Smartphone prices in India may be set for a hike in the near term, after the central government announced the removal of key exemptions for mobile phone and electronics manufacturers in India. In the Union Budget 2021 speech, finance minister Nirmala Sitharaman stated the reduction of exemptions in the manufacturing sector, imposing 2.5 percent customs duties on components, parts and sub-parts that are imported from other countries in a bid to push for “greater domestic value addition” from the sector. Among other areas, the Union Budget 2021 imposed a 2.5 percent customs duty on areas such as circuit boards, camera components and connectors for mobile phones, which were so far exempted from import duties.
Reacting to the move, Navkendar Singh, director of research for mobile devices at IDC India states that the move may lead to a proportionate rise in device prices, particularly in the low-cost smartphone segments. The key factor behind this is that smartphone companies already sell budget phones in India at wafer-thin margins, which does not leave much room for them to absorb more price hikes in the manufacturing chain.
Budget segment to face the impact
Prachir Singh, senior research analyst at Counterpoint India, also states that there will be an expected price increase in smartphones, but the hike may largely be short-term. “The impact of this move may be similar to the increase in GST rates, but this may eventually be absorbed in the bill of materials (BoM) cost in the longer term.”
IDC’s Navkendar Singh further notes that as a result of this move, more smartphone brands may choose to ship smartphones without a bundled charger, in a bid to mitigate the overall price increase, or keep it nominal at best. “Many chargers were already being made in India, but the government’s move is putting a thrust on this sector,” he adds. He further believes that the budget sector is the one that will be impacted the most, and in the price segment of above Rs 15,000 in India’s smartphone market, the price impact may be better absorbed as a result of more expensive smartphone portfolios, and a premium charged for features such as 5G connectivity.
More pressure for localisation
Counterpoint’s Prachir Singh also agrees to the idea of the government imposing a stronger push for localising sectors. As he says, “Many component manufacturers are already making their products in India. For instance, many camera component makers are either importing sub-parts in a semi knocked-down (SKD) format, or are going the completely knocked-down (CKD) way by sourcing components locally. The government’s move essentially puts additional pressure to speed up the process.”
In the end, the consumer electronics market looks set to take a hit in the short term, in the time period through which India’s nascent mobile, components and electronics manufacturing industry continues to develop. As Mahesh Jaising, partner at Deloitte India puts it, “On an immediate basis, until there is an ecosystem of manufacture of these components, we may observe an impact of incremental cost on manufacturers of mobile phones on a short term basis. The same may have an impact on the pricing (of the devices).”
The move by the Indian government will hence put forth an incremental price impact, particularly in the high volume and value-sensitive budget smartphone category. It is also important to note that it is this sector that may find it the most important to keep chargers bundled in the retail box, since it attracts the largest number of first-time smartphone buyers in the country.
Demand may not decline
While it remains to be seen if the duty hike delivers a double whammy to budget smartphone makers in India, Counterpoint’s Singh notes that it is unlikely to have a major impact on the consumer demand for smartphones on the overall sense. “Despite the government’s increase of 10 percent duties on display panels last October, the market still went on to chart a record quarter during the festive season. This time too, the consumer demand will likely not decline, even if there is a nominal price increase in phones as a result of this move,” he added.
Spokespersons of India’s major mobile phone and electronics brands could not be reached at the time of publishing of the story.