A BRIEF REPORT ON ELECTRONICS INDUSTRY IN INDIA February, 2015 A brief report on Electronics Industry in India

Private & Confidential Page 2 of 13 1.Electronics Industry in India 1.1Historical Developments The Indian electronics industry had its origins to the year 1965 with an orientation towards space and defence technologies. This was rigidly controlled and initiated by the government. This was followedbydevelopmentsinconsumerelectronicsmainlywithtransistorradios,black&white TVs,calculators,andotheraudioproducts.Colourtelevisionssoonfollowed.1982wasa significantyearinthehistoryoftelevisioninIndiawhenthegovernmentallowedthousandsof color TV sets to be imported into the country to coincide with the broadcast of Asian Games in New Delhi. 1985 saw the advent of Computers and Telephone exchanges, which were succeeded byDigitalExchangesin1988.Theperiodbetween1984and1990wasthegoldenperiodfor electronics during which the industry witnessed continuous and rapid growth. 1.2Current Scenario TheelectronicsmarketisoneofthelargestintheworldandisanticipatedtoreachUS$400 billionin2022fromUS$69.6billionin2012.Themarketisprojectedtogrowatacompound annual growth rate (CAGR) of 24.4 per cent during 2012-2020. Theelectronicssectorconsistsofconsumerandindustrialelectronics,computers, communicationandbroadcastingequipment,strategicelectronicsandelectroniccomponents. Total production of electronics hardware goods in India is estimated to reach US$ 32.7 billion in FY13andUS$104billionby2020.Thecommunicationandbroadcastingequipmentsegment constituted 31 per cent, which is the highest share of total production of electronic goods in India in FY13, followed by consumer electronics at 23 per cent. A brief report on Electronics Industry in India

Private & Confidential Page 3 of 13 The consumer electronics and durables industry is currently poised at about Rs 340 billion. India isalsoanexporterofavastrangeofelectroniccomponentsandproductsforthefollowing segments Display technologiesEntertainment electronicsOptical Storage devicesPassive components Electromechanical components Telecom equipment Transmission & Signaling equipmentSemiconductor designing Electronic Manufacturing Services (EMS) ThegrowthintelecomproductsdemandhasbeenbreathtakingandIndiaisadding2million mobile phone users every month! With telecom penetration of around 10 per cent, this growth is expectedtocontinueatleastoverthenextdecade.Penetrationlevelsinotherhighgrowth productsareequallyhighandgrowthindemandforComputer/ITproducts,autoelectronics, medical,industrial,aswellasconsumerelectronicsisequallybrisk.Combinedwithlow penetrationlevelsandtheIndianeconomygrowingatanimpressive7percentperannum,the projectionofaUS$150Billion+marketisquiterealisticandoffersanexcellentopportunityto electronics players worldwide. ThisgrowthhasattractedglobalplayerstoIndiaandleaderslikeSolectron,Flextronics,Jabil, Nokia,ElcoteqandmanymorehavemadelargeinvestmentstoaccesstheIndianmarket.In consumerelectronicsKoreancompaniessuchasLGandSamsunghavemadecommitmentsby establishing large manufacturing facilities and now enjoy a significant share in the growing market forproductssuchasTelevisions,CD/DVDPlayers,Audioequipmentandotherentertainment products.ThegrowthintelecomproductsdemandhasbeenbreathtakingandIndiaisadding2million mobile phone users every month! With telecom penetration of around 10 per cent, this growth is expectedtocontinueatleastoverthenextdecade.Penetrationlevelsinotherhighgrowth productsareequallyhighandgrowthindemandforComputer/ITproducts,autoelectronics, medical,industrial,aswellasconsumerelectronicsisequallybrisk.Combinedwithlow penetrationlevelsandtheIndianeconomygrowingatanimpressive7percentperannum,the projectionofaUS$150Billion+marketisquiterealisticandoffersanexcellentopportunityto electronics players worldwide. 1.3Electronic Manufacturing Services A brief report on Electronics Industry in India

Private & Confidential Page 4 of 13 Indiaiswell-knownforitssoftwareprowess.Butonthehardwarefront,theprogressisrather slow.However,thecountryhasbeenmakinggainsinthissectoralso.Already,50Electronics ManufacturingServices(EMS)/OriginalDesignManufacturers(ODMs)providersareoperating inIndia,rangingfromglobalplayersincludingFlextronicsandSolectrontoindigenousfirms includingDeltron,TVSElectronicsandSahasra.Furthermovesbyinternationalplayersare expected to add production in India in the coming years. Obviousallureoflocatingelectronicsproduction inIndiaisthenationslowlaborcosts.Labor costs for conducting electronics manufacturing in India are between 30 to 40 per cent less than in the United States or in Western Europe. Other equally important benefits from operating in India includeafast-growingdomesticmarket,anexcellenteducationsystem,thenationstechnology parks, and the recent improvements in the countrys transit and utility infrastructure. However, the Indian contract-manufacturing industry is not expected to pose a significant threat toChinaspositionastheepicenterofelectronicsmanufacturingintheshortterm.Indias contract manufacturing activities primarily serve the nations indigenous demand. Theconsumerdurablesandelectronicsmarketinruralandsemi-urbanareasaccountforabout 40% of the overall market and is growing at about 30% CAGR.OEMsprimarilyoutsourcemanufacturingtocatertotheIndiandomesticmarket,although export of Indian-assembled electronic goods does occur. In the longer term, i.e. 2009 onward, it is predicted that India may compete with the Chinese providers in select products as the nations share of the global electronics market increases. ForOEMs,usingcontractmanufacturingservicesinIndiacanhelpthempenetratethelocal market.However,OEMsfacespecificrisksassociatedwithusingcontractmanufacturersin India.Fluidexchangeratescombinedwithvolatileoilandcomponentpricesleadto unpredictablecosts.Changinggovernmentpoliciesalongwithshiftinggovernmentregimesalso contribute to an unpredictable political environment. Doing business in India is often disjointed, withaninefficientbureaucraticsystemthatcauses frequentdelays.However,forOEMsableto manage these risks, the opportunity in India is significant.ThesemiconductorfabricationsegmenthasasmallexistingbaseinIndiawithonlytwo fabrication units, which both are developing chips for the defense and strategic sectors. However, semiconductorsuppliersareexpandingtheirmanufacturingactivitiesinIndiatoservethe growing contract-manufacturing industry in the nation.Recent trends show that an increasing number of engineering and design activities are also being outsourcedtoEMScompaniesandtheyarebecomingODMs(OriginalDesignmanufacturers) and also provide final system integration and logistical support A brief report on Electronics Industry in India

Private & Confidential Page 5 of 13 The recent acceleration in EMS activity is mainly due to rapid growth in the electronic Hardware marketinallsegmentsparticularlyrapidgrowthhastakenplaceinTelecomInfrastructure Equipment, computers, Consumer & Hand held devices. Demand estimates for key segments (USD billion)Target 2014 Target 2020 Semiconductor design20.058.2 High-tech manufacturing 4.0 22.6 Electronic components2.6 3.4 Electronic Manufacturing Services1.42.3 Electronic systems IT system and hardware16.754.4 Telecom products and equipments29.5 153.5 Consumer electronics8.117.8 Others (Industrial, Automotive and others 2.77.8 Exports15.080.0 Total of all segments100.0400.0 1.4The Growth Drivers Key Growth drivers are raising incomes, credit availability and government spending. Increase in discretionaryincomeandcreditavailabilityhasboosteddemandforconsumerdurables.The governmentisoneofthebiggestconsumersofthesectorandleadsthecorporatespendon electronics;thisisnotsurprisinggiventhatelectronicsfacilitatese-governance,developmental schemesandinitiativeslaunchedbythegovernment.Strongdemandandfavorableinvestment climate in the sector are attracting investments in R&D as well as manufacturing. Policy support aiding growth in the sector. EncouragementtoFDI,SEZs100percentFDIispermittedintheelectronics hardwaremanufacturingsectorundertheautomaticroute,100percentincometax exemptiontoSEZunitsonexportprofitsforfiveyears,50percentforthenextfive years, Government is planning to set up dedicated clusters to promote manufacturing of electronic products. Customsdutyrelaxation-IT/ElectronicssectoristhefirstinIndiatobeallowed completecustomsexemptiononcertainitemsusedformanufacturingelectronicgoods, in Budget 201415; the government increased custom duty on imported electrical goods toboostlocalmanufacturers,Nocustomsdutyon217tarifflinescoveredunderthe A brief report on Electronics Industry in India

Private & Confidential Page 6 of 13 InformationTechnologyAgreement(ITA-1)oftheWTO,Peakrateforbasiccustoms duty is 10 per cent. Reducedcentralexcise-Meanrateofexciseduty(CENVAT)is8percent, Microprocessors,harddiscdrives,CDROMdrives,DVDdrives/DVDwriters,flash memorysticks,andcombo-drivesareexemptfromexcisedutypaymentandSAD, Components and accessories of mobile handsets are exempt from excise duty and SAD. EPCG, EHTP schemes - EPCG allows import of electronic capital goods without paying anycustomsduty,EHTPprovidesbenefits,suchasdutywaiversandtaxincentives,to companies which replace certain imports with local manufacturing. Intellectualpropertyrights-IntellectualPropertyRights(IPR)areakeydeterminantof progressinR&Dandinnovationintheelectronicssector,GOIhasamendedrelevant IPR-related acts (like the Copyright Act, Trademark Act, New Designs Act) from time to time to help spruce up innovation and new technologies in the sector. 1.5Production Trend of Different Segments 1.5.1Consumer ElectronicsConsumerelectronics(durables)sectorcontinuestobethemainstayoftheIndianelectronic industry contributing about 32 per cent of the total electronic hardware production. The market isexpectedtogrowat10to12percentannually.Theurbanconsumerdurablesmarketis growing at an annual rate of seven to 10 per cent, the rural durables market is growing at 25 per cent annually. Some high-growth categories within this segment include mobile phones, TVs, and music systems. 1.5.2Computer IndustryThe high growth in PC sales is attributed to increased consumption by Industry verticals such as Telecom, Banking and Financial Services, Manufacturing, Education, Retail and BPO/IT-enabled servicesaswellasmajore-GovernanceinitiativesoftheCentralandStateGovernments. SignificantconsumptioninthesmallandmediumenterprisesandincreasedPCpurchasein smaller towns and cities was witnessed during the year. It is expected that increased Government focusonpan-Indiadeploymentofbroadbandatoneofthelowestcostsintheworldwillsoon lead to accelerated PC consumption in the home market.ThegrowingdomesticITmarkethasnowgivenimpetustomanufacturinginIndia.Theyear witnessednotonlycapacityexpansionbytheexistingplayers,butalsonewerinvestmentsin hardwaremanufacturing.Indiaisalsohighontheagendaofelectronicsmanufacturingservices companies. 1.5.3Control, Instrumentation and Industrial Sector A brief report on Electronics Industry in India

Private & Confidential Page 7 of 13 Thisisnowamaturedindustrysectorinthecountryatleastasfarasvariousapplication segmentsisconcerned.State-of-artandreliableSCADA,PLC/DataAcquisitionsystemsare beingappliedacrossvarioussectionsoftheprocessindustry.LatestACdrivesystemsfrom smallertoveryhighpowerlevelsalsofindapplicationinlargeengineeringindustrieslikesteel plants and/or metal industries. World class UPS systems are being manufactured in the country tocatertotheneedoftheemergingdigitaleconomy.However,itappearsthereisreallyno manufacturingbaseinthecountryforthewholerangeofthelatesttestandmeasuring instruments which are invariably procured from outside. A good number of Indian companies in thecontrolandinstrumentationsectorareabletoacquireordersforexportsystemsthrough international competitive bidding.However, the creation of knowledge base in the country through industrial R&D in this critical sectorhasnotbeenimprovingasdesired.ThereisstilllackofneededR&Dactivitiesbythe industrylookingattheglobalmarket.OnthepartofDepartmentofInformationTechnology someofthelatesttechnologydevelopmentandapplicationsinthisareaincludeIntelligent SCADASystemsformonitoringandcontrolofMiniHydelplants,AdvancedTrafficControl Systemforurbantransportation,IntelligentPowerControllersforimprovementofqualityof electricpower,etc.Thesesystemshavebeensuccessfullydevelopedandappliedinrealfield conditions. 1.5.4Communication & Broadcasting Sector Thetelecommunicationindustryhasgainedtremendousrecognitionasthekeydriverforall rounddevelopmentandgrowth.Indiahasemergedasoneofthelargestintheworldand secondlargestinAsia.Broadbandconnectivityisholdingtremendouspotentialinthecountry. Indiahasemergedasthesecondlargestmarketformobilehandsets.Followingthe unprecedentedgrowthinthemobilemarket,anumberofcompaniesareplanningtosetup production base for mobile handsets in the country for meeting local as well as export markets. DirecttoHome(DTH)broadcastservicehasgainedmoreandmorepopularityBetterquality digitalbroadcastreceptionisnowavailablealmosteverywhereinthecountrytothecommon people on their TV sets through the use of small dish antenna and a Set-Top Box (STB). 1.5.5Strategic Electronics Thoughthegovernmenthasstartedtheprocessofgettingprivatesectorinvolvedinthe production of strategic electronics equipments, the private involvement is at its nascent stage. 1.5.6Electronic Components A brief report on Electronics Industry in India

Private & Confidential Page 8 of 13 The components with major share in the export are CD-R, CPTs, PCBs, DVD-R, connectors, semiconductor devices, ferrites, resistors, etc. The serviceable market for professional grade components such as PCBs, semiconductor devices, connectors, wound components, antennas, etc., is likely to go up due to launch of manufacture of mobile handsets in the country. Strengtheningofthecoreareasofdesignandapplicationdevelopmentwillprovebeneficialfor the Indian electronics and manufacturing industry. Moreover, it will also lead to improvement in innovation both in the domestic and international markets 2.REGULATORY ENVIRONMENT 2.1 Implementation of ITA-I under WTOIndiahasbeensuccessfullypromotingreformsinalltheconstituentsoftheInternet, Communication,andEntertainmentsector.BeingasignatorytotheInformationTechnology Agreement(ITA-I)oftheWorldTradeOrganizationandwitheffectfromMarch1,2005the customs duty on all the specified 217 items has been eliminated.Industrial Licensing has been virtually abolished in the Electronics and Information Technology sector except for manufacturing electronic aerospace and defence equipment.ThereisnoreservationforpublicsectorenterprisesintheElectronicsandInformation Technology industry and private sector investment is welcome in every area.Electronics and Information Technology industry can be set up anywhere in the country, subject toclearancefromtheauthoritiesresponsibleforcontrolofenvironmentalpollutionandlocal zoning and land use regulations. 2.2Foreign Investment PolicyA foreign company can start operations in India by registration of its company under the Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100 per cent. At the timeofregistrationitisnecessarytohaveprojectdetails,localpartner(ifany),structureofthe company, its management structure and shareholding pattern. Registration is a kind of formality and it takes about two weeks. It can forge strategic tie up with an Indian partner.A joint venture entails the advantages of established contracts, financial support and distribution-marketingnetworkoftheIndianpartner.Approvalofforeigninvestmentsisthrougheither automatic route or Government approval. A brief report on Electronics Industry in India

Private & Confidential Page 9 of 13 ForeigntechnologyinductionisencouragedboththroughFDIandthroughforeigntechnology collaborationagreement.ForeignDirectInvestmentandForeigntechnologycollaboration agreementscanbeapprovedeitherthroughtheautomaticrouteunderpowersdelegatedtothe Reserve Bank of India (RBI) or otherwise by the Government. 2.2.1Foreign Trade PolicyIngeneral,allElectronicsandITproductsarefreelyimportable,withtheexceptionofsome defence related items. All Electronics and IT products, in general, are freely exportable, with the exception of a small negative list which includes items such as high power microwave tubes, high end super computer, and data processing security equipment. Export Promotion Capital Goods scheme (EPCG) allows import of capital goods on payment of 5 per cent customs duty. The export obligation under EPCG Scheme can also be fulfilled by the supplyofinformationTechnologyAgreement(ITA-1)itemstotheDTA.Providedthe realization is in free foreign exchange. TheImportofsecondhandcomputersincludingpersonalcomputersandlaptopsarerestricted for imports.2.2.2MSIPS and SEZ SchemeTheUnionCabinetgaveitsgreensignaltotheModifiedSpecialIncentivePackageScheme (MSIPS) under which the central government will be offering up to Rs 100 billion in benefits to theelectronicssectorintheupcomingfiveyears.Thisfundingwillbemajorlyusedforthe promotion of production of electronics products and components in India. Thepolicyismeanttocreateanindigenousmanufacturingeco-systemforelectronicsinthe country.Itwillfosterthemanufacturingofindigenouslydesignedandmanufacturedchips creating a more cyber secure ecosystem in the country.1.The schemeprovidessubsidy for investments in capital expenditure - 20% for investments inSEZsand25%innon-SEZs.ItalsoprovidesforreimbursementofCVD/excisefor capitalequipmentforthenon-SEZunits.forhightechnologyandhighcapitalinvestment units, like fabs, reimbursement of central taxes and duties is also provided.2.Theincentivesareavailableforinvestmentsmadeinaprojectwithinaperiodof10years from the date of approval.3.Theincentivesareavailablefor29categoryofESDMproductsincludingtelecom,IT hardware,consumerelectronics,medicalelectronics,automotiveelectronics,solar photovoltaic,LEDs,LCDs,strategicelectronics,avionics,industrialelectronics,nano-electronics,semiconductorchipsandchipcomponents,otherelectroniccomponentsand EMS.Unitsacrossthevaluechainstartingfromrawmaterialsincludingassembly,testing, A brief report on Electronics Industry in India

Private & Confidential Page 10 of 13 packagingandaccessoriesofthiscategoryofproductsareincluded.Theschemealso provides incentives for relocation of units from abroad.4.Theschemeisopenforthreeyearsfromnotification.Approvalsforincentivesnot exceeding Rs. 100 billion will be granted during the 12th Plan period.It is believed that the electronics clusters would give this key sector the desired growth direction and also lead to the creation of millions of jobs. Governmentsapprovalforthedevelopmentofelectronicsmanufacturingclusterstosupport the establishment of both green-field and brown-field clusters is slated to enhance the growth of the hardware sector. The production of computers and mobile handsets has potential to benefit from this scheme. Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. SEZ unit may import/procurefromtheDTAwithoutpaymentofdutyalltypesofgoodsandservices, includingcapitalgoods,whetherneworsecondhand,requiredbyitforitsactivitiesorin connection therewith, provided they are not prohibited items of imports. Theunitsshall also be permittedto import goodsrequired for the approved activity, including capital goods, free of cost or on loan from clients. SEZ unit may, on the basis of a firm contract betweentheparties,sourcethecapitalgoodsfromadomestic/foreignleasingcompany.SEZ unitshallbeapositiveNetForeignExchangeearner.NetForeignExchangeEarning(NFE) shallbecalculatedcumulativelyforaperiodoffiveyearsfromthecommencementof production.2.2.3Export Oriented UnitsSpecial schemes are available for setting up Export Oriented Units for the Electronics/IT Sector. Various incentives and concessions are available under these schemes. The schemes are:Export Oriented Unit (EOU) Scheme Electronics Hardware Technology Park (EHTP) SchemeSoftware Technology Park (STP) SchemeEOU/EHTP/STP Schemes A brief report on Electronics Industry in India

Private & Confidential Page 11 of 13 Unitsundertakingtoexporttheirentireproductionofgoodsandservices,exceptpermissible sales in the Domestic Tariff Area (DTA), may be set up under the EOU, EHTP, or STP Scheme formanufactureofgoods,includingrepair,re-making,re-conditioning,re-engineeringand rendering of services. Trading units, however, are not covered under these schemes. 100 per cent Foreign Direct Investment is permitted through automatic route for the units set up undertheseschemes.Theseunitsmayimportand/orprocurefromtheDTAorbonded warehousesinDTA,withoutpaymentofduty,alltypesofgoods,includingcapitalgoods, required for its activities, provided they are not prohibited items of import in theITC (HS). The units shall also be permitted to import goods including capital goods required for the approved activity, free of cost or on loan/lease from clients. Aunitunderanyoftheseschemesmay,onthebasisofafirmcontractbetweentheparties, sourcethecapitalgoodsfromadomestic/foreignleasingcompanywithoutpaymentof customs/exciseduty.Thisunitshallbeapositivenetforeignexchangeearner.NetForeign Exchange Earnings (NFE) shall be calculatedcumulatively in blocksof fiveyears, starting from the commencement of production. SuppliesofInformationTechnologyAgreement(ITA-1)itemsandnotifiedzeroduty telecom/electronic items affected from EOU/EHTP/STP units to DTA will be counted for the purpose of fulfillment of positive NFE.TheSoftwareTechnologyParksofIndia(STPI)schemeplayedapivotalroleincatalyzingthe growthofthissectorandsupportingitsrapidproliferationacrossthecountry.Thetaxholiday helpedattractmuchneededinvestments(MNCandIndian)inthesectorandthevirtualmodel allowed firms to avail benefits without constraints on their choice of location. Although the existing term of the STPI scheme has been discontinued, the government has been tryingtorestoretheSTPIschemefortheunitsintier-2andtier-3citiesinIndia,astheSTPI scheme was a key contributor to the success of the Indian IT industry in its infancy. A brief report on Electronics Industry in India

Private & Confidential Page 12 of 13 2.2.4National Electronics policy 2012 Incentives provided by government to attract investors 1.ToprovidesubsidyofuptoUSD10millionper100acresofprojectinelectronics manufacturing clusters2.Reimbursement of excise duties for capital equipment in non-SEZ units3.Nocentraltaxesanddutiesfor10yearsinhigh-techfacilitiessuchassemiconductor fabricating units4.Variousexportincentivessuchas25percentofdutycreditonexportsofdifferent products Moreover, the government proposed an Electronics Development Fund worth USD2billiontopromoteinnovation,R&D,productcommercialization,andnanoelectronics StrategiesFavorableecosystemPromotingexportsFocusonHumanresourcedevelopmentDevelopingandmandatingelectronicsstandardsFocusonstrategicelectronicsFocusoninnovationandR&D A brief report on Electronics Industry in India

Private & Confidential Page 13 of 13 3.CHALLENGES AND OPPORTUNITIES 3.1 ChallengesMajorchallengesfacingtheIndianelectronicmanufacturingmarketareaninfrastructurethat needs to be improved at the earliest possibility, easing of foreign investment procedures, which are underway, and a restructured government tariff that now makes domestically manufactured goods more expensive than imported goods with zero tariffs. Therearealsootherproblems,whicharehamperingthegrowthoftheIndianelectronics industry. Some of them are:Lack of World-class infrastructure.Lack of clear-cut government policy for the industry.Very little expenditure in Research and Development area.Power of Marketing not harnessed to the maximum3.2OpportunitiesWhiletheElectronicssectorinIndiaiscurrentlysmall,thereareseveraladvantagesthatIndia offers that can be effectively leveraged to achieve higher growth. These can be categorised under three heads: Manpower Market Demand Policy and Regulatory Support MarketforelectronicsisexpectedtoexpandataCAGRof24.4percentduring201220.The demandforelectronicshardwareinIndiaisprojectedtoincreasefromanestimatedUSD69.6 billionin2012toUSD125billionby2014andUSD400billionby2020.Domesticelectronic production accounts for around 45.0 per cent of the total market demand. Therefore, in order to reducetheimportbill,thegovernmentplanstoboostthedomesticmanufacturingcapabilities andisconsideringaproposaltogivepreferencetoIndianelectronicproductsinitspurchases.ConsumerdurablesmarketinIndiaischaracterizedbylowpenetrationinvariousproduct segments,viz.1.0percentinmicrowaves,3.0percentinACs,16.0percentinwashing machines, 18.0 per cent in refrigerators, etc. Higher disposable incomes are leading to realization of penetration potential in various product segments, especially in rural areas.