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Saurabh Gupta, Group CFO, Dixon Technologies, says “there’s a $10 billion opportunity in IT hardware for India. $10 billion worth of IT hardware products are imported into India. So, it is a large opportunity for import substitution and if India is able to do a good job as an industry, if you are able to generate that operating leverage and cost competitiveness, in a few years, yes, it can potentially get exported from India as well.”
Gupta also is confident that achieving a growth rate of 35-40% annually should not be a challenge over next few years.
On EMS, India’s position & Dixon’s share
Saurabh Gupta: If you look at the whole electronic manufacturing space, India’s share in the global electronic space is just 2%. But if you look at the whole government policy framework, as far as the labour pool availability and labour cost in India is concerned, we are looking at a very significant growth potential in this particular sector. The reason is increasingly, brands want to outsource more and more manufacturing and not only manufacturing, they want to deepen the level of manufacturing and in our sense, it will be more design-led manufacturing for us and also, the government policy framework has been very supportive.
So, the government started encouraging domestic manufacturing by first rationalising and increasing the duties on the finished products that were imported, because electronics is one of the largest import bills for India. Then, they came out with something called a PLI scheme. They have recently rolled out the semiconductor scheme and there is also a programme of the government called phased manufacturing programme, whereby every year they are putting duties on the components so that more deepening of manufacturing happens in India.
Clearly, in my view, India is sitting on a large opportunity. We have a young, working age population, low labour cost and as manufacturing in China is getting expensive day by day, and clearly we are looking for a large share in the global electronic manufacturing space.
So, India’s share is 2% and analysts have predicted that by the end of 2030, that share should eventually go to higher single digits and by 2040 that number should go to almost 20-odd percent. That number in itself can be almost $370-380 billion by 2040. China today dominates and it accounts for almost 45%. So, I feel we will increasingly keep taking more and more wallet share from China.
That China plus one strategy is going to start working out much higher now because we have already been seeing that in other industries that we talk about. Is it finally time that this could start working out for Indian companies and we could be an export hub now?
Saurabh Gupta: Yes, clearly China plus one will play out and is already playing out. One, China is getting expensive. If you look at the labour cost comparison between India and China, China is almost six times more expensive and their costs are just ballooning. So, clearly, the low-end products of the value chain will keep shifting out of China to India, because of its low labour cost, a large domestic market, and also availability of a lot of talent and resources in India.
Clearly India is a preferred destination. Now increasingly, because of geopolitical tension, the brands also want to de-risk from China. They want to diversify their supply chains and India is becoming a more and more preferred destination. I think China plus one will continue to play out in years to come.
Let us talk about PLI schemes that you highlighted. For Dixon, the mobile scheme, the PLI scheme, that really led to a big push and today 68-70% of our revenue comes from this. How did it help the company and how should other companies actually start developing themselves? For EMS companies, a lot of focus has come in on this PLI scheme. How does it work out for Dixon and what are the other companies in competition?
Saurabh Gupta: Clearly, PLI scheme is a big game changer, especially for our industry and for us and mobile PLI has really played out well. From a net importer of mobile phones, India started exporting mobile phones worth $15 billion and for us also, our significant growth will come from mobile as a vertical. So, the objective of PLI is a couple fold. One, they want India to become a manufacturing hub, not only for serving the large domestic market but also the global markets. They want to create a component ecosystem. They want to boost exports from India. And also, within the same time, they are incentivising the foreign and domestic investment to set up manufacturing in India and also within that they have created a separate carve-out for domestic companies.
So, they want certain domestic global champions to come out of this PLI scheme and Dixon is definitely one of them. We had a beneficiary of five PLI schemes, mobile, IT hardware, telecom and networking products, and two on the component side, lighting and AC inverter controller boards. So, definitely it has played out well.
If you look at the large players like Apple and Samsung, they have made deeper commitments to India, not only on the final mobile manufacturing device, but also they are now gradually working on creating a component ecosystem in India. And our experience has been that once a scale gets created, the component ecosystem also evolves, like the way it has happened in automotive sector, where India has become a manufacturing and export hub. I think so clearly we see that that would get replicated in the electronic sector as well.
When can we expect the electronic sector to actually reach that big and be like the auto sector that we are talking about?
Saurabh Gupta: Things are moving very fast. As I mentioned, from a single digit, only 2% of a $1 trillion global EMS market, and assuming the global EMS market will continue to grow, if we are able to take higher single digits by 2030 and almost double digit by 2040, we are looking for significantly higher growth. Companies like Dixon already have a first mover advantage, already have a large scale and the ability to scale up fast. We have backward integration, designing capabilities as well. So we are well positioned to take a large opportunity of that overall pie.
Is it necessary for EMS companies that will come in to have this backward integration? Is it going to be key or is it okay if some companies do not have it? How is the growth with backward integration and without that?
Saurabh Gupta: Over a period of time, what happens is that if you have a scale and size, you need to build up this backward integration and designing capabilities. My sense is it really enhances your stickiness with the consumer because the consumer or the principal customer of yours also is demanding you to get more into more backward integration and also enhance your designing capabilities. So, that becomes a bigger differentiator for you and creates a specific moat around your business. So, increasingly, in Dixon, we want to migrate more and more to backward integration and also focus more and more to our own design solutions.
Of late, there has been a lot of focus on the EMS industry. Mobiles and EMS together is 68% contribution in FY23. How much is just the EMS contribution? How does that bifurcation come into that?
Saurabh Gupta: We should be closing at somewhere around Rs 18,000 crore revenues, out of which 50-55% should come from mobile as a vertical, which is broadly 9,000-9,500 crore and Rs 1,000 odd crore is broadly the EMS activity. The EMS vertical is really growing for us. So, whether it is telecom, whether it is IT hardware, whether it is a variable sector which is also a high growth vertical for us, all these verticals are growing, but the largest trigger for growth would come from mobiles. We have added a lot of customers in this category. We have started exporting for our anchor customers in this category and we have a very large order book in this category.
When you talk to so many of these clients, you get inquiries. Which is the hottest segment in Dixon that is getting the maximum number of inquiries? Is it going to be mobiles or even other of your segments are picking up that inquiry pace that we are seeing?
Saurabh Gupta: In every vertical that we have, it is an important critical process just to keep adding more customers and also continuously take a higher wallet share from customers. Increasingly, we are seeing the trend towards outsourcing because the brands want to focus more on branding and distribution. But within all the verticals, I would say the largest order book that we would have is in mobiles, where we have added a lot of customers.
The next biggest opportunity for us would be IT hardware where the government has again come out with a PLI. They have increased the budgetary outlay, the incentive outlay. They have also put some kind of a restriction on imports because India imports a lot of IT hardware products and unlike mobile manufacturing, where the government resorted to tariff barriers to encourage their domestic manufacturing, here since it is an IT one product, so the government resorted to non-tariff barriers by putting some kind of a restriction on imports.
So, IT hardware over the next two-three years can also be a $1 billion opportunity for us.
For overall as an industry for India as well?
Saurabh Gupta: For India as well. Yes, so it is an opportunity of almost $10 billion. So, $10 billion worth of IT hardware products are imported into India. So, it is a large opportunity for import substitution and if India is able to do a good job as an industry, if you are able to generate that operating leverage and cost competitiveness, in a few years, yes, it can potentially get exported from India as well.
Where’s the industry’s next leg of growth? Obviously IT hardware is an opportunity, but what could be the growth driver for EMS industry? Where could one see maximum growth in the next five years, six years?
Saurabh Gupta: As far as exports is concerned, we have only scratched the surface as an industry. In our scheme of things also, only 10% of our revenues come from exports and majorly it is driven by mobiles. But increasingly we are getting a lot of inquiries on exports because the brands want to diversify their supply chains from China. China is very deeply embedded in world supply chains.
You have a lot of marquee clients that have come in as well in the last year as well.
Saurabh Gupta: So, clearly a lot of brands are committed now to India, first for the Indian market and then they want to make India as a hub for their global requirements as well. For example, Apple also. Apple has already started sourcing a significant portion of its requirement from the Indian market. Similarly, we see that happening for other brands as well.
So, one, our exports should be as a percentage of revenues on much higher revenues should continue to grow and we see Dixon in next five years as a company, one on a much larger scale in terms of revenues and as a company which are very much deep into components, have some kind of a designing capabilities and a decent portion of our revenues coming from exports, so this is what we see Dixon.
Decent portion means how much? How much would you say? Like right now if we are at around 9-10%. Where would you see us?
Saurabh Gupta: Our wish list and our target is that at least 20-25% of our revenue should come from exports.
And that is in the next five years.
Saurabh Gupta: Next five years.
At least our ambition is and our target internal target is that.
Saurabh Gupta: That is right.
Obviously like you were mentioning before as well, FY24 approximately will be ending at Rs 18,000 crore revenue for the company. Now with this export push also, with the overall schemes that are coming into play, what is the growth rate one could expect from the company? Is it like this 40-50% that we are seeing?
Saurabh Gupta: We feel confident that achieving a growth rate of 35-40% annually should not be a challenge. Clearly, we are sitting on a large opportunity. The opportunity pool in the categories that we operate is very immense and we are also looking at new categories. We are looking at PCBA for industrials and so even that is a very high growth category. So, yes, my sense is 35% to 40% kind of an annual rate should be achievable for us.
How is the pricing, because normally we say the pricing matters and that is why they kept going to China to get it produced as well. So, in terms of pricing now, how does India stand versus other competitive countries?
Saurabh Gupta: My sense is in a lot of categories, we have achieved that kind of a cost structure. We are able to compare ourselves with China. The one thing which is lacking in India as of now and the reason why the government is giving up PLI and hand-holding you for a period of five-six years is basically the component ecosystem. China has of course built a component ecosystem over the last 12-15 years apart from the infrastructure that they have.
In my view, all those other things are falling in place – a good infrastructure in India, the advantage of low labour cost. But I think the one piece which is missing is a component ecosystem. So, every year we are seeing that the value addition in India is increasing, whether it is our lighting products, washing machine, refrigerators, or whether it is mobile phone. So, it is increasing year on year. But yes, to achieve and go to the similar level where China is today, I think so it will take some more time. So, one thing which is lacking and that is the reason why the government is also giving you a window of five-six years.
It gives a bit of support. to the companies as well. How is Dixon looking at the semiconductor market? Is that something that we would look at?
Saurabh Gupta: As of now, we have absolutely played full. We have too much on the card, especially mobiles, IT hardware, and even other verticals as well.
In semiconductor, one, you need to have a very strong partner on the technology side and plus it is a very high capex investment and it has long gestation projects for all this kind of semiconductor projects. As of now, Dixon’s play will not be in the semiconductor because we already have an order book and a committed capex under the PLI or outside the PLI.
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