EMS providers, electronics OEMs target India and China for expansion

By Barbara Jorgensen, Senior Editor -- 1/2/2007

Even though the electronics manufacturing industry is still facing many challenges in China, OEM and EMS companies are looking to India as their next target for expansion.

At its recent Quarterly Forum, supply chain research firm and consultancy Technology Forecasters Inc. (TFI) reported that about 20 percent of the 400 electronics companies  it recently surveyed say they plan to manufacture in India within the next two years. This is in addition to the 25 percent of respondents that already have some manufacturing capacity in the region.

At the same time, TFI reports that attendees at the forum expressed considerable frustration about the tactical measures they are having to take to comply with environmental regulations such as China RoHS and finding profitable and socially responsible ways to manufacture the low-volume, high-mix products that represent the next wave of electronics outsourcing globally. “I am so tired of the fire drills for WEEE, RoHS and now China RoHS,” one attendee from an OEM company complained.

Still, many OEMs and their EMS partners are looking to India for some of the same reasons they moved to China: a growing demand for consumer products and low labor costs. Merrill Lynch analyst Steve Fox, who attended the TFI conference, cites EMS player Solectron.

“Solectron believes that the primary drivers for expansion include domestic market demand; high import duties; proximity to design centers; and contractual requirements, which in some cases require companies to manufacture in India to win business,” Fox says. “Solectron believes there are significant near-term manufacturing opportunities in the consumer market, such as mobile phones; the industrial market; and the telecom market, including telecom infrastructure, in India. Lower labor costs are also a factor driving manufacturing to India. For example, although indirect labor costs in India and China are comparable, Solectron estimates that direct labor costs are 35 percent lower in India than in China (70 cents per hour versus $1.07 per hour).”

However, warns Technology Forecasters, the question for OEMs and EMS providers alike is: Just how big is India’s consumer electronics market? “That depends on your assumptions about the size of the middle class,” explains Bruce Rayner, TFI’s vice president of research. “For most electronics goods, significant purchasing doesn’t occur until household income reaches an income level of approximately $4,500 per year. The number of Indian households earning $4,500 a year or more today is about 18 million, or slightly fewer than 100 million people. Over the next five years, that figure is expected to double, with dramatic consequences for the consumption of electronic goods, including cell phones, televisions and refrigerators.”

The next wave of RoHS

The electronics industry is still facing challenges from its last great expansion into China. TFI recently conducted a study of 127 OEMs, which gave their own companies a grade of C for keeping up with new product-focused substance and recycling legislation and regulations worldwide.

“Our members see the business value of approaching ‘design for environment’ proactively so that they are ahead of customers’ and regulators’ increasing requirements,” says TFI president Pamela Gordon.

There is some overlap between RoHS and China RoHS, according to Michael Kirschner, principal of consultancy Design Chain Associates, but the differences are significant. Companies must prepare if they want to market products to the Chinese, according to Kirschner. For example, the requirement for product testing by domestic Chinese facilities will have significant consequences that aren’t relevant to the EU’s RoHS. The deadlines are fast approaching (Phase 1 will be implemented March 1, 2007), but many of the most basic requirements of the law are not finalized, he says.

Environmental regulations continue to provide both risk and opportunities to EMS providers, according to Merrill Lynch’s Fox. “We believe that uncertainty about China RoHS and OEMs’ lack of preparedness may present an opportunity for EMS providers to capture additional business as OEMs seek assistance,” Fox explains. “For example, Celestica views environmental regulations as an important market opportunity and has focused on expanding its green service offerings.”

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