The challenge of attracting Apple to India

This is a very informative and sobering article, well worth a read (HT: Rajeev Mantri). It outlines in great detail the challenges that India will have to overcome to attract the likes of Apple into manufacturing in India. Even with China's problems, attracting the global value chains into India will be a very big struggle. We should be realistic.

Since 2017, its Taiwanese supplier Wistron has been assembling older models sold in India, starting with the iPhone SE and currently the iPhone 7... However, most of the parts that go into these phones are still made in China, these people say. India-based companies supply packaging materials, phone chargers and batteries, but nothing more, they say. Last year, Apple had seven major suppliers operating in India, compared to 135 operating in China, its public disclosures show. The biggest challenge for Apple may simply be the less developed nature of manufacturing in India compared to China...

Finding suppliers that could produce components locally proved difficult. One major issue was compliance with Apple’s supplier standards for health, safety and the environment... One reason why suppliers aren’t willing to improve factories in India to meet Apple’s requirements is because of its small order sizes. Current and former employees at Apple suppliers such as Shenzhen Yuto, Salcomp and Sunwoda, which make packaging, power adapters and batteries, say order sizes in India are in the thousands per month. By contrast, Apple’s orders in China are in the hundreds of thousands per week.

This is a very telling assessment of the Indian market,

Apple’s phones are simply too expensive for the market. While India has a population of nearly 1.37 billion—almost as big as China’s—its middle class is around one-fifth the size of China’s. ... In the 12 months leading up to March 31, Apple’s India subsidiary reported sales of around $1.5 billion, down 19% from a year earlier, according to local corporate filings. It’s a tiny fraction of Apple’s global revenue over the same period of nearly $260 billion... Last year, Apple shipped 2 million iPhones to local retailers in India, compared to 30 million in mainland China, according to Canalys. Because of the low volumes, Apple can’t take advantage of economies of scale and pays 60% more per unit for Wistron to assemble the iPhone in India.

Issues like the far smaller domestic market (than is hyped), poor labour productivity, poor quality of infrastructure etc are not going to be resolved anytime soon. The only things that can be fixed are bringing more predictability to government policy (even that can be a stretch) and giving fiscal incentives (to which there are limits). But the structural negatives appear to be so daunting as to offset anything positive on the policy side.

Much the same challenges would be at play with other manufacturing areas like batteries, defence, railways, thermal BTG, renewables, telecoms equipments etc. Even textiles. 

It's difficult to understand why for a very big country with several country-sized states, India struggles with suppliers (beyond packaging material and phone chargers in case of Apple), entrepreneurs, investors and creation of eco-systems. 

It was thought that many of the structural negatives will be offset by merely being a big country. After all China is not an easy place to do business, though its other advantages more than offsets the formidable problems of navigating the bureaucracy and the Party.

A takeaway is perhaps that instead of going after big names like Apple or Tesla, India should perhaps try to court the likes of Oppo and Xiaomi, who are more likely to find a large enough local demand and also therefore have the incentives to invest in volumes and create eco-systems. And also support their  smaller component manufacturers compared to the likes of Foxconn.

Update 1 (06.04.2020)

As India eyes the unique opportunity of attracting factories from China, the challenges loom. SCMP points to the success with mobile phones PMP,

The number of cellphone and accessories manufacturing units rocketed from a mere two in 2014 to over 260 in 2019. Today, India is the world’s second-largest maker of cellphones, with 95 per cent of them assembled locally.

But the cellphone industry still imports around 75% of components from China, and only 12% is made in India. The challenges are formidable, 

Moreover, despite efforts to boost India’s manufacturing, it consists mainly of assembly lines rather than industrial clusters, so it has some way to go to develop a fully fledged capacity comparable to that of China. Modern manufacturing has a sophisticated multi-tier structure: those directly connected to the assembly line are the first-tier suppliers, who have second-tier suppliers of their own, who may, in turn, have a third tier of suppliers. For example, as one commentator pointed out in Foreign Policy, Volkswagen has around 5,000 first-tier suppliers, each with an average of 250 second-tier suppliers, so it could end up with as many as 1.25 million suppliers. So even if the Indian government successfully attracted some manufacturers with their first-tier suppliers, it would still need to cultivate a suppliers’ network and forge industrial clusters. Furthermore, as Apple’s aborted idea of relocating its iPhone 11 production to India has demonstrated, one should not take assembly-line readiness for granted. Suppliers are able to build large-scale factories in China, employing more than 250,000 semi-skilled workers because the Chinese education system prepares tens of thousands of these battle-ready technicians and engineers. By contrast, India lacks the capacity to provide such skilled and semi-skilled workers. And these problems will linger as long as the Indian government balks at critical reforms for labour and land.

Update 2 (09.04.2020)

Strategic purchases by government can be of help with localisation and shifting the value chains, like with LED bulbs,

Meanwhile, the localization content in LED bulbs is getting brighter. The broad script is similar to mobile phones. While manufacturers assemble in India and have reduced dependence on China for low-value work, component manufacturing is yet to take root. “We are far more detached from China than what we were a few years back," said Sumit Joshi, the chief executive of Signify Innovations India Ltd, the new avatar of Philips Lighting India Ltd. “About 98% of what we sell in India is made in India. I don’t depend on China for finished goods," he added. Joshi said the dependence on Chinese components is dwindling. “We are now able to make 60% of the components in India," he said. Lighting components imported from China include LED chips, transistors, and resistors.

There are two reasons why lighting companies de-risked from China. Indian consumers behave differently from global consumers and two, the Indian government became a big buyer. The Union government’s Unnat Jyoti by Affordable LEDs for All (UJALA), a scheme to provide LED bulbs to consumers and replace 770 million incandescent bulbs, began in 2015. The overall LEDs distributed through the programme totals over 360 million until 16 March 2020. Since the mandate was to make bulbs affordable, LED makers started developing local supply-chains. How are Indian consumers different? Joshi cites the example of the still-preferred tube light in Indian homes. “We came up with the Philips T bulb. It is more of a horizontal kind of a bulb because Indian consumers like brightness and a throw of light," he said. To switch over from conventional lighting to LEDs, Indian consumers also demanded longer warranties. Signify offers a two-year warranty on a bulb, a small value product. It can’t afford returns. The company, therefore, ensures that the bulbs tolerate power surges, common in many parts of the country. This customization ensures that lighting companies are less dependant on imports.