Electronics Manufacturing: Market Growth and Demand Drivers Date: 2nd March, 2017

Where is the overall electronics market headed? Market Size in 2020 Current Market (2016): ~USD 104 Billion (in 2016) USD 400 Billion CAGR of 40% over next 4 years CAGR of 15% over next 4 years USD 181 Billion USD ? Billion CAGR of 15% over last 6 years

What are pockets of challenges and opportunities

Slow down in some of the largest contributor segments is impacting the market 4% growth in market witnessed in 2015-16 Computing market is declining year on year 12-15% growth expected in 2016-17 Expected to continue through 2020 5-6% growth expected from 2017-18 to 2020-21

Shares in Total Production of Electronics, 2015-16 In addition, India’s reliance on import continues to be high at about 60% Shares in Total Production of Electronics, 2015-16 Around 60% of the demand for electronic products is fulfilled through imports, while nearly 75%-80% of the electronic components market is dependent on imports Unavailability of local components leads to low value addition/localization

So, where are the opportunities? Other significant segments: Consumer Electronics & LED High growth verticals for 2020 Increased demand for safety, energy efficiency, connectivity and IoT is leading to increased electronics content in vehicles Growth in smart city applications, new LED and Solar PV projects will drive demand for industrial electronics

Solar Powered Projects Digital India Initiative GoI announced programs driving the consumption of electronics products and hence creating more opportunities for domestic manufacturers Smart Cities Project Solar Powered Projects Digital India Initiative Make In India Will drive substantial demand for electronic products including IT hardware, and networking and communication equipment GoI announced programs

What is stopping India from scaling up domestic manufacturing?

Challenges faced by Indian manufacturers that hold them from scaling up the volume Nascent Ecosystem Majority of domestic manufacturing is high level assembly, resulting in low value addition Limited availability of components and other raw material at low-cost and good quality leads to low localization Global competition Traditional electronics manufacturing destinations such as China, Taiwan and South Korea have built significant capacities across manufacturing value chain (SKD assembly, CKD assembly, Semiconductor Assembly & Testing Services) . In addition, emerging (Malaysia, Vietnam) destinations have also built capacities. Infrastructure Issues Power, water good roads & connectivity and logistics – remain as roadblocks Power outage directly affects domestic production Cheap Import Options & Taxation structure Inverted duty structure has been a cause of higher cost and thus making it attractive for OEMs to import components. This is turn lead to depressed demand for domestically manufactured components Lack of domestic demand Limited scale of operations and local component demand due to the nascent product manufacturing in India Component demand in India is quite low due to very limited value addition as primarily last level product assembly takes place in India High Turn-around time Unavailability of component supply, leads to delayed turnaround time and increased production cost

So, what do we need to do to drive the ecosystem?

Areas that will drive growth Market led Need to re-fuel consumer demand for traditional segments – phones, computer, etc Invest in emerging areas of electronics – LEDs, IOTs, solar, etc – to leapfrog the current market Focus on building relevance for electronics Industry Led Drive domestic manufacturing Bring in cost competitiveness – clusters, tax/ duty rationalization, etc Invest in building a diverse and vibrant ecosystem instead of focusing on one area Look for emerging technologies that will allow India to leapfrog

Steps to improve the domestic production scenario 5/28/2018 Steps to improve the domestic production scenario Indian Domestic manufacturing would be cost-competitive only if India develops complete supplier base here to support the local manufacturing need; It can be done by - Creating electronics manufacturing clusters Setting up component manufacturing ecosystem Creating the complete ecosystem for Electronics industry #1 China’s changing business environment is creating a unique opportunity for India – foreign investors should be made aware of Ease of doing business in India – with single window clearance, e-Biz portals Improved infrastructure - development of world-class ports, cargo hubs, highways and railway corridors that will provide greater accessibility Attracting foreign investment for Electronics sector #2 Tax reforms that would help domestic manufacturers and would make them more competitive : Unified Goods and Services Tax (GST) By reducing indirect taxes and import duties Imposing anti-dumping duty Zero duty on imports Stimulating domestic demand #3 Capital subsidy for domestic manufacturer to help them to scale up their production Preferential market access to give preference to domestically manufactured electronics components/products) Judicial selection of target markets based on existing technical capability Setting up component manufacturing ecosystem: Provide priority sector treatment to component manufacturing and provide privileges and sops such as duty benefits and tax exemptions (e.g., tax holiday for 10 years for domestic component manufacturing) Attracting foreign investment - Global electronics companies are shifting manufacturing base from China – most opportune time for India to attract them. Foreign investors can enter either via partnerships with existing local manufacturers OR through greenfield projects   Presence of more MNCs will result in technology transfer and increased production to meet the domestic demand. Creating technology parks/clusters: concentration of suppliers will reduce turn-around time and will boost productivity; Investors should look for setting up IT product parks with integrated supply chain where its companies can actually set up their production plants in association with the Government of India Foreign companies setting up base in India: The foreign companies should come with their vendors for ancillary parts that would eventually help to create an ecosystem in India, which is currently missing; Operating within such an consolidated industry environment will further attract domestic companies to flourish where the complete value chain can exist and support each other. This approach would speed up the domestic manufacturing process and provide the advantage of economies of scale. © 2012 Microsoft Corporation. All rights reserved. Microsoft, Windows, and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries. The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Setting up electronics product park with integrated supply chain – which would help significantly in completing the eco-system and enhancing competitiveness GoI has already initiated several initiatives to attract foreign investment - Investors should be encouraged to set up electronics product parks with integrated supply chain The foreign companies/MNCs should come with their vendors for ancillary parts that would eventually help to create an ecosystem in India, which is currently missing Operating within such an consolidated industry environment will further attract domestic companies to flourish where the complete value chain can exist

Thank You! Biswapriya Bhattacharjee Executive Vice President & Head Technology Research Email: biswapriya.bhattacharjee@imrbint.com