Study on the Electronics Industry in India

By Rajesh Anuragi (196) Romi Narang (197) Ankit Mehta (198) Shilpi Prasad (199) Rut Patel (200)

Introduction
The electronics industry in India dates back to the early 1960s. Electronics was initially restricted to the development and maintenance of fundamental communication systems including radiobroadcasting, telephonic and telegraphic communication, and augmentation of defense capabilities. Until 1984, the electronics sector was primarily government owned. The late 1980s witnessed a rapid growth of the electronics industry due to sweeping economic changes, resulting in the liberalization and globalization of the economy. The economic transformation was motivated by two compelling factors - the determination to boost economic growth, and to accelerate the development of export-oriented industries, like the electronics industry. The electronics industry has recorded very high growth in subsequent years. By 1991, private investments - both foreign and domestic - were encouraged. The easing of foreign investment norms, allowance of 100 percent foreign equity, reduction in custom tariffs, and de-licensing of several consumer electronic products attracted remarkable amount of foreign collaboration and investment. The domestic industry also responded favorably to the politic policies of the government. The opening of the electronics field to private sector enabled entrepreneurs to establish industries to meet hitherto suppressed demand. Improvements in the electronics industry have not been limited to a particular segment, but encompass all its sectors. Strides have been made in the areas of commercial electronics, software, telecommunications, instrumentation, positioning and networking systems, and defense. The result has been a significant trade growth that began in the late 1990s. During recent years efforts have been made to encourage the production and manufacturing of electronics goods in India. As a result of this many foreign companies and domestic firms have started setting up their manufacturing units in India. In this article we will attempt to study the various micro-economic aspects related to the electronics industry in detail.

Demand and Supply behavior

In the past 10 years, the global market has witnessed a surge in demand as economies such as Brazil, Mexico, India and China have opened up and begun rapid development, welcoming globalization with lan. The consumer durables industry has always exhibited impressive growth despite strong competition and constant price cutting, and the first contraction since the 2001 dot-com bust has been due to the global recession. Given the strong correlation between demand for durables (both new and replacements) and income, the industry naturally suffered during the 2008-2009 period. However, projections for current year going forward are very optimistic, as consumers resume spending, and producers launch new enticing variants to grab new customers. Leading players include Sony Corporation, Toshiba Corporation, Whirlpool Corporation and Panasonic Corporation. Developing countries such as India and China have largely been shielded from the backlash of the recession, as consumers continued to buy basic appliances. In fact, China has been ranked the second-biggest market in the world for consumer electronics. Despite the recession, their strong domestic economy and growing high-income population have buoyed demand leading to aggressive market growth.

There is growing interest for new age products such as LCD-TVs and DVD players. Meanwhile, the penetration of the basic, largest dollar items such as ovens, washing machines and refrigerators is also increasing. India too, has witnessed a similar phenomenon, with the urban consumer durables market growing at almost 10 %p.a., and the rural durables market growing at 25% p.a. Some high-growth categories within this segment include mobile phones, TVs and music systems. The Indian consumer durables industry has witnessed a considerable change in the past couple of years. Changing lifestyle, higher disposable income coupled with greater affordability and a surge in advertising has been instrumental in bringing about a sea change in the consumer behavior pattern. Apart from steady income gains, consumer financing and hire-purchase schemes have become a major driver in the consumer durables industry. In the case of more expensive consumer goods, such as refrigerators, washing machines, color televisions and personal computers, retailers are joining forces with banks and finance companies to market their goods more aggressively. In addition, change in policy, such as the WTO FTA in 2005 resulted in zero customs duty on imports of all telecom equipment, thereby improving the pricing and affordability of imported goods.

Elasticity of the market

When we see the latest trend in the price elasticity of demand in electronic items we get to know this is one of the most elastic markets. We can see demand of electronics items in India is growing very high as compared to decreasing in price, which totally shows a perfect elasticity in this area. Price Elasticity of Demand for Mobile Phones Demand for mobile phones in India is price-elastic as a 10% price increase is found to have reduced demand for it by roughly 21%.When mobile service was introduced in India, only the affluent could afford it, owing to high call rates. All the mobile players were incurring huge losses, and then it became very clear that volumes only could bring profitability. And volumes in

a price conscious country like India could be achieved by reducing the phone price &call rates. Gradually, mobile carriers started shifting their focus to mass markets by reducing the phone price by 90%. A simple mobile phone used to cost INR 1200 now costs INR 1000 and sometimes even less than that.

As shown in the figure, we have seen that after 2001 mobile market is totally elastic. Percentage change in the demanded cell phones is much higher than the percentage change in their price. As depicted in graph in 2001 the average selling price of cell phone was around 6000 and the no. of users were around 10 million, but in 2007 the average selling price of mobile was 3000 but the no. of users had increased to 140 million, a huge increment in the no. of subscribers. Price elasticity of demand for computer market When we analyze the market trend of the electronic goods, we can clearly see that the demand of computer is quiet elastic with respect to price.

As shown in the figure, this is a collective result of the APPLE, DELL, HP and LENOVO in past years. If we analyze it thoroughly we will get to know that the demand curve is very sensitive to the Average Selling Price curve. Percentage change in the demand responds very well with respect to the percentage change in the price. As shown in the figure the average selling price has come down from 920 dollars to 720 but at the same time unit volumes has increase from 17000 to 33000 that shows a perfect elastic market.

Government Regulations
Industrial Approval Policy The major highlights of Industrial Approval Policy include the following:

Industrial Licensing has been virtually abolished in the Electronics and Information Technology sector except for manufacturing electronic aerospace and defense equipment. There is no reservation for public sector enterprises in the Electronics and Information Technology industry and private sector investment is welcome in every area. Electronics and Information Technology industry can be set up anywhere in the country, subject to clearance from the authorities responsible for control of environmental pollution and local zoning and land use regulations. Large Industries (where investment in plant and machinery is more than Rs.10 crores) and exempted from licensing are only required to file information in the prescribed Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India and obtain an acknowledgement. Immediately after the commencement of commercial production, Part B of the IEM has to be filed. No further approval is required. Forms can be downloaded from the website of the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry (http://dipp.gov.in). Small Scale Industries (where investment in plant and machinery is more than Rs.25 lakh but less than Rs.5 crores) and Medium Industries (where investment in plant and machinery is more than Rs. 5 crores but less than Rs. 10 crores) are required to register with the District Industries Centre (DIC).

Foreign investment policy A foreign company can start operations in India by registering of its company under the Indian Companies act 1956. Foreign equity in such Indian companies can be 100 percent. At the time of registration it is necessary to have project details, local partners (if any), structure of company, and its management structure and shareholding pattern.

Foreign Trade policy: In general, all electronic and IT products are freely importable, with the exception of some defense related items. All electronic and IT products in general are freely exportable with exception of small negative list which includes items such as high power microwave tubes, high and supercomputers and data processing security equipments. The Import of second hand computers including personal computers and laptops are restricted for imports. India E-Waste Guidelines Indias E-Waste Guidelines, issued in March 2008, identify various sources of electrical and electronic equipment (e-waste) covered by the Guidelines and set out procedures for safe and environmentally sound handling of these e-wastes. The Guidelines serve as best practice benchmarks for all those who handle e-waste, from generators and collectors to transporters, dismantlers, and recyclers, irrespective of the size of the business. Government authorities, in the absence of specific mandatory measures applicable to e-waste, also look to these Guidelines as indicators of baseline expectations for e-waste handlers. Minimum recycling standards and procedures for recycling facilities are outlined under the Guidelines. These standards include a recommendation that proper handling, treatment and recycling of e-waste be provided with the product at time of sale. The Guidelines also indicate that manufacturers should facilitate pick-up services for used e-waste. Among other interesting provisions, the E-Waste Guidelines set forth the threshold limits for the use of certain hazardous substances in designing their products, such as lead, cadmium, mercury, polychlorinated biphenyls (PCBs) and other toxic and hazardous substances for which safe substitutes have been found. There is reportedly growing pressure among governmental and nongovernmental stakeholders for making these thresholds mandatory.

Growth Trends
Currently the electronics industry is growing at a very fast rate. Indias domestic consumer electronics devices market, defined to include computing devices, mobile handsets and video, audio and gaming products, was estimated to be worth about US$29.4bn in 2011 and this is expected to increase to US$53bn by 2015, driven by rising incomes and growing affordability of key products. The electronics consumer market is mainly divided in following segments. Computers This is the biggest segment. This segment has been growing rapidly. It is expected that the computer hardware and PC sales in 2010 grew by 30%. This growth trend is expected to continue even for 2011. This segment has shown consistent growth, with an exception during 2009, due to the effects of global economic slowdown. This can be seen from the table below. It shows the revenue from the sales of computers in India during the past few years.

2007 Domestic Computer Hardware sales (USD$ mn) Domestic PC sales (USD$ mn)
*From BMI

2008 7,303 5,842

2009 6,680 5,344

2010 8,414 6,816

2011 9,478 7,696

6,671 5,337

The Indian addressable market for PCs (including notebooks and accessories) will be worth around US$7.7bn in 2011, up from US$6.8bn last year. The addressable market is expected to grow around 17% Y-o-Y. Growth was robust is due to the new products and promotions of the computer manufacturing companies. The main driver was the consumer PC segment, although business demand also contributed. Consumer PC demand was faster to recover from the economic slowdown, with much market got the growth it required. AV This is another major segment in the electronics industry. Indias AV devices market is projected at about US$10.5bn in 2011. The market will be driven by growing affordability, rising incomes and more flexible consumer financing. Table shows that the revenue in this segment has been consistently growing during the past years. During 2010, it has showed a growth of 20% Y-o-Y. Video applications account for about 76% of the total segment, driven particularly by digital TV sets and other products such as set-top boxes. TV sets remain the core product in the AV category, with demand for color TV sets estimated at about 21mn units in 2012. There is still room for organic TV set market growth driven by first-time buyers, as household TV penetration is estimated at less than 60%. Sporting events in particular the cricket tournaments gives a boosts to the TV market. As sales of digital TV sets grow, a nascent market is emerging for set-top boxes and this category is expected to record strong growth in the coming period. 2007 Domestic consumer electronics sales (USD$ mn) LCD TV sets (000) Digital Cameras (000) 5,230 459 3,335 2008 6,195 771 3,904 2009 7,454 1,526 4,946 2010 8,939 2,442 6,051 2011 10,531 3,726 7,339

Digital cameras are still expensive, but middle-income consumers are more ready to upgrade their cameras to digital or to buy a better digital camera when new features become available, especially as prices decline. This is the main reason for the increase in the sales of the Digital Cameras in India. Meanwhile, it is important to note that the fastest-growing segment in 2010 was demand for high-end DSLR cameras, which was on course to achieve triple-digit growth of over 500%. Revenues from audio devices were estimated at about US$2.3bn in 2011. Audio separates such as radios, MP3 players, speakers and CD players are the biggest audio category. Radios remain the dominant electronic source of information and entertainment in rural India, with annual unit sales still more than 5mn. Meanwhile, the popularity of portable devices such as MP3 players and laptops has undermined demand for home AV devices, particularly in urban areas. The

popularity of mobile phones with MP3 players may mean slower growth for high-end standalone audio devices. Mobile Handsets Another major and rapidly growing segment in the electronics industry is that of the Mobile handsets. Indian market handset sales are projected by BMI at 184mn units in 2011. The underlying driver is the staggering growth rate of mobile subscribers, with mobile phone population penetration of 84.9%. In 2009 the market continued to grow despite the global economic downturn, with much of the growth coming from rural subscribers and the business segment. The handset replacement rate is expected to pass 25% in near future. Domestic handset sales (USD$ bn) 2007 2,836 2008 3,902 2009 6,427 2010 8,232 2011 9,425

Table shows that there has been consistent growth in the mobile handsets segment. With the introduction of the 3G technology in the mobile networks, and thus the sales of 3G phones. This segment will continue to grow further. Two-third of India's population resides in rural parts of the country. The telecoms network still only connects about 4,500 towns and cities, and 65,000 villages in the country. So with the increase in connectivity in these areas the demand for mobile handsets is expected to continue growing.

Type of Market and Competitive behavior

An oligopoly market is a market dominated by a few producers, each of which has control over the market. It is an industry where there is a high level of market concentration. However, oligopoly is best defined by the conduct (or behavior) of firms within a market rather than its market structure. The concentration ratio measures the extent to which a market or industry is dominated by a few leading firms. Normally an oligopoly exists when the top five firms in the market account for more than 60% of total market demand/sales. Hence Electronics goods and Computer Hardware industry is considered as Oligopoly market organization.

Considering electronics goods and Computer Hardware industry as oligopoly market we analyze with Cell phone ad LCD TV. The pie chart above for the mobile handsets industry, it clearly indicates that there are few major players in this market such as Nokia or Samsung. The four largest firms Nokia, Samsung, LG and Micromax in the market occupy greater than 80% of the market. A similar structure can be observed in the other segments of the electronics industry. The small number of firms let oligopolies to set prices and output levels, to some extent. However, because there are competitive firms, oligopolies must take note at how they react to its change in price, output, product or advertising. A similar market structure can be found for the computer segment also. The top three vendors account for more than 40% of the brand PC market. HP claimed a market share of around 17.3% in Q4 2010, ahead of Dell with around 14% and Acer with 11.5%.