PLI scheme for air conditioners fails to excite local manufacturers

Lack of incentive for incremental assembly may delay investments

The newly introduced production-linked incentive (PLI) scheme for air conditioners (ACs) may have long-term potential to boost the local component ecosystem. But the scheme has failed to impress local manufacturers who assemble finished units.

Since last April, the Cabinet, headed by Prime Minister Narendra Modi, has approved PLI for five other sectors. But unlike the previous ones, the latest scheme focuses solely on growing component manufacturing. The manufacturers will receive 4-6 per cent incentive on incremental production, only if they add value by growing component production.

“The selection of companies for the scheme shall be done, so as to incentivise manufacturing of components or sub-assemblies which are not manufactured in India presently with sufficient capacity. Mere assembly of finished goods shall not be incentivised,” said the government in a statement.

Leading consumer durables manufacturers said it will help in growing the local AC manufacturing base and make India more competitive in the global market. The absence of incentives for incremental assembly will lead to the deferment of investments by local players in building capacity for finished ACs.

According to Kamal Nandi, president of Consumer Electronics and Appliances Manufacturers Association and executive vice-president, Godrej Appliances, the scheme will help India become self-reliant in the coming year.

“However, towards a holistic growth of the sector, it is highly desired that the finished goods are also considered for incentivising, in addition to its components, under the PLI scheme. Further, given the low penetration of this category, the domestic demand also needs to get a boost by making ACs more affordable,” said Nandi.

Krishan Sachdev, chairman, Carrier Midea India, thinks the government has taken two steps forward. “Instead of focusing on growing the base for the final product, this time the entire focus is on developing the component ecosystem. This is a truly forward looking move,” said Sachdev.

Currently, in the Rs 18,000-crore local AC market, 70 per cent of the cost material used in assembly are imported. Key parts like compressors, variable speed motors in indoor units, and high quality copper pipes, among others, are imported.

But with no incentive for incremental assembly, manufacturers are now hoping that large global component makers set up shop here. Since key components that are being imported require huge investments to manufacture locally, setting up such facilities will not be a viable business proposition for entities in India, clarified companies.

To turn such investments profitable, the kind of scale that is required does not exist in the local market. At 6 million units a year, India’s AC market is much smaller, compared to leading global markets like China (50 million units), the US (17 million), and Japan (12 million).

“We expect multinational companies to bring in meaningful investments through the foreign direct investment route for component manufacturing. This will help increase the local value addition in AC manufacturing — from the current 25 per cent to 75 per cent,” said Kanwal Jeet Jawa, managing director and chief executive officer (CEO), Daikin India.

According to Jawa, in the long run, the scheme will help India gain a competitive advantage. “Fewer manufacturers willing to invest towards the finished goods production may delay the planned investments,” he said.

Manish Sharma, president and CEO, Panasonic India & South Asia, said, “One of the key pillars to drive up manufacturing and exports is backward integration. The scheme will also enable design-led manufacturing, fuel innovation, and drive component exports, along with finished ACs from India.”

Welcoming the move, Vijay Babu, vice-president for home appliances at LG Electronics India, said it will help India achieve its goal of self-reliance by giving local manufacturing a leg up.