Contract Manufacturing is next big bubble in the atmanirbhar Bharat

Pic: Carlos Aranda/ Audi/ Mexico

#contractManufacturing

Post #tiktokbaninIndia, the #localforvocal and #atmanirbhar Bharat getting louder each day – we based on our developing research predict the Contract Manufacturing ( CM) market to go up from here – as in the demand for CM would increase. Let us analyse further:

Define – by CM we mean the market which include only on demand third-party manufacturing in the car, electronic, textile, smartphones, etc space. Means the market of CM which excludes CM of Pharmaceutical, Medical devices or the end user applications / consumptions of sterile and non-sterile products.

The CM of the medical device manufacturing outsourcing is large and mature enough that require a separate conversation. It is predicted to be close to $280 billion by 2026.

Market size:

As per our initial analysis and research, Contract Manufacturing ( of automobile, textile, home appliances/white goods, electronic and smartphones) is close to $15 billion market in 2019 and could grow sharply in next one year around July 2021. Estimated market size could be around $97.5 billion by 2024. It could be more if local manufacturing companies join the current players ( which includes multi- national Contract Manufacturers which are already operating) in India. However, there are many small and medium ancillary manufacturers are active in the ecosystem, which are making parts or small components ( similar to OEMs – we are not considering that market also).

However, it is possible that some of the mid-size OEMs ( say in automobile industry) could invest to offer full blown service of contract manufacturing of cars or other vehicles, and then they could fit the market we are discussing under CM. Similarly companies like Foxconn could invest more to offer manufacturing services other than only smartphone. Players in this market could offer manufacturing of electronic products such as tv, sound systems, digital cookwares etc. The white label manufacturers / CM who understands the supply chain, testing and certifications will go big now in India.

Auto market-

As per invest India, the $74 billion Automobile industry is expected to reach $300 bn by 2026.

CM in auto sector can be segmented into design and development, component manufacturing, electronics, and whole vehicle assembly. Component manufacturing and vehicle assembly have a significant market share of the total CM market in India and worldwide in general. While design & development and auto electronic service would fast pick in coming years. Passenger cars has the significant market size that would drive the CM growth.

Note – As per ACMA, Over a quarter of India’s auto part imports – $4.2 billion – came from China in 2019, including engine and transmission parts. So there is an opportunities to replace the dependency of China

As per the Automotive Component Manufacturers Association of India (ACMA), the Indian auto-components industry is expected to register a turnover of $100 billion by 2020 for domestic market and for exports the market expected to reach $ 80- $ 100 billion by 2026.

However Auto component turnover split include domestic sales, export sales and aftermarket sales. We are considering domestic sales in auto component manufacturing in India only. As per our estimates total CM market including auto component would be around $58 billion by 2024.

Once recent example is – M&M partnership with FORD, the alliance between Mahindra and Ford is to provide contract manufacturing platform to Ford motors in India.

Not the new concept:

the new business model and we are likely to call it as You-Design-We-Build ( YDWB) model. However the concept is not new, but the current business model is likely to get disrupted further.

Players:

Some of the known players in this segment are Jabil, Magna-Steyr, Providence enterprise, Elin,  Rangsons, Hyundai Dymos, Avtec, etc.

 

Coming to The Textile industry

Contract Manufacturing is very common practice in textile/ apparel / fashion industry. Multiple manufacturing units / suppliers work as CM for one brand to produce different products in different regions. They source products based on different types of agreement and other factors in the process. The fashion and textile industry is complex in nature consists of companies that produce raw materials, manufacture products (CM), distribute, and sell their products to customers. So CM in textile and apparel industry should add to the market value now that many brads might re-look the strategy while dealing with Chinese companies. However China is big supplier of raw materials to different contract manufactures in India. This should be an opportune moment for both Indian raw material suppliers/ manufactures as well as CM to add to this CM market.

As per industry sources, apparels are produced by about 77,000 small-scale units classified as domestic manufacturers, manufacturer exporters, and fabricators (subcontractors). According to Wazir India’s apparel market would grow to $160 billion by 2025. The domestic apparel market is estimated around $80 billion by 2024, out which formal /organized sector consumption would be close to 45%. We are estimating a conservative opportunity in the apparel market for contract manufacturers, and it would be around $25 billion market by 2024. It could increase due to consumption patterns and more multi-national players join the total market post covid-19.

Smartphones sector 

Among the first contracts given out in 2019, DBG Technology India Pvt Ltd is making about 1.5 million smartphones a month of Samsung model. DBG Technology India Pvt Ltd is JV of DBG Hong Kong and Karbonn mobiles India.

In India 100% FDI through the automatic route in contract manufacturing is allowed to attract more players – on the lines of Foxconn, Wistron, Flex, etc.  To help set up bases in India to manufacture for the domestic and international (export) market. As per new policy, govt has slashed base corporate tax rates to 15% for new manufacturing plants to attract companies looking to migrate production out of China. To attract phone manufacturing Indian govt has pushed for the production-linked incentive (PLI) scheme.  Companies like Samsung, Apple, Foxconn, Oppo, Vivo and Flextronics are in the process to increase manufacturing in India under this PLI scheme. The iPhone maker is also reportedly under discussions to get a third Apple manufacturer, Pegatron to start manufacturing in India. Details please read https://bit.ly/2ZEmcEE

Market- The electronic manufacturing Services (EMS) market in India is around $7.5 billion and would grow at a rate of 30% to reach at expected value of around $18 billion by 2024. Mobile / smartphones, Telecom, and Consumer electronics and appliances were the major contributor of the EMS market growth.

The White good / appliance is a $4 billion  market now, where only entry- to mid-segment products have typically been manufactured locally. Among the players BSH Household Appliances Group, is planning to invest 100 million euros (about Rs 800 crore) for setting up a refrigerator factory near Chennai after having recently started making washing machines. As the govt has doubled duties on import of 19 items, including air conditioners, household refrigerators and washing machines, the CM in this market has become core necessary for brands. Brands either would establish local manufacturing unit or would look for local CM as strategic partners.

Players – TCL, Haier, Tata group firm Voltas and Arcelik are among few who has invested to reduce the operating cost of products.

Once sector which we haven’t consider also is the defence / aerospace sector:

Because the complex procurement, manufacturing and delivery landscape of sector. It is very big market, however it involves too many participants and stakeholders. Estimating the CM market won’t be a straight forward – too man sub-contractors, system, integrators and offset partners are involved.

As per ASSOCHAM report, govt is preparing a roadmap to promote manufacturing of aeroplanes in India to ensure growth of country’s aviation sector. There is a push for Indian Manufacturing Capabilities for Defence & Aerospace to enable and priorities  #makeinIndia initiative in this market.  As per Make in India website India plans to spend $130 bn on military modernization in the next 5 years, as achieving self- reliance in defence production is a key target for the Government of India.

Player like Genser, Magellan Aerospace, Aequs Aerospace, Adani defence, etc. would definitely keep the market busy in coming days.

Conclusion:

Post COVID-19 phase, the market players would realign their strategy to address the Made in India and self-reliant business movement in India. Thus contract manufacturing going to be even more important part of the value chain, and would play big role in bringing India in the global manufacturing map.

CM market estimation, expandnext research $ billion, 2024 (E)
electronic manufacturing Services (EMS )  $                       7.5
Automobile CM  $                     58.0
Apparel CM  $                     25.0
white goods CM  $                       7.0
 Total market  $                     97.5

 

*estimation – it is a part of developing research, the value is subject to change in future. Publishing on the expandnext blog page for benefit of the larger audience and open discussions. Please contribute generously. Please write to us at [email protected]