News Excerpt:

The Indian Cellular and Electronics Association (ICEA), an industry body representing mobile and other electronics assembly and manufacturing units, has called for a reduction in tariffs on certain smartphone components.

The Reasons Behind Their Demand:

• The primary reason for these demands is to reduce input costs for smartphone assembly units.
• It is because of the saturation of the domestic market. Nearly every phone made in India is assembled domestically, with the surplus being exported.

• • In the financial year 2022-23, smartphones were the fifth largest classifiable commodity exported, compared to their rank of 178 in 2015-16. 
  • With domestic demand fulfilled, the need for high component tariffs has diminished.

• Another reason cited by the industry is the nature of the specific components that it is seeking duty cuts for.
• Printed Circuit Boards (PCBs) and sub-assemblies, which are highly complex and miniaturized inputs for smartphones, are not close to being manufactured in India, increasing costs for local assembly operations.
• The overall aggregate demand necessary for domestic investment in some inputs is much larger than the demand created by the prevailing production level.
• This means that the current tariff levels on PCBs (20%) and other inputs are not leading to increased domestic production of these components; instead, they are raising assembly costs since these components have to be imported anyway.

Global Market

• The industry is framing these proposed changes as a "competitive re-alignment" to keep up with other major electronics manufacturing giants like China, Vietnam, Thailand, and Mexico.
• Vietnam's "bonded zones," which offer special duty exemptions, allow assembly and manufacturing units based there to benefit from much lower tariffs on component imports.
• If Indian companies like Micromax and Lava want their phones to be competitive in the global market, they should not think of import substitution when selecting parts and components.

Case Study: China’s manufacturing market

• When China started assembling smartphones 15 years ago, Chinese firms' only contribution was labor-intensive assembly, accounting for about 3.6% of the total manufacturing value addition.
• At present, Chinese firms have captured about 25% of the manufacturing value added by providing batteries, camera filters, glass back-cover, stainless frames, printed circuit board assembly, and other parts, which are technology-intensive and offer higher value addition than pure assembly services.

What should be done?

• The ICEA emphasizes the need to scale up smartphone production, which can only be achieved by increasing exports. 
• To increase exports, smartphones must be competitive with those from China and Vietnam, which requires reducing tariffs and maintaining stability in the tariff regime.
• Smartphone assembly units have benefited from the production-linked incentive (PLI) scheme for mobile manufacturing, which subsidizes phones that are domestically assembled.
• However, the ICEA argues that it does not support tariff cuts for components widely manufactured in India, such as open cells and LED light parts.