Samsung gives PLI scheme for IT hardware and telecom equipment a wide berth

It has bet big on Vietnam as its key global manufacturing hub for exports

Though Samsung has a substantial share of the information technology (IT) hardware and telecommunication (telecom) equipment domestic market, it has kept away from the government’s production-linked incentive (PLI) schemes for these two sectors.

This decision has raised questions on whether the South Korean giant which, along with Apple, was expected to showcase the ambitious PLI scheme to the world, has chosen caution as its policy.    

Its presence in IT hardware — tablets, laptops, and personal computers (PCs) — is substantial, according to a research by Canalys in the first quarter of calendar year 2021. Samsung has jumped to fourth place (from fifth last year), with an overall market share of 8.2 per cent.

That is because it has a large share of the tablet market which, in terms of overall volume, accounts for 23 per cent of the overall PC market in the country.

In telecom equipment, based on industry estimates, it has controlled over 50 per cent of the market over the past one or two years, thanks to contracts from Reliance Jio (the rest were shared among Ericsson, Nokia, and Huawei).

The company has, though, participated in the mobile device PLI scheme with Apple and is one of the 10 eligible players. Yet, its play has been nowhere as aggressive as Apple’s.

The latter, through its three exclusive vendors, has committed over 56 per cent of the production value of its mobile phones (Rs 6 trillion) under the PLI over five years and as much as 80 per cent of its phones for exports, even though the PLI criterion is that only 60 per cent needs to be exported.

While Samsung declined to comment or share any figures, it is believed to have exported phones worth $2-$2.5 billion last year. It was the only player to have met its production commitment under PLI in the first year because it already has an ongoing plant.  

Analysts say the reason why Samsung is so cautious is that, before the PLI scheme began in 2020, it had already bet big on Vietnam as its key global manufacturing hub for exports.

This differs from Apple’s strategy. The latter only started looking aggressively for an alternative destination after China-US trade tensions rose. Only then did Apple seek to hedge its dependence on China, where 95 per cent of its products are manufactured.

Apple looked at other countries too, such as Indonesia, but chose India. This happened to coincide with India devising the PLI scheme to woo global brands.

Since 2016, the growing increase in labour costs and competition from Chinese mobile device players in the domestic market have prodded Samsung to move, in phases, its mobile production base from China to Vietnam.

Analysts say Vietnam seemed more attractive because of its lower cost of production, plentiful labour, and a proactive government which was aggressively wooing foreign investors.

Studies by the Indian government, together with sector associations, at the time the PLI scheme was being drafted, revealed that the cost of production in electronics was at least 6-12 per cent lower in Vietnam than in India.

The incentives under the PLI were specifically created to deal with this difference and push exports.

Samsung has invested over $17 billion in Vietnam and in India, it announced a Rs 4,900 crore investment in 2018 in what is the company’s largest mobile factory in Noida. But a bulk of its investment went to Vietnam.   

The contrast between India and Vietnam is reflected in the investment numbers: Samsung is the largest investor in Vietnam. It is in talks to put in more money, which includes setting up a battery plant for electric vehicles.

Its investment in India is only over $2 billion, which includes its new display plant coming up in Uttar Pradesh and a mobile device factory. It has some television and consumer electronics factories, but also outsources manufacturing to third-party players.  

In terms of sheer presence, Samsung in India has hit over $11 billion in revenue in 2019-20, with a sizeable share (70 per cent) from mobile devices. A large figure by any standard until, of course, you compare it with the fact that in 2020, its revenues in Vietnam were $63.25 billion — over 6x those of India’s.

The Vietnam revenue accounted for over 30 per cent of the company’s overall revenue, while India accounted for only over 5 per cent.

Fifty per cent of its smartphones and tablets are produced in Vietnam and exported all across the world. The value of smartphone and component exports from Vietnam is $50 billion. That is 5x the total turnover of the South Korean company in India.     

India is a key research and development (R&D) centre. The Bengaluru facility is the largest for the company outside South Korea. It has over 10,000 employees working in its three R&D centres here.

But Vietnam could soon be catching up on this front. Samsung is now making a big push in R&D. According to reports, it is investing $220 million in a new R&D centre in Vietnam, which will employ over 800 researchers (taking the total headcount to 3,000).

The new centre will be functional in 2022 and will work on emerging technologies, such as 5G and artificial intelligence, and its status will be that of a ‘strategic’ centre for the group.   

Many experts say that one key reason why the company might have kept a distance in India is that it has the advantage of free trade agreements (FTAs) to fall back on.

Vietnam and South Korea have FTAs with India, which allow Samsung to export products from its manufacturing hubs without duties. In Vietnam and South Korea, it already has economies of scale and a global supply chain in place. In India, it still has to build both.

“It has the FTA advantage, which European gear makers don’t have. In India, it has imported a lot of its equipment from Vietnam using this route and enjoying a huge cost advantage. Therefore, it doesn’t require a PLI incentive in telecom at all,” said an executive of a competing telecom gear maker.

Going forward, the concern for Samsung could be its dependence on Reliance Jio for telecom gear. Reliance is planning to sell its own 5G technology and equipment and might compete with Samsung. In any case, the domestic market for 5G is uncertain.

This, together with having only a limited number of global contracts for telecom gear, means it does not make sense for Samsung to expand its manufacturing base in India.