INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN An IESA - Frost & Sullivan Report & SULLIVAN FROST

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1 FROST & SULLIVAN INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN An IESA - Frost & Sullivan Report Supported by the Department of Electronics & Information Technology, Ministry of Communications & Information Technology Government of India

2 Copyright 214, India Electronics & Semiconductor Association 2 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

3 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 Report released by Shri J. Satyanarayana, IAS Secretary Department of Electronics & Information Technology Ministry of Communications & Information Technology Government of India CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 3

4 Copyright 214, India Electronics & Semiconductor Association India Electronics & Semiconductor Association Prestige Terminus II, Unit-G-2, 91, Ground Floor, Civil Aviation Road, (HAL Old Airport Exit Road), Konena Agrahara, Bangalore Phone: Facsimile: research@iesaonline.org Website: IESA is the premier trade body representing the Indian Electronic System Design and Manufacturing ESDM industry and has represented it since 25. It has over 2 members - both domestic and multinational enterprises. IESA is committed towards building global awareness for the Indian ESDM industry and supporting its growth through focused initiatives in developing the ecosystem. This is through publishing credible data, networking events and alliances with other international associations IESA works closely with the Government as a knowledge partner on the sector, both at the centre and at the state level. The material in this publication is copyrighted. No part of this book can be reproduced either on paper or on electronic media without permission in writing from the publisher. Requests for permission to reproduce portions of it should be sent to the IESA at the above address. First print: January 214 Published by: India Electronics & Semiconductor Association, Bangalore Edited by: Debanjan Sinha, IESA Designed by: Cocoon Creative Concepts, Bangalore COPYRIGHT All content included in this study, such as text, graphics, logos, images, data compilations, etc. is the property of India Electronics & Semiconductor Association ( IESA ). The study is for customers internal use and not for general publication or disclosure to third parties. No part of this study may be given, lent, resold, or disclosed to non-customers or exploited for any commercial purposes. Furthermore, the Study in its entirety or any part cannot be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written consent of IESA. DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY This study is provided by IESA on an as is and as available basis. IESA has provided information that is provided by market participants, survey respondents and secondary research of publicly available information. IESA takes no responsibility for any incorrect information supplied to us by market participants (manufacturers or users). Quantitative market information is based primarily on interviews and therefore is subject to fluctuation. No claims are made for the accuracy or applicability of the information to any specific situation. IESA makes no representations or warranties of any kind, express or implied, as to the information, content, materials, etc., included in this study. The user of the study shall do so at the user s sole risk. In the event the user intends taking any steps that could have an adverse effect on the users business, IESA expressly states that the user should consult its legal, tax or other advisors, in order to protect the interests of the user, which maybe specific from case to case. It is emphasized that IESA has participated in preparation of this study in an independent manner and should not be construed as necessarily being reflective of the views or position of any individual member company of the IESA or of the representatives of such member companies that may serve on the IESA s executive council or other member forums. To the full extent permissible by applicable law, IESA disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. IESA will not be liable for any damages of any kind arising from the use of this study, including, but not limited to direct, indirect, incidental, punitive, and consequential damages.

5 Indian ESDM Market ANALYSIS OF OPPORTUNITY AND GROWTH PLAN An IESA - Frost & Sullivan Report Assessment of challenges and identification of steps to develop ecosystem and increase indigenous value addition for top 25 high priority electronic products and corresponding components market Supported by the Department of Electronics & Information Technology, Ministry of Communications & Information Technology Government of India

6 Acknowledgements The research report on the Indian ESDM industry will be incomplete without acknowledging the contribution of all the individuals associated with this exercise. These individuals have been untiring in their efforts to bring in their wealth of experience and knowledge base to add value to the exercise. The research exercise could leverage their acumen and count on their unwavering support till the stage of its completion. India Electronics & Semiconductor Association and Frost & Sullivan would wish to thank them wholeheartedly for their valuable time and guidance whenever we needed them.

7 MESSAGE The India ESDM industry presents a huge opportunity and is expected to emerge as a vital contributor to the nation s economy. While we continue to dominate the high-end semiconductor design space, we are also seeing a major shift in focus from just design to end-to-end product conception and manufacturing to truly dominate the global ESDM industry. The Department of Electronics and Information Technology (DeitY), Government of India has been actively working towards reviving indigenous manufacturing in a big way. IESA has also played a prominent role in supporting the Government in its initiatives. In order to realize the vision of the ESDM industry, we would need to promote the opportunities presented by the ESDM industry to attract investments in the sector. As the electronic products have a pervasive role in all industry verticals, it is desirable that the industry reports on the market opportunities in key products are carried out, which would serve as useful reference to the various stakeholders, and, thereby, help them in taking informed decisions on their plans of investing in India. The IESA - Frost & Sullivan Report 214 on the Indian ESDM Market- Analysis of Opportunity and Growth Plan is a right step in this direction. This report includes an extensive study and analysis of the top 25 high priority electronic products and their related components in the Indian ESDM industry. This report also gives insightful information on resolving the current challenges and the recommendations to move ahead. I congratulate DeitY and IESA for putting together this important and timely report for the benefit of all the stakeholders of the Indian ESDM industry. I am sure it will help us in achieving our vision of taking India to global leadership in the ESDM industry. (KAPIL SIBAL) Room No : 15, Sanchar Bhawan, 2 Ashoka Road, New Delhi Phone: , Fax:

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9 Message With the Indian ESDM industry is expected to touch the USD 4 billion mark in the coming decade, the Government of India has identified the electronics hardware manufacturing sector as a major thrust area for the country. IESA has done a commendable job of catalysing the growth of the domestic ESDM industry and is relentlessly working towards this objective. Taking cognizance of the demands of the economy and the industry, the Government of India has taken a number of steps to promote the Indian ESDM industry. The Department of Electronics & Information Technology (DeitY) and IESA, as the Knowledge Partner to the Government, have brought out the report on Indian ESDM Market Analysis of Opportunity and Growth Plan. This report identifies the top 25 electronics product markets with large opportunities and draws a roadmap for their growth. It also identifies the major components used in these products and evaluates strategies to promote their ecosystem in India. I am sure that this credible report would be extremely valuable for decision makers both in the government and the industry. I congratulate DeitY and IESA for their excellent work in putting together this informative and timely report. (J. Satyanarayana) New Delhi January 2, 214

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11 W-11/68/213-IPHW January 6, 214 Message The Indian ESDM industry is poised for exponential growth. India, as one of the biggest markets for electronics products, is at a crucial juncture today. With companies from the world over vying for their share of the pie, Indian companies today have the opportunity to dominate the global ESDM landscape by catering to this enormous local demand. Product innovation and manufacturing are the keys to capturing the market and establishing market leadership. In this regard, the IESA-Frost & Sullivan Report on Indian ESDM Market Analysis of Opportunity and Growth Plan could not have come at a better time. With awareness about domestic manufacturing at a new high, Indian decision makers and the investors are looking for credible data on various products and components that make up the ecosystem. The IESA-F&S Report conducts an extensive study and SWOT analysis of the top 25 high priority electronic products and their related components. This Data is also invaluable for the industry and the investors looking to capitalize on the opportunities available in the Indian ESDM industry. The recommendations in the report will also help us to leapfrog the challenges and quickly respond to market dynamics. It is indeed heartening to note the single-minded focus that IESA brings to promote the growth of the Indian ESDM industry through its various initiatives. I complement IESA in bringing out this timely report. Your s Sincerely New Delhi January 6, 214 (Dr. Ajay Kumar)

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13 Table of Contents Foreword 15 Preface 17 Executive Summary 19 Top 1 Products and Components Markets to Focus for Near Term Local Value Addition Improvement Mobile Handsets - Product and Ecosystem Analysis 39 Flat Panel Display TV - Product and Ecosystem Analysis 45 Notebooks - Product and Ecosystem Analysis 49 Desktops - Product and Ecosystem Analysis 53 Digital Camera - Product and Ecosystem Analysis 59 Inverters and UPS - Product and Ecosystem Analysis 65 Memory Cards and USB drives - Product and Ecosystem Analysis 71 4W EMS - Product and Ecosystem Analysis 75 LCD Monitor - Product and Ecosystem Analysis 79 Servers - Product and Ecosystem Analysis 85 Base Stations (BTS) - Product and Ecosystem Analysis 91 Power supplies - Product and Ecosystem Analysis 97 Set Top Boxes - Product and Ecosystem Analysis 11 Printers and MFDs - Product and Ecosystem Analysis 17 Router/Switches - Product and Ecosystem Analysis 113 Car Radio - Product and Ecosystem Analysis 117 CFL - Product and Ecosystem Analysis 121 Energy Meters - Product and Ecosystem Analysis 125 Digital Instrument Clusters (DICs) - Product and Ecosystem Analysis 129 Smart cards - Product and Ecosystem Analysis 135 GPON ONT - Product and Ecosystem Analysis 141 Tablets - Product and Ecosystem Analysis 145 LED Lighting - Product and Ecosystem Analysis 151 Payment Terminals - Product and Ecosystem Analysis 157 2W Ignition - Product and Ecosystem Analysis 163 Appendix

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15 Foreword The Indian electronics system design and manufacturing (ESDM) industry is at a huge inflection point. From being predominantly consumption driven, the Indian ESDM industry has a major potential to become a design led manufacturing industry. Concerted efforts from both the Government and the industry are required to propel the Indian ESDM industry into one of the critical GDP contributors in the near future. The Indian Electronics and Semiconductor Association (IESA), a premier representative body for the ESDM industry in India commissioned a full-fledged research in its efforts to map the current status and future opportunities in the industry. The objective of the report was to establish the current status of all the value chain components in the ESDM industry and identify the growth trends. This exhaustive report developed by IESA s consulting partner, Frost & Sullivan, and released in early 213 is the only authentic detailed report on the overall ESDM industry in India. As a next step, there was the pertinent need to identify the high growth product markets within the overall electronics industry and do a deep dive evaluation of the existing ecosystem for these products. This study would help identify the appropriate initiatives needed for further developing the ecosystem for these high priority products. The Department of Electronics and Information Technology (DeitY) has been very active in formulating and announcing various policy measures aimed at developing the ESDM industry in India. To ensure the effective implementation of these policies and for directing the focus in the right direction, this extended analysis of the top 25 high priority electronic products was commissioned by IESA. The report on the ecosystem SWOT analysis of the top 25 high priority products covers the following product markets: 1. Mobile Phones 2. Flat Panel Display (FPD) TV 3. Notebooks 4. Desktops 5. Digital Cameras 6. Inverters and UPS 7. Memory Cards and USB Drives 8. 4W EMS 9. LCD Monitors 1. Servers 11. Base Stations 12. Power Supplies 13. Set Top Box 14. Printers and MFD 15. Routers and Switches 16. Car Radio 17. CFL 18. Energy Meters 19. Digital Instrument Clusters 2. Smart Cards 21. PON, GPON ONT 22. Tablets 23. LED Lighting 24. Payment Terminals 25. 2W Ignition

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17 Preface IESA is today recognized as the most credible voice of the Indian ESDM industry. As the knowledge partner to the Government of India and the foremost trade body representing the interests of over 2 member companies in the Indian ESDM landscape, IESA regularly undertakes research and publication activities. The IESA- Frost & Sullivan annual report on the Indian ESDM industry is one such report that is much awaited and widely referred by decision makers in the government as well as the industry. The IESA- Frost & Sullivan report 214 is the seventh publication since its inception in 25. This year we have conducted an extensive study and SWOT analysis on the Top 25 high priority electronic products and their related components in the Indian ESDM industry. As we aggressively promote indigenous manufacturing and reduction of our dependence on imports, this report aims to uncover the challenges associated with manufacturing these top 25 electronic products and associated components domestically. The findings of the report are interesting. And as always, we have proposed a range of measures to overcome these challenges and kick-start high-value addition manufacturing activities in a big way in India. We sincerely hope that you will find these facts and statistics beneficial for strategic decision making and join us in taking the right steps to further enrich the Indian ESDM industry. Mr. Sanjeev Keskar Chairman Mr. PVG Menon President

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19 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 Executive Summary The Indian electronics system design and manufacturing (ESDM) industry is one of the fastest growing sectors in the country. Witnessing uninterrupted growth, the ESDM industry in India is globally renowned for its consumption potential. Changing global landscapes in electronics design and manufacturing capabilities, and cost structures have turned the attention of global companies towards India. Companies from around the world are looking to build local capabilities in India not just to serve the resident market but also to cater to overseas markets. This has resulted in the development of indigenous capabilities across the ESDM value chain in India. The different segments within the ESDM industry are at varying stages of development. Similarly, various electronics applications markets such as telecom electronics, automotive electronics, consumer electronics and industrial electronics, are at different stages of ecosystem development. The focus is currently on providing the necessary impetus to take advantage of the dormant capabilities across the various electronics markets and developing the missing links so as to make the local ESDM sector globally competitive. The Indian ESDM industry was estimated to be $68.31 billion in 212. The impressive guidance between 211 and 215 for this industry is expected to result in a Compound Annual Growth Rate (CAGR) of 9.88 percent. The corresponding size of the industry by 215 is anticipated to be $94.2 billion. The following chart illustrates the total ESDM industry market growth: India ESDM Industry Forecasts (21-215) Revenues ($ Billion) Base Year: 211 Source: IESA-Frost & Sullivan The ESDM industry in India comprises the following four key components: 1. Electronic Products 2. Electronic Components 3. Semiconductor Design 4. Electronics Manufacturing Services (EMS) Of the above, the first two represent products while the remaining highlight the services opportunities catering to the domestic and export markets. CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 19

20 Developing the Ecosystem is Crucial for Bridging the Supply Demand Gap Much of the domestic electronics consumption in the country is served through imports. This does not bode well for the economic health of the country in the long term. Electronics imports, which are currently the third highest, next only to crude and gold, accounted for nearly $3 billion in 212, and are forecasted to scale past $5 billion in just 3 years. From a detailed assessment of the electronics market, total market (TM) was estimated to be $44.81 billion in 212, representing a growth of 7 percent over the previous year. The TM is expected to grow at a CAGR of 11.5 percent and reach revenues of $64.85 billion by 215. Total domestic market (TDM) for 212 was estimated to be $17.7 billion, representing a growth of 11 percent over 21. Growing a CAGR of 1.4 percent, the TDM is expected to scale to $22.66 billion by 215. The chart below represents the TM and TDM forecasts for the Indian electronics market. India Electronics Product Market: TM, TDM Forecasts (21-215) CAGR ( ) TM: 11.5% TDM (overall): 1.4% TDM (Low/Med value add) : 12.3% TDM (High value add): 3.9% Total Domestic Manufacturing (High Value Add, $ Billion) Total Domestic Manufacturing (Low & Medium Value Add, $ Billion) Total Market ($ Billion) Base Year: 211 Source: IESA-Frost & Sullivan Note: Total market or TM refers to the domestic electronics consumption in India which therefore includes all locally manufactured and locally consumed products as well as imports. Total domestic market or TDM refers to the domestic production that caters to domestic demand. Value addition is classified into two broad categories: 1. Low/Medium Value Add: Includes negligible sourcing, minimal design activity, EMS, SKD and CKD assembly; corresponds to value addition of upto 5% (<2% being low value add and 2%-5% being medium value add) 2. High Value Add: Includes high local sourcing, high levels of indigenous design and complete system manufacturing; corresponds to a value addition of >5%. 2 Some of the key observations include: 65 percent of the current demand for electronics products is met by imports. Imports are likely to grow from $28 billion in 211 to $42 billion in 215 in the absence of intervention High value added manufacturing is likely to be restricted to less than 7 percent in 215. This represents a cumulative opportunity loss of $2 billion between 211 and 215 in the absence of intervention Increasing total domestic manufacturing to 5 per cent by 215 will create additional direct employment for nearly 2 lakh people There is a very pertinent need to recognize the ESDM industry as a priority sector and provide a favourable environment for its growth IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

21 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 Government as an Enabler for the ESDM Sector The Indian Government, through the Department of Electronics and Information Technology (DeitY), has instituted a number of forward-looking policies to foster the growth of the Indian electronics ecosystem. These policies are aimed at holistic development of the ESDM industry by offering specific incentives for the development of each element in the value chain. These forward looking policy measures include: National Policy on Electronics (NPE): The objective of the NPE is to create an ecosystem for a globally competitive ESDM sector in the country by attracting investment of about USD 1 billion and generating employment for around 28 million people at various levels. The ultimate aim of the policy is for the Indian ESDM sector to develop core competencies in strategic and core infrastructure sectors like telecommunications, automobile, avionics, industrial, medical, solar, information and broadcasting, railways, intelligent transport systems, etc. National Manufacturing Policy (NMP): The government has brought out the NMP to increase the growth of the manufacturing sector to 12 to 14 percent over the medium term and enable manufacturing to contribute at least 25 percent to the National GDP by 222. Modified Special Incentive Package Scheme (MSIPS): The MSIPS aims to offset cost disabilities and attract investments in the India ESDM sector through an INR 1, crore corpus. Subject to certain investment thresholds, subsidies to the tune of 2 per cent for SEZ units and 25 per cent for non-sez units will be given on capital expenditure along with reimbursement of excise/cvd. Setting up semiconductor fabrication units: The Government of India has received the applications of two consortia (IBM, Jaypee Group, TowerJazz; STMicroelectronics, HSMC) to establish 2 semiconductor wafer fabrication units in Gujarat and Noida with the aim of operating at 2 nm process node within two years of initial operations and reaching a capacity of at least 4, WSPM of at least 3 mm size. Various incentives are being offered by the government to this effect: 25 per cent subsidy on capital expenditure and growth capital expenditure, reimbursement of CVD and excise duty, exemption from basic customs duties and 2 per cent deduction on R&D activities, among other incentives such as reimbursement of training costs, deduction for income tax and various forms of viability gap funding. Electronic Manufacturing Clusters (EMCs): The government is offering financial support for the development of EMCs. For greenfield EMCs, assistance will be given up to 5 per cent of the project cost subject to a ceiling of INR 5 crore for every 1 acres of land. For brownfield EMCs, assistance will be given up to 75 percent of the project cost subject to a ceiling of INR 5 crore. Electronics Development Fund (EDF): The EDF aims to create an ecosystem of R&D in electronics in India which will promote IP generation and large scale manufacturing, while simultaneously fostering the growth of the ESDM ecosystem. The focus of EDF will largely revolve around small and medium enterprises (SME) in line with the goal of promoting innovation and job creation. CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 21

22 The chart below captures the salient features of the various government initiatives to promote the Indian ESDM sector. Indian ESDM Industry: Snapshot of Government Policies To attract investment of USD 1 billion and generate employment of 28 million NPE s mission is to promote manufacturing and R&D across the value chain, especially in strategic electronics Aim to reach 2nm process node within 2 years of initial phase, and reach at least 4, WSPM of 3 mm IBM, Jaypee, and TowerJazz; and STMicro electronics and HSMC got approval in principle to establish 2 semiconductor fabs NPE s vision is to create a globally competitive ESDM ecosystem to meet the country s needs and serve the international market. MSIPS makes available a corpus of INR 1, crore to attract investment in ESDM 2% Capex subsidy for SEZ units; 25% Capex subsidy for non-sez units and CVD/ excise reimbursed 25% subsidy on capex; CVD and excise reimbursed; BCD exempted; 2% R&D deduction; etc. Financial support will be offered for development of EMCs to aid growth of ESDM through innovation and entrepreneurship Scope of policy includes: nanoelectronic, semiconductor fab, solar, LED, LCD, passive components, and EMS EDF is a planned scheme of DEITY to create ecosystem of electronics R&D and promote IP generation Greenfield: 5 percent of project cost subject to ceiling of INR 5 crore for every 1 acres of land Focus will largely be on SMEs in line with the goals of promoting innovation and job creation Brownfield: 75 per cent of project cost subject to ceiling of INR 5 crore Source: IESA-Frost & Sullivan Identification of High Priority Product Markets Holistic development of the ecosystem can be the panacea to all of the woes of the Indian ESDM industry. However, application of the Pareto principle at a broad level suggests that identifying the products that accounts for nearly 8 per cent of the electronics market revenues and provide the necessary support and incentives required to eliminate the disability costs associated with local manufacturing/value addition in these products shall enable enormous development in the overall ecosystem. Initiatives aimed at promoting indigenous value addition in the top 2-25 percent of products is expected to have a cascading effect on the remaining 75-8 percent of the products. In line with the Pareto principle, it is observed that the top 2 product markets accounts for 8 percent of the overall electronics TM revenues for 212, as indicated by the chart next page. 22 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

23 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 Indian Electronics Market: Top 2 Products by TM Revenues (212) Product Revenue % of Total Product Revenue % of Total Mobile Phones 38.85% FPD TV 7.91% Notebooks 5.54% Desktops 4.39% Digital Camera 2.73% Inverters and UPS 2.65% Memory cards and USB drives 2.46% 4W EMS 2.33% LCD Monitors 2.2% Servers 1.72% Total of Top 1 Products 7.6% 212 Electronics Product TM = $44.81 Billion Base Stations 1.61% Power Supplies 1.28% Set Top Box 1.13% Printers and MFDs 1.6% Routers/Switches 1.5% Car Radio 1.2% CFL 1.% Energy Meters.66% Digital Instrument Clusters.58% Smart Cards.52% Total of Top 2 Products 8.52% Mobile Phones FPD TV Notebooks Desktops Digital Camera Inverters and UPS Memory cards and USB drives 4W EMS LCD Monitors Servers Base Stations Power Supplies Set Top Box Printers and FPDs Routers / Switches Car Radio CFL Energy Meters Digital Instrument Clusters Smart Cards Base Year: 211 Source: IESA-Frost & Sullivan Beyond just these top 2 products, it is also essential to identify as high priority those product markets that are currently not amongst the top 2 in their contribution to the overall revenues, but have growth trends in excess of even these top 2, thus indicating their potential to be significant product markets by 215. Identifyingfive such products with significant CAGR trends and providing them the necessary impetus for ecosystem development is also important for the growthof the ESDM industry. The chart below highlights five such products across industry segments that have the potential, and hence, deserve the thrust. Indian Electronics Market: Top 5 Products by with Highest CAGR (till 215) Industrial Electronics LED Lighting (CAGR = 38%) Automotive Electronics 2W Ignition (CAGR = 1%) Telecommunications PON, GPON ONT (CAGR = 12%) IT/OA Tablets (CAGR = 54%) Payment Terminals (CAGR = 19%) CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 23

24 SWOT Analysis of the 25 High Priority Product Markets The characteristics of these product markets with regard to the Indian electronics ecosystem vary very widely. Hence, they need to be evaluated thoroughly with regard to their strengths, weaknesses and growth prospects among other factors in order to gain a thorough understanding of their unique market dynamics. This report contains detailed evaluation of the market dynamics, current ecosystem availability, disability factors restricting local value addition and future potential for these 25 high priority products. The chart below highlights the consolidated strengths, weaknesses, opportunities and threats for these 25 high priority products. Consolidated SWOT Analysis of the Ecosystem for the High Priority 25 Product Markets STRENGTHS Huge Consumption Market. Strong Design and R&D Capability in Select Products - Auto electronics, industrial etc. Government Schemes a Good Demand Generator - NKN, NOFN, tablets for education sector, digitization policy, broadband push etc. Adequately Developed EMS Industry - to be a significant contributor to ecosystem development. Enormous ResidentTalent in Semiconductor Design and Embedded Software OPPORTUNITIES Significant Local Demand as a Influencer for Investment Attraction Rising Manufacturing Costs in China Leading to India as Alternate Destination Government Policies - MSIPS, EMC, local FABs etc Favour Attracting Manufacturing Investments Export Potential - huge consumption market in ME; emerging growth markets of North Africa and Latin America. Existing R&D Capabilities can be Encouraged to Develop Made in India Products and Generate Local IP SWOT WEAKNESS Reliance on Imports for all Critical Components - Semi battery, LCD displays, electronic components etc Convoluted Tax and Duty Structure - Imports made Cheaper than Local Products. Debilitating FTAs with Thailand, Japan. Lack of Subsidies/Incentives for Support Industries makes Local Manufacturing Costlier Inadequate Domestic Standards andtesting Facilities. Slow and Delayed Policy Implementation Inadequate Local Product Innovation and IP Creation THREATS Established Manufacturing Ecosystem in China poses a Major Threat. Emergence of other Low Cost Manufacturing Destinations like Vietnam. Inadequate / Fledgling Ecosystem for Components and Raw Materials. Infrastructure Inadequacy as Demanded by Certain Sectors - Electricity, Water, Utilities etc, Depreciation of the Rupee as a Short Term Threat. Component Ecosystem for the 25 High Priority Product Markets Research indicates that the most crucial elements for the development and sustenance of a robust ecosystem include: A healthy consumption economy with export potential Design, development and R&D capabilities Availability of raw materials to locally source Infrastructure adequacy Favourable policy environment Availability of necessary skill sets Local availability of components/raw materials is considered very significant for achieving high local value addition in any product manufacturing. Moreover local supply of components ensures faster turnaround time and lesser production cost; this is why globally, component supply/manufacturing is closely located along with product manufacturing locations. Absence of a component ecosystem is a major disability in electronics product manufacturing. To evaluate the significance of this, the research did a detailed assessment of the local ecosystem for the top four components in each of the 25 high priority products. The table below provides a snapshot of the 25*4 matrix. 24 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

25 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 S.No Product Component 1 Component 2 Component 3 Component 4 1 Mobile Phone Memory (22%) Display (19%) Application Processor / System on Chip (15%) Camera 2 FPD TV Display( 5%) IC s ( 15%) Electromechanicals ( 15%) Power ( 5%) 3 Notebooks Display (18%) Processor (15%) Motherboard (12%) HDD (1%) 4 Desktop Processor (15%) Monitor (15%) Motherboard (12%) HDD (1%) 5 Digital Camera Lens (3%) Image processor (15%) Image sensor (15%) Battery (1%) 6 Inverter, UPS Transformer(5%) Power Semiconductor(1%) Heat sink(1%) Microcontroller(5%) Memory Cards, Drives 7 Flash Memory chip (8%) Microcontroller/ASIC(5%) Crystal Oscillator (5%) USB connector (5%) 8 EMS 4 W Mechanicals - Pump, Injectors (4-5%) Analogs+Sensors (2%) Microcontroller (1%) 9 LCD Monitor Display( 5%) Electromechanicals ( 15%) IC s ( 1%) Power ( 5%) 1 Servers Processor (25%) Memory (25%) Motherboard (15%) HDD (12%) 11 BTS IC (4%) Power Amplifier (15%) Power supply (12%) Antenna (1%) 12 Power Supplies Transformer (3-4%) Power Semiconductor Rectifier diodes PCB 13 Set Top Box IC (MPU,Memory,Tuner) PCB Power supplies Plastics and Mechanicals 14 Printers & MFDs Photosensitive Drum Fusing Roller Transformer Lens and scanner 15 Routers / Switches Software & OS (5%) Processor (1%) Memory (1%) Electromechanicals 16 Car Radio IC s ( 3%) Electromechanicals ( 2%) PCB ( 1%) Power ( 1%) 17 CFL Lamps Capacitor (2%) Glass tube (2%) Transformer (1-15%) Transistor (1%) 18 Energy Meters System on Chip (2%) Transformer (2%) LCD Display and backlight (15%) Super Capacitor (1%) 19 Digital Instrument Stepper motor (2%) PCB (15%) Microcontroller (1%) LCD (7%) Cluster 2 Smart cards IC s (62.5%) PETG/Polycarbonate Antenna ( wire or Software OS (1%) body (2%) printed) (7.5%) 21 GPON ONT Optical Module (35-4%) System on Chip (15%) Power Supply (8%) Memories (5%) 22 Tablet Display (38%) Memory (1%) Battery (1%) Processor (1%) 23 LED Lights LED (25%) Driver (2%) Heatsink (15%) Thermal interface material (7%) 24 Payment Terminals Communication Module (16%) 25 2 W Ignition Microcontrollers (2%) LCD/TFT Display (16%) Printers (16%) Processor (14%) Power semiconductor (2%) CDI Capacitors (1%) Transformer (1%) The percentage in brackets in the table above indicates the contribution of each component to the overall product bill of materials (BoM). The most common components that are within the top 4 BoM contributors across these 25 products are the following: Power devices and semiconductors Processor Memory Printed circuit board (PCB) LCD display Transformer CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 25

26 Semiconductors: As observed, 3 of these top 5 key components (power semiconductor, memory and processor) include semiconductor chips and devices. Currently, the absence of a local fab implies complete reliance on imports for these components. The FAB initiative that is expected to usher atleast 2 semiconductor fabs in India in the foreseeable feature shall help in making these core chips available locally. Given the numerous applications that require processing capability, creating an India-specific processor design, and fabricating them in local chips shall ensure a significant contribution to the local value addition. Semiconductor Ecosystem Assessment CHALLENGES Global hub for VLSI and board design Strong third party design service providers Huge domestic electronics consumption market Presence of R&D and design centres of the top 23 global semi majors STRENGTHS Very limited IP creation Restricted number of Fabless companies Inadequate ATMP facilities Absence of Fab Fund for Fabless Promotion Encourage ATMP investments under MSIPS Expedite the setting up of 2 Approved Fabs Incentivize local sourcing of Semi Local Fabs to fabricate chips in high demand RECOMMENDATIONS Source: IESA-Frost & Sullivan Printed Circuit Board (PCB): India has a good number of PCB manufacturers in the country. However the local capability is restricted to producing single, dual and multi layered PCBs of upto 8-12 layers. The PCBs needed in most of the 25 high priority products, especially in telecom, consumer and automotive applications, require complex multi-layered PCBs that are not available locally, thus necessitating imports. Building on the existing capability, special initiatives need to be targeted to encourage indigenous design and manufacturing of multi-layered PCBs of upto 64+ layers. This will ensure local sourcing of PCBs for product manufacturers, thus contributing to higher value addition; this shall also meet the requirements of the local EMS players who source PCBs in bulk. PCB Ecosystem Assessment CHALLENGES PCB manufacturing capability exists locally Strengths in single, dual layers Capability to do multiple layers too for less complex applications Export market exists Inability to compete with Chinese imports on cost Chinese exporters get 17% export incentive Working capital challenges Excise and customs duty procedural issues High import tariff on PCB imports. Nil duty on raw material imports. Interest subsidies/low interest loans for PCB manufacturers Quicker, easier reimbursement of CENVAT Export subsidies STRENGTHS RECOMMENDATIONS Source: IESA-Frost & Sullivan 26 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

27 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 LCD Displays: In the case of LCD displays, India possesses local design and manufacturing capabilities for some of the end use products. However, the cost of production of panels and its technology-intensive nature have kept India void of an LCD display assembling/manufacturing unit hitherto. Other challenges include the existing duty structure which makes importing a cheaper option for displays. Given the high volume demand anticipated in the various products that consume displays, it becomes pertinent to grow the ecosystem for LCD displays locally. LCD Display Ecosystem Assessment CHALLENGES Huge consumption demand End use product manufacturing through OEMS and EMS exists Favourable incentives for panel manufacturing available under MSIPS Ecosystem doesn t prevail Inverted duty structure Debilitating FTAs with Thailand, Japan etc Infrastructural challenges Relocation of a brownfield Gen 5 fab Preferential excise duty for panel manufacturing; tax rebates. Hike in import duty of finished display imports Fund to encourage local technology development STRENGTHS RECOMMENDATIONS Source: IESA-Frost & Sullivan Transformers: Transformers belong to the larger family of wound components. This is a market that is dominated by small scale indigenous manufacturers as it requires limited infrastructure and inexpensive labour. Consumer and industrial electronics segments drive the demand for transformers and, owing to cost advantage, transformers are predominantly imported from China, Taiwan and South Korea. Reliance on import for raw materials, specifically copper, is a major handicap for Indian transformer manufacturers in achieving faster turnaround time as well as lower production costs. Transformer Ecosystem Assessment CHALLENGES Huge consumption demand End use product manufacturing through OEMS and EMS exists Local design know how and manufacturing technology skills exists Local landed cost of production high: makes imports cheaper Reliance on imports for copper Delayed turn around time due to copper import time Preferential excise duty for transformer manufacturing: tax rebates. Subsidies on logistic costs of copper import to reduce product landed cost Special interest loans for working capital for SME STRENGTHS RECOMMENDATIONS Source: IESA-Frost & Sullivan CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 27

28 Product Specific Recommendations Each of the 25 high priority product markets has varying levels of developed and underdeveloped ecosystems and while there are some common initiatives that are required for eliminating the disabilities associated with local value addition across the 25 products, there are certain specific steps that need to be taken product-wise to enable holistic development of an ecosystem that services the local market and holds export potential as well. Here we summarize some of these key measures that shall help provide the necessary impetus to these high priority product markets. Mobile phones Offering incentives to develop India as a hub for mobile phones batteries Developing policies to address the disability costs associated with local manufacturing through - exemption of CVD on imported capital equipment and excise duty on capital equipment sourced locally; - levying of a tax equivalent to CST on imported mobile phones; - basic customs duty and CVD exemption from on all imported capital equipment for manufactureof mobile phone parts and components. Developing India-specific certifications to ensure quality of products. This would also act as a non-tariff barrier that would incentivize local manufacturing. Flat panel TV Encouraging domestic assembly, including low value add activities,to boost local sourcing and generate employment in the long run. Setting up a center for excellence for LCD and LED displaysto encourage indigenous development Providing incentives under the MSIPs scheme to bring FPD panel assembly activity into India. Notebooks, Desktops, Servers Simplification of the reimbursement process for claiming tax credit on input duty paid Incentivizing manufacturing of motherboard and LCD displays for laptops / desktops by exempting their individual components from basic customs duty and excise duty, or offering preferential excise duty. Digital Cameras Need for Duty restructuring - The CENVAT for digital cameras is around 16% and an excise cess of 2% against an import duty of 1% makes it more expensive to assemble or manufacture locally. The component ecosystem and technology leadership for this segment being non-existent in India, focus can be on developing batteries for digital cameras rather than the product itself. Inverters and UPS Encouraging local manufacturing by lowering excise duty and making the process of reimbursement of tax credit easier and quicker. Making appropriate R&D investment to gain expertise in the design and manufacturing of UPS with high power rating. The planned EDF corpus of DeitY could be an appropriate way of implementing this measure. Providing energy star ratings under the aegis of Bureau of Energy Efficiency (BEE) shall help in fostering growth of solar powered UPS as well as power efficient UPS and inverters. The higher rated UPS/inverters would have more sophisticated electronics and semiconductors, thus boding well for the semiconductor market as well. Memory Cards and USB Drives Considering the low margins and the magnitude of investment required to set up a flash manufacturing facility, it seems logical to divert the available resources towards other areas that would offer greater and faster returns on investment. 28 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT

29 INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN 214 Automotive sub systems (CDI, Digital Instrument Clusters, 4W EMS, Car Radio) Setting up of an automotive EMC possibly near Chennai or in the NCR to completely indigenize the manufacturing of 2W ignition units. Incentivizing the manufacturing of PCBs and LCD displays by offering preferential excise duties or greater rates of CENVAT credit. Leveraging the MSIPS and EMC policies to set up an automotive EMC near the Bangalore-Chennai area to indigenize the manufacturing of instrument clusters. Attracting investment through the MSIPS policy, preferential excise duties or greater rates of CENVAT to provide impetus for manufacturemicrocontrollers in the country; the setting up of the two semiconductor fabs in the country would prove to be a great enabler in this regard. Setting up a center of excellence for car infotainment needs within an auto electronics EMC to encourage indigenous design through frugal innovation. Setting up of auto electronics cluster under EMC either in Chennai or Pune with facilities such as incubation center to promote innovation research, testing laboratories and all other essential infrastructure. LCD Monitor Encouraging LCD manufacturing by offering preferential excise duty rates and facilitating easier reimbursement of tax credit. Investing in R&D for new display technologies to hedge against any investment made in TFT LCD display fabrication. Encouraging local sourcing of electromechanical components, SMPS transformers and the plastic enclosures used in the assembly of LCD monitors by offering tax credits for vendors who source these components locally. Encouraging competencies in the manufacture of LCD displays, especially for tablet and laptop applications. This would require investment in generation 5 fabs, which are mostly being used for these end user applications. Also, generation 5 fabs are growing at only 3 percent a year while higher generation fabs are clocking almost 26 percent annual growth. This could mean that relocationof a generation 5 fab to a brownfield location could be done at an affordable level of investment. Base stations (BTS) Incentivizing indigenous IP with preference in government procurement. Exploring India-specific standardsfrom a security standpoint. Decreasing the in-land freight costs from 17 percent to about 4 percent through subsidies to reduce costs for indigenous manufacturing and encourage local value addition. Encouraging domestic manufacturers to build their capabilities to design and develop power supplies and antennae used in the BTS. Power supplies The component duty currently ranges between to percent which is considered high for the industry especially since the Indian market is a price sensitive market. Offering subsidies for manufacturers who manufacture in bulk volumes. Ensuring continual availability of copper through the year at subsidized prices to reduce the overall cost of the components. Setting up regional level testing labs for testing imported goods. Set top boxes Indigenous manufacturers need pay a sales tax in addition to local VAT (~12.5 percent) that makes locally manufactured products more expensive than imported STBs. Issuance of Form C to alleviate the payment of sales tax in addition to local VAT. Increasing the import duty for STBs would help create a level playing field between global suppliers and indigenous manufacturers; it has been observed that the hike in the same during budget was not sufficient for this purpose. Export subsidies to create mini clusters for remote manufacturing of the various components that go into a set top box including RCA cables, remote control and passive components. Optimizing the tax structure being levied on the DTH industry and cable operators to alleviate the operational challenges being faced by them. Offering special low interest loans would help sustain growth and increase the amount of domestic value addition. CONFIDENTIAL IESA COPYRIGHT IESA - Frost & Sullivan : Indian ESDM Market 29

30 Printers and MFDs Offering tax credits on R&D activity in high-end laser printing and MFDs. The government could also facilitate the formation of joint ventures between indigenous players and global OEMs to take advantage of latent manufacturing capabilities; there could be export opportunities to the Middle East, Sri Lanka, and Africa due to India s geographical location. Incentivizing local value addition for components such as transformers, PCBs and cabling, that are currently being manufactured in India, by offering preferential excise duties and greater CENVAT credit for suppliers. Routers/switches Creation of funds for local technology know-how development and incentivizing local IP generation Focusingon promoting local manufacturing of components such as complex PCBs for routers by either offering preferential excise duty rates for the manufacturing of complex PCB designs or offering greater rates of CENVAT. Prioritizing /inviting investment in PCBs manufacturing under the MSIPS scheme and offer associated benefits to those investors. CFL Reducing VAT for CFL manufacturing to zero per cent across all states Developing ISI certifications to standardise manufacturing of CFLs in the country. Energy meters Development of standards for manufacturing of smart meters, create a R&D fund for innovations in smart meters, and also create opportunities for manufacturing of key individual components such as communication modules and transceivers. Incentivizing export duty and establishing India as an export hub by encouraging product modifications suiting international requirements Setting up an R&D fund for smart meters to encourage SME manufacturers to invest in innovation Incentivize manufacturing of communication modules and transceivers Global marketing support for cash-strapped SME suppliers Smart cards Incentivizing software development and customization services Creation of indigenous standards that are application specific with the aim to ensure higher security in the smart cards consumed in the country. Setting up of subsidized testing facilities for EMV compliance The Indian ecosystem has enormous skillset availability in the software and integration part of smart cards which could be incentivized through offering appropriate R&D deductions. Encouraging local sourcing of plastic (PETG) by offering preferential excise rates when raw materials are locally sourced. GPON ONT Creating supportive policies like reduced excise duties to encourage domestic manufacturing. Tablets Repealing the levy of SAD individual electronic components or individual components of LCD monitors and motherboards. Incentivizing the manufacture of motherboard and LCD monitors by exempting their individual components from basic customs duty and excise duty, or offering preferential excise duty. Simplifying the reimbursement process for claiming tax credit on input duty paid Creating a centre of excellence for tablets to consolidate the different design efforts in the private and public sectorsto develop world-class commercial Made in India tablets. LED Lighting Restrictive tax structure with a high VAT of 14.5 percent obstructs LED lighting penetration. Reduction in the VAT and a uniform VAT structure across all states will increase penetration. Mandating BIS technical specifications to standardize manufacturing processes and products. Imported LED lamps should also be tested rigorously to prevent dumping of goods in the local market. 3 IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT