Shifting global supply chains in India due to the rise of mobile exports surge, BofA

India’s mobile phone exports have recently experienced a remarkable surge, making global headlines and positioning the country as a credible alternative in the global supply chain for mobile phones and electronics. The exports have grown at an impressive rate, reaching 2.2 times year-on-year and totaling a significant US$1 billion per month.

Bank of America has prepared a report, co-authored by Amish Shah, Managing Director & Head of India Research at Bank of America.

HIGHLIGHTS

India: a supply chain alternative; 68 global stocks exposed:
India’s mobile phones’ exports (2.2x YoY/US$1bn/month) made global headlines recently. Exports mix in local production also expanded from 16% to 25% YoY. We believe India could be a credible global supply chain alternative for mobile phone/electronics. Success in other sectors is also likely.

We believe India’s efforts to cut imports/step-up exports, could improve its macro-outlook, particularly,

• Cut current account deficit by US$112bn over 5 years,
• Provide stability for rates & INR, and
• accelerate growth for capex/credit /logistics sector.

Besides, it could help diversify supply chains for global brands/contract manufacturing firms. We see exposure for 68 stocks globally on the back of this theme.

Electronics: $158bn market, 1/5th trade deficit; localizing:
India consumed US$158bn of electronics in FY23 (11% CAGR over FY17-23), supply for which, was largely met by imports. At US$77bn, it is India’s second largest import bill &1/5 of its trade deficit. Hence, in-line with India’s broader goal to cut imports/expand exports , the sector has seen increased policy focus. To push localization/exports, almost half of the US$37bn Production-Linked Incentives (PLI) has been allocated to this sector.

Mobile phones: A success story; India prioritizing scale:
Mobile phones are 21.5% of India’s electronics domestic demand pie & are growing faster at 15% CAGR. Mobiles’ PLI scheme, among other policies to fix India’s production cost gap vs peers is already a success: since FY17, mobile phones production/exports are up 3.9x/65x, while imports are down to a third. India’s low production value add at 18% is a key criticism (China/Vietnam: 38%/24%).

However, our analysis suggests 70% of mobile phones’ cost (display/memory/chips) is hard to localize near term as it requires large capex & high-end technology. Analysis of China/Vietnam’s journey also shows that focus on higher scale initially, helped them expand value add ratio long term.

India to meet its FY26 targets of 3x production, 5x exports:
Given India’s focus on scale, its PLI scheme targeted large players: Samsung & contract manufacturers of Apple, which contributed 80% of its US$11bn mobile phones exports in FY23.

We believe India can meet its ambitious target: 3x domestic production/5x exports at US$126bn/US$55bn, by FY26, which could help create a vendor ecosystem overtime.

Policy stability, labour productivity & last mile connectivity, are key factors to watch.

Apple may shift >18% iPhone production to India by FY25. Targets under the PLI scheme may drive Apple to shift at least 18% of its global iPhones production to India by FY25 (7% in FY23, negligible pre-PLI). Apple’s share may expand further if larger scale incentivizes its vendors to also expand in India. Apple could also see share gains (4% now) within India’s mobile phone market on improving affordability of locally made iPhones & shift in favor of premium products. We see India contributing >5% of Apple’s global iPhone sales by CY25 & register 21% CAGR over CY22-25.

CT Bureau