In the first week of March 2023, Foxconn got into the middle of a controversy. Two Indian states Telengana and Karnataka which fiercely compete for investments, simultaneously claimed that Foxconn would invest and that would create 100,000 jobs in their respective states. Foxconn first said to the media that no definite agreements had been signed about fresh investments but the next day sent letters to the Chief Ministers of both states claiming that Foxconn was committed to the agreements that had been signed. Now the question comes how and why Foxconn got itself into such an awkward situation?
Hon Hai Precision Industry better known as Foxconn is the world's largest Electronic Manufacturing Services (EMS) company. It is also the largest private sector employer and exporter of China. Almost 65% of Foxconn's production base is in China. Western media and Indian media repeatedly claimed that after watching the rising geopolitical tensions between China and USA and impact of Covid, Foxconn authority and its chief customer Apple Inc have decided to diversify its production base. But in November 2022, Foxconn Chairman Young Liu downplayed the risk in China and made it clear that Foxconn's Biggest investment destination would remain China but will expand production in Vietnam, India and Mexico. So what is the truth? Is Foxconn really shifting production base from China as Western and Indian media is claiming or shifting production away from China to India is just a mere myth?
To answer this question we have to look into the Foxconn investments inside India. Foxconn directly started operation in the state of Tamil Nadu of India in 2019 by opening smartphone making plant for Apple. It now employs 35,000 blue collar workers. Foxconn is said to be expanding its smartphone production capacity in India. In September, 2022 Apple began assembling iPhone 14 models in India. Indian media further claimed that Apple would be able to turn India into a global iPhone manufacturing hub by 2025. J.P. Morgan analysts in September, 2022 Apple would move 5% of global iPhone 14 production to India by late 2022 and 25% of all iPhone production by 2025. Morgan Stanley analysts claimed that Apple wants India to contribute 10% of total iPhone production in 2-3 years.
But it is not just about Apple smartphones. Foxconn recently tied with Vedanta group and signed Memorandum of Understanding (MoU) with Gujarat government for setting up a semiconductor plant of USD 19.5 billion. The plant is to produce 28 nanometer chips most of which would be bought by Foxconn's new Electric Vehicle (EV) sector. In India EMS for EV components is going to be a large market of USD 9.2 billion by FY26. So Foxconn is also interested for setting up a white label EV manufacturing plant. But it needs a customer who will brand and sell it in the Indian market. It is not an easy job to find such a customer in India.
It must be remembered that Foxconn entered India in 2015 indirectly through Bharat FIH. It became India's largest EMS player with 12.4% share of USD 20 billion revenue market. This does not include Foxconn's earlier mentioned plant which assembles Apple phones only. Bharat FIH makes phones for non Apple customers, telecom products, EV components, mobile device components. Bharat FIH has plants in Andhra Pradesh and Tamil Nadu. But recently the company is facing problems as its largest customer Xiaomi (buys 48% of Bharat FIH sales value) shifted a large part of contract to its competing EMS companies. It was unable to get benefits from PLI schemes as it missed its sales commitments.
Now we get into the most important point i.e. PLI or Production Linked Incentive which is a part of Indian Government's Make in India plan. Through Make in India, Indian Prime Minister Narendra Modi hoped that India will emerge as a global manufacturing hub. Before we discuss how much successful Make in India project is let us first understand what PLI is all about.
The scheme was originally designed for FY20 for a few select industries such as mobile phones and allied equipment manufacturing, pharmaceutical ingredients, and medical devices. This was implemented by the Ministry of Electronics and Information Technology (MEITY) and the Department of Pharmaceuticals with a financial outlay of USD 7,089 million to be used over a five-year period. In FY2020, the scheme benefitted 150 manufacturing units, generating incremental sales of USD 6,187 million and showcased the significant potential for additional employment over the next eight years. As a result, the scheme has been expanded to accommodate an additional 10 sunrise sectors to boost the economy and India’s self-reliance with an estimated allocation of USD 20,169 million spread across five years.
The bulk of the exports will come from large-scale electronic manufacturing, which is dominated by mobiles. Exports will account for 48% of the sales value of USD 351 billion committed by companies across nine Production Linked Incentive (PLI) schemes spanning various sectors, based on their commitments to the government. Through their implementation, it is hoped that economies of scale are created so that domestic manufacturing becomes competitive in India. The resultant benefits include job creation, export capabilities, and lessening the import dependency – particularly in critical sectors and high-tech goods. It is envisaged that India’s total industrial production will increase by over USD 520 billion during the period covering PLI policy implementation.
Now let us come to the main point how far has PLI Scheme succeeded so far. At the first glance result is remarkable. Electronics has become India's fastest growing export sector for the 22 month period from April 202 and February, 2023. In this period electronic exports grew 61.57% in INR term. In FY22 electronic exports were up by 40.5%. Smartphones accounted for 47% of total electronic exports between April, 2022 and February, 2023 from 37% a year ago. Smartphone exports by Apple contractors like Foxconn, Pegatrom and Wistorm together accounted for 46% of total smartphone exports in the last 11 months. Samsung too will come in the list. Moreover, all of them are participants in PLI Scheme. So from these data it seems that PLI Scheme has worked.
Now let us check other angles. Electronics comes in 6th position among all Indian exports in the last 11 months. In FY22 it came to 7th position. Traditional items like engineering goods, mining & petroleum products have almost 10 times more value when compared with electronics. So PLI Scheme has not changed the composition of Indian exports in a great way. Similarly, Merchandise Trade Deficit between March 2022 and February 2023 is record highest USD 270 billion braking the record of 2021-22 when it was USD 192 billion. So it can be said that PLI Scheme has failed to reduce India's Merchandise Trade Deficit. But PLI Scheme has indeed changed the composition of imports. Now India is importing more electronics product making equipments and other intermediary goods and less of final goods. So India is importing intermediary capital goods to make more of final goods domestically. Result we are getting is that Merchandise Trade Deficit is rising. So it can be said that PLI Scheme is in a sense misallocating resources by shifting away from cheaper imports to costly ones. This is bound to happen when government incentivises sectors where the country has little competitive advantage.
Susannah Patton, the director of Australia based Lowry Institute's South East Asian Program said that India's inward looking economic policy and not signing multilateral free trade agreements made it less connected to Asian economies and this has reduced India's competitive advantage. Indian economists also claim that Indian manufacturing is focusing on top 10% Indian consumers and so failing. India needs to focus on those manufacturing goods which has demand among majority of Indian consumers and not merely top 10%.. Only then Indian manufacturing can become net exporter. Moreover, Indian government's incentives are tilted towards manufacturing. But India has shown its comparative advantage in service sector. India's Overall Trade Deficit (Merchandise and Service both) in 2021-22 was USD 79 billion. So India scored Service Trade Surplus of USD 112 billion in 2021-22. Hence India must focus on service sector in which it has vast comparative advantage and not in manufacturing sector in which it has little.
We now find that India though is showing significant improvement in electronic exports but it is showing even more deterioration in trade balance as it has to import more costly capital goods for making those electronics exports. In this perspective we need to know Chinese economist Lin Yifu's New Structural Economics (NSE). It says that a strategy of developing one sector of the economy without relation to others cannot achieve success. It is because an individual sector of production cannot be ripped out of the context of vast division/socialisation of labour which determines its inputs and outputs. In 1973, several Middle-East countries used the profit from higher oil price to import capital goods for making petrochemicals. But those first class capital goods from Germany and USA failed to show desired productivity because producing petrochemicals needed other inputs like skilled workforce, transport and power supply facilities, state of art maintenance, logistics, etc. So the capital goods which gave higher productivity in USA and Germany could not do the same in Middle East. So the efficiency level of a country depends on the level of division/socialisation of labour it has achieved. It is impossible to isolate and develop one part of the total productive chain. NSE says that a country can definitely develop a particular industry if it devotes a disproportionate amount of resources to it. But this reduces resources available for other industries of the economy. So as a whole the economy cannot develop. NSE advocates countries to focus on those industries whose inputs are already available and gradually country has to upgrade those inputs and move to more sophisticated capital and complicated technology centric industries. A country will fail if it tries to develop a sophisticated industry with low skilled labour and bad infrastructure. This is what happening to India as it is trying to develop smartphone industry, EV industry and semiconductor industry. It is actually embarking on the failed Import Substitution strategy of pre-globalisation era.
In 2020-21 female labour force participation rate in India is mere 25.1%. In 1990 when China had started to rise as an economic power, female labour force participation rate was 80%. In 2020-21 India's literacy rate was 75% while its 77.7% in China in 1990. In 2021, China's literacy rate was 97%. So India needs to improve the basic indicators to create better skilled labour force and better infrastructure. China has so far formed more than 1,500 vocational education groups and alliances covering more than 45,000 member units, including enterprises, schools, and industry and research institutions to conduct studies with 30 million students. India is not known to have such an elaborate network of vocational training centres. So India must follow NSE model and start from working on industries which is most suitable to its level of work force and infrastructure which is still very low skilled and poor. Then India has to gradually improve the quality of its work force and infrastructure and move to more sophisticated technology based industry.