Samsung Won’t Get Incentive for Smartphone Production in FY22

Samsung Unlikely to Get Fiscal 2022 Incentives in India Smartphone Production Scheme

Source: News article published by ET Bureau on January 18, 2024

Analysis of this News for a Layman

The Indian government has implemented a production-linked incentive (PLI) scheme to encourage global manufacturers to produce smartphones locally. Under this scheme, cash incentives are provided to companies that meet certain output targets. Samsung, a major global technology company, was one of the early applicants approved under this 5-year program in 2020.

However, according to the latest updates, Samsung has failed to meet the smartphone production targets set under the PLI for the fiscal year 2022 (April 2021-March 2022). This failure makes the company ineligible to receive incentives estimated to be around ₹900 crore for that year, representing a missed opportunity.

Nevertheless, Samsung is on track to submit claims under the PLI scheme for fiscal year 2023, having met the stipulated targets. However, with one year of zero incentives, its total participation in the scheme has effectively been reduced to 4 years instead of the initially allowed 5 years. This underscores execution missteps relative to competitors like Apple suppliers Foxconn, Wistron, and Pegatron, which have significantly outperformed targets after initial struggles during the pandemic.

Samsung Won’t Get Incentive for Smartphone Production in FY22

Impact on Retail Investors

For retail investors, Samsung’s failure to meet production targets under a key government scheme raises concerns about the company’s manufacturing and export ambitions in India. It suggests that Samsung lags behind Apple’s contract manufacturers, who appear to be leveraging India’s talent pool and policy incentives more effectively to boost their production volumes.

This development could negatively impact investor confidence in Samsung’s competitive position in the world’s fastest-growing smartphone market. Unless execution significantly improves, Samsung may lose market share, affecting sales volumes and profit margins over time.

Additionally, increased competition poses challenges amid known headwinds like high inflation and energy costs, which can hamper demand. However, investors could consider using price dips as opportunities to accumulate the stock from a long-term perspective, focusing on the company’s technological leadership.

Impact on Industries

The consumer electronics and related supply chain industries benefit from the shift of smartphone and component manufacturing to India, aided by policy incentives. This spurs job creation and reduces dependence on imports.

However, Samsung missing its production targets indicates that the company has not fully leveraged India’s available manpower and skillsets to optimize its production ecosystem to global standards. Competitors appear to be quicker in capitalizing on incentives and the enormous market potential.

Thus, there may be some slack in ancillary hardware industries serving Samsung in terms of capacity utilization until its export ambitions gain momentum. However, the forecast for domestic sales growth remains positive, and the long-term opportunities remain attractive.

Long Term Benefits & Negatives

Over a 5+ year horizon, the PLI scheme has the potential to transform India into a reliable global manufacturing and export hub for smartphones, reducing dependence on single geographical sources like China. Samsung can play a pivotal role in this transition, diversifying supply chains and lowering concentration risks.

Homegrown component manufacturing can also receive a boost over time, enabling the creation of robust ancillary ecosystems that cater to various technology brands. With its credibility and technological strengths, Samsung retaining market leadership seems highly likely as India emerges as one of the top three smartphone consumer and production hubs globally by 2030.

Key challenges remain related to rapidly changing consumer technology preferences, Chinese competitors gaining market share through aggressive pricing, and policy stability. However, the opportunity for multiple winners remains substantial. Through course corrections, Samsung should regain momentum.

Short Term Benefits & Negatives

In the near-term perspective for 2023-24, the failure to receive full incentives for the past year indicates execution gaps relative to competitors. This could negatively impact investor sentiment, forcing analysts to reassess growth forecasts linked to India’s manufacturing boost.

Unless remedial measures, such as addressing supply chain bottlenecks and aligning product mix with demand trends, are visibly demonstrated in the coming quarters, Samsung’s stock may face pressure.

However, from a two-year perspective, policy support for mobile manufacturing in India seems intact regardless of political changes. Samsung’s technological edge, brand appeal, and channel access still position it well to tap into the market potential, despite recent setbacks. Investors can consider accumulating shares during periods of pessimism.

Companies Impacted by Samsung’s Missed PLI

Indian Companies Gaining:

  1. Foxconn, Wistron, Pegatron:

    • These iPhone manufacturers are exceeding PLI targets, potentially attracting increased government focus and benefiting from continued scheme support.
    • Their success in the program could enhance their reputation and attract further investments in Indian smartphone production.
    • Their increased market share due to Samsung’s potential PLI loss might boost their financial performance.
  2. Indian Smartphone Component Suppliers:

    • Increased focus on iPhone makers due to Samsung’s potential PLI loss could benefit Indian companies supplying electronic components for smartphones.
    • Companies like Dixon Technologies, Bharat Electronics, and UTL might see higher demand for their products.
  3. Indian Smartphone Brands:

    • Samsung’s potential loss of PLI benefits could make Indian brands like Micromax, Lava, and Intex relatively more competitive.
    • Potential government support towards domestic brands could further strengthen their position in the market.

Indian Companies Potentially Losing:

  1. Other Smartphone PLI Participants:

    • Samsung’s missed PLI targets could raise concerns about achieving scheme goals, potentially leading to stricter scrutiny and higher compliance requirements for other participants.
    • Increased pressure to meet targets could impact their production costs and profitability.
  2. Samsung India:

    • Missing out on PLI benefits for FY22 might lead to lower profitability and potential job cuts.
    • This could negatively impact brand perception and employee morale.
    • However, their reported claims for FY23 suggest potential future recovery.

Global Companies Gaining:

  1. Apple:

    • Samsung’s potential loss of PLI benefits could indirectly benefit Apple by reducing competition in the premium smartphone segment.
    • Increased focus on iPhone makers under the PLI scheme could further support their growth in the Indian market.
  2. Global Smartphone Component Suppliers:

    • Overall growth in the Indian smartphone market driven by iPhone makers could benefit global component suppliers like Qualcomm, MediaTek, and Micron Technology.

Global Companies Potentially Losing:

  1. Samsung Electronics:
    • Missing out on PLI benefits in India could have a negative impact on their overall smartphone production profitability.
    • This could lead to reduced research and development investments and potentially affect their global competitiveness in the long run.

Please note: This analysis is based on the available information and is subject to change based on future developments. It is not intended as financial advice, and you should always consult with a professional before making any investment decisions.

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