After a heady period of growth, mobile phone sales in India are slowing. According to the Indian Cellular and Electronics Association (ICEA) of India, which represents mobile phone brands, the total value of phones projected to be sold in the domestic market in 2023-24 (FY24) stands at $33 billion, the same level as FY23, as mobile penetration crosses 83 cent and the installed base (feature and smartphones) touches 1,150 million in a population of 1.4 billion.
Unless policy interventions are made, the ICEA expects to end FY27, the last year of the production-linked incentive (PLI) scheme for mobile devices, with $37 billion. Between FY15 and FY19, domestic mobile demand rose at a compound annual growth rate (CAGR) of more than 21 per cent, before slowing down to 4.8 between FY20 and FY23. The growth is projected to slow further to 3.8 per cent in the period from FY24 to FY27.
The Ministry of Electronics and Information Technology’s (Meity) vision document had envisaged that by FY26 mobile device production will reach $126 billion, with $52-58 billion coming from exports and the rest ($68-74 billion) from domestic sales. This will be an unlikely target at the growth rates being projected.
The slowdown also raises questions about the country’s ambition, in the same period, to reach electronics production worth $300 billion, of which $120 billion would come from exports and the rest from domestic sales. These targets depend on mobile phones, which account for 43 per cent of the total electronic production target and nearly half of the export target.
Exports have perked up, thanks to the PLI scheme. Companies such as Apple Inc, through their vendors, have hit export values in excess of their commitment under the scheme. That is why the share of exports in the total production by value is moving up sharply, from 15 per cent in FY22 to 25 per cent in FY23, and projected to end FY24 with a 31.2 per cent share, before rising to a whopping 42 per
cent in FY27.
The ICEA’s projection, based on the current scenario, is that exports would touch only $27 billion in FY27, nearly half of the $52-58 billion envisaged in Meity’s vision document. But that could change dramatically, say mobile device makers, if import tariffs on components and on the sub-assemblies used in the making of mobile phones are reduced or removed altogether. These, they say, are making India uncompetitive in comparison with rivals China and Vietnam.
An Apple is not enough
A study of import tariffs by experts for the mobile industry shows Indian device makers face a cost disadvantage of 7 to 8 per cent on the bill of materials of a phone and 5 to 7 per cent of the cost of the total phone. What it means is import tariffs neutralise the benefits of the PLI scheme, which, in a bid to counter the lower cost of production in China and Vietnam, offers 4 to 6 per cent incentives.
As things stand, in spite of the PLI incentives, India’s gap with China and Vietnam is not fully bridged, leaving a gap of 4 to 5 per cent.
However, if these tariffs are brought down, the ICEA estimates that exports will go up to $50 billion by FY27, inching up to the target in the vision document. The association has asked for a graded reduction across key components.
The government would also need players other than Apple Inc, which accounted for 66 per cent of the mobile exports in April-December 2023, or $7 billion, to weigh in. South Korean giant Samsung, which is also a beneficiary of the PLI scheme, has seen its export growth slow down. Bharat FIH, a Foxconn company that makes phones other than the iPhones, has not met its production targets to be eligible. Many homegrown companies have faltered.
Chinese players, who lord it over the domestic market, have not made serious moves even after being pushed by the government to do so. They argue it is not competitive.
That leaves the finance ministry to strike a balance between global mobile makers that want low or no tariffs on sub-assemblies and components, and homegrown players who argue that without tariffs walls a local supply chain cannot survive.
Many point to the success of printed circuit board assembly (PCBA) for phones, where, despite tariffs rising from zero in FY18 to 11 per cent in FY19 and to 22 per cent FY22, local manufacturers and assemblers have reached a localisation of 96 per cent, which they could not have reached without the tariff protection. However, some say this was because the cost impact of tariffs on the inputs used in PCBA was only 0.2 per cent, encouraging the global value chains to include India.
Mobile device makers say the industry will be giving more than Rs 1.62 lakh crore in five years through incremental GST (goods and services tax) and tariffs to the government, which is three and a half times the Rs 45,000 crore earmarked for the PLI in mobile devices.
The Indian smartphone market’s installed base is around 800 million and that of feature phones 300 to 350 million, say industry experts, covering the bulk of the 1.4 billion Indian population and making India a matured market. Smartphones annual sales have fallen from 200 million in FY20 to 150-160 million a year now, which means only one fifth of the total smartphone population is replacing their phones. Due to the improved quality of phones and increasing prices, the replacement cycle of phones has jumped from 12-18 months to 24-36 months.
Around 80 million new feature phones are sold every year, so a fourth of the consumers are upgrading to smartphones.
“The price difference is still very high — Rs 1,000 for a feature phone compared to six times that for a smartphone,” says a senior ICEA executive.
Counterpoint Research says the share of feature phone users buying used or refurbished smartphones is also growing. The secondary market is around 35-45 million per year, growing at double digits, while the primary market stagnates. At least 75 per cent of this market is under Rs 15,000, so they prefer to buy a three-year-old phone with higher specifications, instead of a new phone with lower specifications. For both, the price they pay is Rs 5000 to Rs 8,000.
If import tariffs are reduced, the cost of production of phones for the domestic market will also come down, and so will their prices in retail, making them more affordable. This could help the domestic market expand. But, more importantly, many are clamouring for a reduction in the GST duty, now at 18 per cent for all phones. Business Standard