It takes about 20 seconds for a typical air bathe—a small room the place excessive velocity air is blown to scrub mud—to do its job. That’s near the time it takes for a single meeting line on the manufacturing unit to place collectively a smartphone. This manufacturing unit, which assembles Motorola telephones, has 11 meeting strains, and one line has about 90-100 employees standing subsequent to one another. They make a smartphone just like the items of a jigsaw puzzle.
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Graphic: Mint
It all begins with the liquid show meeting (LDA), an digital board with a telephone’s show on one aspect, and circuits on the again. The first employee attaches the primary printed circuit board (PCB) on the again of this LDA and passes it on to subsequent employee to attach the PCB to a sub-board on the backside. In the next steps, digital camera sensors are hooked up to the LDA whereas a robotic machine applies coolant—a glue-like materials that retains telephones cool. It takes about 15-20 such steps to assemble a low-end smartphone.
Padget Electronics is a completely owned subsidiary of Dixon Technologies India Ltd, one of many oldest contract smartphone producers India has had. Even although corporations like Dixon have existed because the Nineteen Nineties, the rise of China’s electronics manufacturing business led many to overlook these companies.
In 2014, analysis agency Counterpoint Research pegged Micromax (which runs manufacturing agency Bhagwati Products Ltd) as the highest smartphone vendor within the nation. But as Micromax, together with Lava and Intex, disappeared from the market, overrun by Chinese gamers, folks appeared to additionally overlook that they’d important manufacturing companies.
The pandemic, and altering world geopolitics, nevertheless, have introduced Indian contract producers again in focus. And few corporations have drawn as a lot consideration as Dixon Technologies. Besides Motorola, the corporate right this moment manufactures smartphones for Nokia and Samsung. Two extra contracts are within the works. In 2022-23, it expects revenues at ₹12,700 crore, almost double of what the corporate generated in 2020-21. According to Counterpoint Research, within the September quarter of 2022-23, Dixon accounted for 7.8% of all smartphones made in India, narrowly behind Bharat FIH, which manufactured 8.5% of all gadgets. Bharat FIH is a Foxconn Technology Group firm, one of many world’s largest contract manufacturing entities.
Dixon’s inventory underlines the rising significance of Indian contract manufacturing. It rose from round ₹830 in January 2020 to over ₹3,859 in May 2022. While the shares have dropped since, many analysts and brokerages stay bullish on the corporate’s prospects.
What’s driving this optimism?
Brand behind manufacturers
Contract producers like Dixon, Bhagwati and Lava are additionally referred to as electronics manufacturing providers (EMS) suppliers, which implies they take specs from corporations like Motorola and put collectively an digital gadget. Companies corresponding to Motorola, then again, are unique gear producers (OEMs)—they personal the unique mental properties (IPs) and designs merchandise. Typically, they contract an EMS firm to assemble their product. Some corporations, like Samsung, are able to doing each.
Sunil Vachani, chairman and managing director of Dixon, mentioned his firm won’t ever transfer to the OEM enterprise mannequin. The firm, he harassed, needs to stay the “model behind the manufacturers”. In doing so, it will never become a competitor to the companies it produces for. A Motorola, therefore, will never have to worry about handing Dixon a contract because it knows that the company won’t use what it learns from manufacturing Motorola products to create a competing and possibly cheaper product—which is essentially how Chinese companies like BBK Electronics, Xiaomi and many others became giants in the field of consumer electronics over the past decades.
In a way, the strategy is similar to Taiwanese Foxconn’s famed eCMMS business model. While the ‘e’ is simply technology parlance, CMMS stands for component, module, move and service. It explains how Foxconn established itself as a manufacturing giant by making acquisitions that gave the company more control over the ecosystem, and hence, allowed it to offer better pricing.
Foxconn began as a plastic component provider specializing in connector and cable production back in the 1970s. It expanded through the 1980s, 1990s and 2000s to evolve into a complete system integrator for large companies, including Apple. It did so by slowly acquiring control over the labour intensive parts of the industry, and by acquiring capabilities in putting together PCBs, and various other modules of an electronic device.
Similarly, Vachani is keen on getting a handle on components electronics devices use. The company, he said, will be analysing the Budget proposal on halving customs duties on open cell panels—a key ingredient for making televisions (TV)—and will also start injection moulding for TV frames soon.
In the December quarter, the company also completed technology acquisition of Bluetooth mesh technology (a connectivity standard that allows multiple devices to interact with each other) and new WiFi solutions for smart lighting from Ibahn Illumination, a lighting solutions company.
The new factories
What financial investors like in a manufacturing business is how you differentiate yourself,” mentioned an individual who was amongst Dixon’s unique traders and exited when the corporate went public in 2017. He didn’t need to be recognized. He added that this differentiation can come both by changing into a market chief or if the agency can increase the market alternative for itself.
Dixon is doing the second. Mobile telephones are just one a part of its enterprise. The firm additionally assembles merchandise in client electronics, residence home equipment, medical electronics, lighting options, set-top bins, IT {hardware}, and reverse logistics. Expansion means constructing extra factories. Vachani mentioned the corporate is constructing 5.
The first manufacturing unit, which is able to manufacture telecom gear, is prepared. The second manufacturing unit, which can be devoted to manufacturing wearable merchandise (smartwatches, true wi-fi headphones, and so forth.) will develop into operational in March. Yet one other can be used to fabricate fridges and can develop into operational by April. The fourth manufacturing unit is Dixon’s largest at a million sq. toes. It can be devoted to the manufacturing of cell phones and is predicted to be prepared by August-September this 12 months. The final manufacturing unit will come up in Andhra Pradesh on a 20-acre plot and can be devoted to manufacturing surveillance merchandise, like safety cameras.
Meanwhile, Dixon introduced a three way partnership with Bharti Airtel in April 2021 to fabricate telecom and networking merchandise corresponding to routers and modems. While client electronics already generate substantial revenues ( ₹864 crore within the December quarter of 2022-23 with working revenue of ₹26 crore), Vachani has recognized fridges as a progress space. Wearables is one other guess, as can be laptops—as soon as the federal government pronounces a manufacturing linked incentive (PLI) scheme for the sector. The scheme supplies corporations money incentives on incremental manufacturing.
During its January 2023 earnings name, Saurabh Gupta, Dixon’s CFO, mentioned that the corporate has “massive progress” coming in all verticals in 2023-24. He added that fully automatic washing machines could show 100% growth, while wearables, hearables, telecom and TV could grow between 15% and 18%.
In September 2022, Dixon became the first firm to receive benefits—worth ₹53 crore—from the PLI scheme for mobile phones. In fact, no less than five of Dixon’s manufacturing segments are set to receive PLI benefits—besides phones, there is IT hardware, lighting, washing machines and telecom.
“They (Dixon) have been here for more than two decades,” mentioned Tarun Pathak, analysis director at Counterpoint Research. “They have all of the substances to scale up in home. They are scaling on the proper place, on the proper time. And then, clearly, taking a look at exports as a possibility as nicely,” he added.
Vachani concurred, noting that the company aims to earn nearly ₹1,200 crore from exports in future. Exports are not significant at the moment but, going ahead, the company expects to ship mobile phones and lighting products, among others. While the US is the key export market right now, Dixon plans to expand to Africa and the Middle-East as well.
From EMS to ODM
In the early 2000s, companies like HCL, Wipro, Zenith and ALTOS among others had tried to develop a complete ecosystem for personal computer manufacturing in India. Industry veterans recalled how governments didn’t pay heed at the time, dismissing them as “screwdriver companies”. It was among the many greatest errors Indian governments made, they held. The Modi authorities’s give attention to constructing India as a producing various to China should not go the identical manner. That objective can solely be achieved if companies like Dixon transfer from the EMS mannequin to what’s referred to as an unique design manufacturing (ODM) mannequin.
“Manufacturing as a paradigm relentlessly chases low price,” said PVG Menon, a veteran consultant for the electronics industry. “If you want to to broaden this, we should learn from China on how to make it sticky. You add value by deepening the ecosystem and by adding design capability. Offer ready-made modules with which products can be quickly realized,” he added.
ODMs lie someplace between OEMs and EMS companies. ODMs personal key licences and IPs required to fabricate digital merchandise and home equipment. To be certain, the transition to being an ODM is unlikely to make a giant distinction to Dixon’s margins. However, it permits a contract producer extra freedom and higher visibility into its personal enterprise. For occasion, in September, Dixon introduced that it had acquired licences to Android and GoogleTV platforms for televisions from Google.
Vachani mentioned that the corporate plans to launch its first India licensed design for televisions within the first quarter of 2023-24. He additionally mentioned that the corporate already has ODM standing in lighting and washer segments, and it hopes to attain the identical standing within the telecom enterprise within the subsequent monetary 12 months.
Challenges and progress
Dixon, nevertheless, isn’t proof against a world slowdown or the electronics business’s provide chain nightmare. In the January earnings name, Dixon famous that two new cell phone contracts are within the works, however, on the similar time, demand for Motorola telephones had dropped, which led the corporate to revise its estimates.
A sub-par December quarter has led the agency to revise its progress estimates for 2022-23. While Dixon was earlier anticipated to generate income of ₹16,500-17,000 crore, the estimates have now moderated to ₹12,200- ₹12,700 crore.
Analysts mentioned that the 2 new cell phone clients Dixon is ready to amass may very well be key to the corporate’s progress.
An analyst from a high securities agency, who didn’t need to be recognized, mentioned that the steerage revision, together with the market downturn globally, has price Dixon some factors. “The considering amongst some traders is that Dixon is perhaps struggling to allocate funds to the suitable areas effectively. Smaller rivals can transfer quick into progress areas,” the analyst said.
Companies such as MEPL (Sky Electronics), Sun Industries Pvt Ltd, ELIN Electronics, NTL Electronics, Vimal Plast India, etc., are competing with Dixon in different markets—from televisions and lighting products to home appliances. In mobile phones, the company’s biggest competitors are Bharat FIH and Lava.
The analyst quoted above, however, does not believe that the smaller firms pose a great risk. They don’t have the scale advantage Dixon has amassed over the past few years and may struggle for capital.
“You have to understand that Dixon remains one of the largest EMS players in India. Its only real competition is Foxconn. Lava, Bhagwati, etc., can’t expand to other segments fast enough. So, there’s no reason not to remain bullish on Dixon,” the analyst mentioned.
Certainly, traders wish to view the corporate as India’s reply to Foxconn.
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