India’s Electronics Sector and Its Phenomenal Growth Potential

Introduction

• The Indian electronics sector holds immense potential for multibagger returns in the next five to ten years.
• The electronics sector, essential for advancements in AI, IoT, EVs, and 5G, is set to experience significant growth due to various factors.
• In this post, we’ll explore the Indian electronic sector ecosystem, including the value chain, business models, mega trends, and the position of India specifically in the Electronics Manufacturing Services (EMS) space.

Total Electronics market –  India (Value in INR billion)

India’s electronic goods exports and production by value – $ billion  (Source: IBEF)

Value Chain of the Electronic Manufacturing Services (EMS) Industry:

• EMS companies provide various manufacturing services to electronics OEMs (original equipment manufacturers).
• Services include design, sourcing, manufacturing, assembly, testing, distribution, and after-sales services.
• Electronics OEMs, such as Apple, outsource manufacturing to EMS service providers.

Key differences: OEM vs EMS vs ODM

OEM (Original Equipment Manufacturer)

• They design and market complete products or certain sub-systems or components for their customers.
• While they design most of their products themselves and own the intellectual property rights to them, they increasingly outsource all or part of their manufacturing to third parties such as EMS providers.

EMS (Electronic Manufacturing Services)

• They are contract manufacturer in the electronics field.
• These providers not only make products for OEMs but also offer a wide array of value-added services.
• These services include support with initial ideation and design, DfX (Design for Excellence), supply chain management, configure-to-order, outbound logistics, and repair elements1.

ODM (Original Design Manufacturer)

• It is a company that designs and manufactures products that are eventually marketed and sold under the name of an OEM.
• OEMs buy products from ODMs, who adapt their reference design to the OEM’s requirements2.

The distinction between ODM and EMS has become blurred over the years, with EMS offering a range of design services to their clients. However, EMS typically gives OEMs more control over their IP and decision-making than an ODM would

HVLM vs. LVHM

• HVLM (high volume, low mix): Large quantities of a few types of products, such as consumer electronics like TVs, washing machines, and mobiles. Example: Dixon Technologies, Amber Enterprise etc.
• LVHM (low volume, high mix): Emphasis on quality and customization, serving industries like aerospace, defense, medical equipment, etc. Example: Example: Kaynes Technologies, Cyient DLM etc.

End Industries in the EMS Space

Positioning of Indian EMS Industry in the Global Landscape:

• China dominates the global EMS industry but faces rising labor costs and reduced dependency from US MNCs.
• India’s EMS industry is expected to grow over three times in the next three to four years.
• Currently India holds a share of around 2.2% in the global EMS space, but it is expected to grow to 7% by 2026.
• Factors driving growth include increasing demand for electronics, government initiatives like Atmanirbhar Bharat, PLI Schemes,
  and the $10 billion incentive for semiconductor ecosystem setup.
• India has clearly drafted its ambition to achieve US$ 120 billion worth of exports by 2026.

EMS Market Share by Geography

Estimated Export Trends of Indian Electronics Industry by 2026 (US$ billion)

Source: Vision Document on Electronics Manufacturing (Electronics Production in India)

Challenges for the Indian EMS Industry:

• Competing with China’s cost advantage and technological expertise.
• Lack of electronic component ecosystem resulting in higher import costs.
• The Indian EMS industry needs to become more efficient and competitive to capture a larger share of the market.

Conclusion

• The Indian electronics sector, with its thriving EMS industry, presents significant growth potential for long-term investors.
• Understanding the value chain, business models, mega trends, and industry positioning is crucial for building conviction before investing.
• While challenges exist, India’s government initiatives and growing demand for electronics indicate a promising future.
• As India aims to become a prominent alternative to China, the Indian EMS industry has the opportunity to emerge as a prominent global player.

Read About: Against the Tide: India’s Stable Economy Amidst Global Challenges