi Corp. and Gionee.

This comes at a time when experts believe the Indian mobile market is reaching saturation.

Smartphone shipments in India dropped 7% in the first quarter of 2015 to 19.5 million units, according to a report by Cybermedia Research (CMR) in May.

“It doesn’t make sense for these companies to start manufacturing from scratch now because they will need at least three years to stabilize. And by the time they stabilize, the device market will start shrinking. The device market, which currently ranges between 160-180 million devices every year, is itself going to shrink in terms of volumes starting 2018,” Kolla said. “If they primarily make it for India, it will not be practical, unless they look at becoming global players and export to other countries as well.”

To deal with some of these problems, Devsare said that the company has entered into a partnership with a Chinese telecom company to develop technology expertise that will help in local device manufacturing.

“We are very confident of developing complete in-house manufacturing capabilities as our joint venture partner, UTL, has over a decade of experience in manufacturing telecom equipment,” he added.

Karbonn, which is targeting the low- and middle-income segments unlike bigger rival Micromax and Samsung that are also aiming to tap high-income brackets, currently imports 100% of its devices.

With “Make in India”, the company plans to manufacture 70% of the devices in India. It has already partnered with component suppliers and other network partners in India and China. Devsare said that of the 70% devices made in India, 60% will be feature phones and the rest will be smartphones.

In the third quarter of 2014, Karbonn was the fourth largest smartphone vendor in India and the fifth largest mobile manufacturer in terms in terms of shipment numbers, capturing 8% of the market share in each of the segments, according to International Data Corp.

That changed in the December quarter when companies including Xiaomi and Intex ate into the market share, making it lose its place among the top five phone vendors. According to data from Counterpoint Research, the top five smartphone companies in India in the first quarter of 2015 were Samsung, Micromax, Intex Technologies Ltd, Lava and Lenovo Group Ltd (including Motorola).

Some analysts say manufacturing mobile phones in India presents a business opportunity that should be tapped.

“It is an opportunity for the country. We need to develop a kind of market that exists in China. It will create a market in India and boost domestic consumption,” said Tripathi.

“At present what these companies are trying to do and the state of the device ecosystem is in a fluid state. As compared with China, which has on an average 10X consumption as compared with India, India is not lucrative yet for the component makers or suppliers. The return on investment has to be significant if these companies decide to come to India in addition to having some sort of tax exemption.”

The government is promoting “Make in India” in a big way, courting foreign investment in the manufacturing sector, but hasn’t held out any specific incentives for mobile device makers.

“From the government side, we are yet to see any tax rebate, even though the SEZs (special economic zones) have been announced and are being set up. The device imports attract 6-6.5% duty at present,” said Kolla. “If a device is manufactured locally, the companies will get that advantage, but then again they will have to bear different types of custom duties on imported components. The difference then won’t be that big.”

The only advantage of manufacturing in India, at present, analysts say, apart from the labour cost, is that the time to market the product will be reduced and a company may save on shipping charges.

The other advantage that India could offer these manufacturers is a tax holiday which can be passed on to consumers, bringing down the cost of the device and compensate for the cost of component imports.

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