For Dixon Technologies CMD Sunil Vachani, gaining the trust of the customer for a long-term business relation and evolving as their extension has always been more important than the volume growth. The mantra ensured focus on research and development for producing world-class products through state-of-the-art facilities, making him a poster boy of electronic manufacturing services (EMS) in India. No wonder then, the company that he had set up in 1983 at a small rented facility in Noida with USD35,000 borrowed from his father, has evolved from being a 14-inch TV manufacturer to becoming India’s leading contract manufacturer of electronics. Today, it manufactures smartphones for Samsung Electronics, Motorola, and Nokia; TVs for Xiaomi, washing machines for LG, and lighting products for Philips. It has also emerged as the top five LED manufacturers globally, in terms of scale.
Enabled by his clear vision of creating a hardware manufacturing ecosystem in India and focus on innovation, the year 2020 also saw him drive the company to seek approval under the PLI scheme and invest Rs 250 crore to set up a new facility in Noida, with a manufacturing capacity of 25 million phones per year. Driven by his commitments to launch own designed products and tapping on the new market requirements, the company also entered the medical electronics space and started manufacturing RT-PCR test machines in India. Overall his company’s shares surged 824% since the initial public offering in 2017. The company closed its books with total revenue of Rs 6,448.17 crore in FY 2020-201, up from Rs 4,400.12 in the previous fiscal.
A strong believer in India’s ability to harness the Y2K moment for electronic hardware, Vachani has also been working with industry bodies for change in mindset and policy to create a very strong component ecosystem that is vital for making hardware manufacturing more viable in the country, and right environment including funding mechanism to support R&D efforts and design companies in the country. His perseverance and resilience led Dixon Technologies to scale operations to a massive scale, enabling it to carve a slot amidst global manufacturing majors and script a Made in India showcase and success story.
The future of India lies in design-led manufacturing
Set up in 1993 in Alwar, Rajasthan, the company started its electronics manufacturing journey with color TV in 1994. Today, Dixon Technologies is the largest home-grown design-focused and solutions company manufacturing products in the consumer durables, lighting, and mobile phones markets in India. While it did foray into branded products, it quickly did the course correction to become the leading contract manufacturing player making its CMD Sunil Vachani the poster boy of EMS. The company carved a slot amid the global manufacturing majors to script a Made in India success story. Excerpts from the interview:
DQ: The year 2020 was a period of major success for Dixon. How will you describe the year in terms of the challenges and achievements across product lines?
Sunil Vachani: No doubt, it’s been a very challenging year for all of us, first as a country, and then as an industry and a company. But I think everyone has shown that we are very resilient. And that’s the reason we could bounce back strongly. In spite of a complete lockdown for almost a couple of months after the first wave and the subsequent slowdown, the company was able to do extremely well for the full financial year, with full credit to the team for their dedication and hard work.
The second wave was less severe in terms of at least the impact on business because the lockdowns were more local in nature. Thus, factories could operate with reduced manpower and safety norms in place. But of course, the impact on our people was much larger. And it was quite unfortunate what we had to go through as a country. It was a difficult circumstance, also within the company as many of our employees suffered from the disease. But it’s good to see we are finally coming out of it. The economy is bouncing back slowly, and production levels across manufacturing plants are limping back to normal.
DQ: In terms of achievements, can you elaborate on the year 2020 from the company’s perspective of products and tie-ups?
Sunil Vachani: The company was able to start the new plant for manufacturing of fully automatic washing machines, and the entire plant was set up during the pandemic. It will be operational in the next few months with trial runs. The company is venturing into new verticals, and we have announced our entry into IT hardware. We are looking at entering more home appliances categories, such as refrigerators, and the construction has already begun. We are also one of the companies that applied for the PLI (Production Linked Incentive) scheme. In addition, we have tied up with new customers and started the export of mobile phones for the first time. We believe we will be the first Indian company to export 5G phones.
DQ: Dixon Technologies has been approved by the Centre for incentives under the PLI initiative. How will it help the company expand its capacity and benefit the industry at large?
Sunil Vachani: I think this was made possible only because of the proactive policies initiated by the government of India. The PLI policy, which was first announced for mobile phone manufacturing and then for 13 other sectors is a game-changer. I say this because it ticks all the boxes – it creates the scale that is required to be a global player, builds a strong component ecosystem that had been missing all the while, and brings in large ecosystems into the country, which is extremely important for India to become the manufacturing hub of the world. The PLI scheme also helps build or create Indian champions.
DQ: Since you talked about manufacturing and how the PLI scheme is helping in a big way, one major concern for all is related to semiconductors. We are doing great in assembling things but can India also emerge as a semiconductor player?
Sunil Vachani: I am of the firm view that we cannot become a global manufacturing hub for these products without a robust and strong component ecosystem. While the PLI scheme will definitely help, we have to go beyond it, because let’s not forgotten that the component industry was the first to have a zero-duty regime for the last many years. Basically, it has been competing without any duty protection, and with many disabilities in place. Thus, it’s not a very easy industry for attracting investments. So far, the companies that have set up a component ecosystem have done it for addressing only a small percentage of the local market. It’s clear that if you have to be competitive in components, you have to set up capacities that are global in nature. The PLI scheme and SPECS (Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors) will definitely help attract a strong component ecosystem into the country.
Coming to the question on semiconductors, it’s clear that globally, manufacturing of semiconductors is happening only with the help of the government– whether it’s financial or other incentives. It’s great to see that our government has realised that we need a strong component ecosystem including semiconductors. Recently, the government came out with EOIs for attracting large fabs in the country. It’s an encouraging sign, but it’s not going to be easy, and a lot of hand-holding will be required by the government.
DQ: Reports indicate that Dixon is planning to invest Rs 250 crore to expand mobile handset production. Can you elaborate on the plan? How will it help create and nurture the ecosystem?
Sunil Vachani: The company’s foray into mobile manufacturing started almost four years back with manufacturing smartphones for certain brands. After that, we entered the feature phone category where we are the largest player, and then came the PLI where Dixon was one of the five companies selected by the government of India for manufacturing mobile phones. Our manufacturing unit, which has just been set up, commenced production a few months ago and we are looking at manufacturing almost 5 million phones from this particular unit. A new plant is being set up in Noida with a constructed area of almost a million square feet, which will have a manufacturing capacity of almost 25 million phones a year.
DQ: And will they be the nearby Asian countries or beyond?
Sunil Vachani: We are already looking at exporting to mature markets such as the US in a few months and that will include even 5G devices.
DQ: Overall, mobile phones contribute around 12% of the company’s total revenues. With India majorly moving towards a mobile economy, and 5G around the corner, what kind of growth are you looking at?
Sunil Vachani: Next year, the company is targeting a turnover of almost Rs 14,000 crore, out of which we expect mobile phones to provide a significant 4,500 to 5,000 crore. So, yes, the percentage of mobile phones revenue is going to increase substantially.
DQ: And this will be more from the exports or from both domestic and international markets?
Sunil Vachani: This will be at least 65% from the exports and the balance from the domestic market, which will be extremely positive both for the company and the country.
DQ: Dixon recently ventured into medical electronics. What products are you planning to manufacture and what market share are you targeting?
Sunil Vachani: When we look at a new product category, we see whether a few boxes can be checked. One, does the product fits into the large-scale category, both for global and domestic markets. Two does it enable us to launch our own designed products in the future. Three is there a scope for considerable backward integration rather than mere assembly. And four is there is a potential for outsourcing, and whether outsourcing increases as a percentage and as a trend in that particular category. When we looked at these points, we found that medical devices such as RT-PCR test machines had a huge potential, both for domestic and export markets. So, we tied up with a design company and became the manufacturing partner.
DQ: One of the criteria you mentioned is whether the company can launch its own designed products. DTIL has three R&D facilities in the country. What kind of research are you doing?
Sunil Vachani: Our objective is to offer our own-designed products across each of our product categories over a period of time. In the home appliances category, we have the largest range of semi-automatic washing machines, with almost 180 models. Even in our lighting category, almost 85% of the total revenue comes from our own designed solutions. In fact, as far as LED lighting is concerned, we were responsible for coming out with an extremely low-cost solution; the first time EESL launched the UJALA scheme, aimed at distributing low-cost bulbs to rural markets, we jointly worked with a customer and designed the cost-effective solution.
DQ: Reports indicate that despite a vast pool of workforce, the higher education system in India is unable to produce quality engineers and design architects. Have you faced any talent issues? What should the country do to build the skill and entrepreneurial ecosystem?
Sunil Vachani: I don’t think it’s a problem producing quality engineers. It’s about providing the right environment. Globally, Indian engineers have created the best hardware and software designs across product categories. And the reason is that they have been provided the right kind of environment. Additionally, we need to encourage and nurture design companies. Setting up a design company in India and becoming successful at it is not easy, due to funding and financing issues. Besides, in India, we frown upon failure and that’s probably one of the key differences between mature economies and us. In a mature economy, companies can fail and are allowed to fail, and can start again. We need to start creating funds and give incentives for investments in R&D.
DQ: ELCINA predicts that the Indian EMS industry may touch USD152 billion by 2025, up from USD23.5 billion in 2019-20. Can India really push its growth from the existing level in four years? What do we need to do to support this as a country?
Sunil Vachani: As far as the numbers are concerned, there is no doubt that we are sitting on a huge opportunity to make India the next global hub for the manufacturing of ICT products. The reason is that we have a large domestic market for these products, providing the advantage of generating scale, which is extremely important for export competitiveness. In the domestic market for LCD televisions, we are at a level of 17 million television sales per annum. Yet, the penetration levels are hardly 14-15%. This shows that there’s a huge scope for growth. Moreover, there are strong tailwinds in the favour of our country and the company. Globally, everyone is looking at China plus one for sourcing in terms of hedging their bets. And India is extremely attractive to potential investors. If you look at Vietnam, you will find that it exports almost USD90 billion worth of ICT products, whereas our exports stand in the range of USD11-12 billion. It gives you an idea of the huge potential that exists and what we can do as a country.
At the same time, we do have some disability factors, in the form of land acquisition, which is extremely inefficient. We have issues of high finance and logistics cost and, most importantly, a lack of a strong component ecosystem. We have been working as an industry body and discussing these issues with the government, and a lot has happened in the last seven or eight years. However, we need to get a number of MSMEs into the component ecosystem. In countries such as China, SMEs are the backbone of their component ecosystem. We need to make it easier for them to set up shop in India. The state and other local governments could offer them a plug-and-play model. Also, while we do have an interest subvention scheme for some of the sectors, it only benefits the direct exporter. What we need is a scheme that covers the entire ecosystem, including the manufacturer and its suppliers.
DQ: You mentioned that one of the reasons India is likely to become a hub is the scale of the domestic market. But that scale was always there. And we had hardware and EMS players such as Weston, Uptron, Videocon, HCL, and Zenith. So why did it take so long for Dixon to happen in India?
Sunil Vachani: We did have local demand but not local manufacturing, and a lot of the demand was being met through imports. If you look at mobile phones, maybe we had a huge demand for them 10 years ago, but there was hardly anything being manufactured in the country. If you compare it with today, almost 90% of the mobile phones sold in the country are manufactured in India. Moreover, the mindset of entrepreneurs has changed. Earlier, people used to look at setting up small plants catering to a small percentage of the Indian market. But now, the mindset is to set up large plants and large-scale backward integration for products where we can become global players.
DQ: Actually, that was the question – why did a similar company not emerge earlier despite the market?
Sunil Vachani: I have a personal story to answer this. I remember visiting a very senior bureaucrat many years back and talking about India’s potential of becoming a global hub for the manufacturing of electronic hardware. When I talked about our plans, what we were looking to achieve as a company, I was told that our strength lies in the software. They felt that India didn’t have the strength to become a big player in electronic hardware manufacturing. So, as I mentioned, the biggest change that has happened is the change in the mindset.
DQ: As an example from the automobile sector, we have seen how one Maruti Suzuki created an ecosystem and the ancillary companies that emerged have now become global suppliers. But we don’t see this happening in the hardware and electronics system. Why?
Sunil Vachani: Yes, I often give the example of the automotive sector as a huge success story because this is one industry that caters to the domestic market with local manufacturing. The sector has players who are the largest in the world in terms of exports. There’s also a strong auto component ecosystem in place. The origins of this success story lie in the right policy initiatives. If you have to encourage manufacturing in India, you need to have the right duty structure – customs duty and indirect taxes. If you look at the auto components, there was a basic customs duty, a large one, then a lower duty structure for some of the components, and then the lowest for the raw materials. Unfortunately, we have not had that kind of situation in the electronics industry. We rushed into free trade agreements with countries that were not even large markets, but we’re competitors like us, for example, ASEAN countries. We should have signed FTAs with consumption-based economies, such as the US, the UK, and European Union. But, I am glad it has started happening now. Coming back to the auto industry, once you have the correct duty structure in place, it brings manufacturing into the country. And then if there is a large scale, the component ecosystem develops around it. Thus, a correct policy framework is extremely important.
DQ: In some of the recent interviews, you have said that this is the golden moment of electronics manufacturing in India. If I look at it from the policy and another framework perspective, is it not too early to announce this?
Sunil Vachani: Well, not at all. We call it the Y2K moment for electronic hardware. And there are many reasons for that. First of all, we have already achieved that scale in some other categories. In LED lighting, for instance, Dixon today is probably among the top five globally in terms of scale. In mobile phones, some of our players are extremely large, there is a huge scale-up and the component ecosystem is developing, and we also have the PLI in place. This is the stage where we are just taking off. I am extremely confident that India will emerge as a hub for manufacturing these products and Dixon will be at the forefront of this revolution.
DQ: Dixon has also showcased what can be done in terms of global contract manufacturing? What are the upsides and challenges?
Sunil Vachani: I think the opportunities are very clear. If you look at LED lighting as a category, the global market is about USD130 billion and India is hardly exporting anything. Similar is the case with mobile phones and we are already targeting USD100 billion dollars worth of exports as a country. What we need now are the right policy initiatives, which have already begun. We need to continue pushing for the component ecosystem and design-led manufacturing, encouraging design houses to set up operations, and signing more FTAs with consumption-based economies.
DQ: How big is the threat from countries such as Vietnam, Malaysia, and Thailand that are doing pretty well in manufacturing?
Sunil Vachani: India has certain unique advantages. Firstly, we have a large domestic market that helps us get the scale, which is extremely important for competing in global markets. We have huge strength in designing and availability of engineers. In terms of labor costs, we are probably one of the lowest in the world. In terms of productivity, Indian operators and manpower are as efficient, if not more, as the best in the world. Many global companies that have a manufacturing base in India and other parts of the world have said that the Indian plants are the most efficient in terms of productivity.
DQ: Where do you think the future of India as a global supplier lies – in hardware or in software or will it be a sweet spot somewhere in between?
Sunil Vachani: The future lies in design-led manufacturing. In most of the products, including mobile phones, it’s a combination of strength in hardware design and software that really comes into play. Going forward, companies will have to build such strength in-house, and really try to churn out more of their own designed products than just being an EMS player. As a country, we do have that strength. We just need to create the right environment for this to happen in a big way.
By Shubhendu Parth