From Blueprint to Boom
In this newsletter, we are are going to talk about what is ESDM and how it is expected to grow like wildfire.
Have you ever wondered who actually makes the gadgets you use every day? You might think it’s the big brands like Apple, PlayStation, Onida, or Asus, right? Well, not exactly. These brands mostly handle marketing and sales. The real manufacturing is done by third-party companies.
These third-party companies don’t just build products; they do much more. They work closely with brands to design, source materials, ensure quality, and more. This whole process is part of an industry called Electronic System Design and Manufacturing, or ESDM.
And Guess what? This industry is rapidly growing in India.
So, let’s understand what ESDM actually is, how its growing in Indian and what future holds for it!
What is ESDM?
As we mentioned earlier, ESDM stands for Electronic System Design and Manufacturing. It’s the process of designing, making, and testing all kinds of electronic devices, like your TV, smartphone, or even a video game console. Think of it as a big, magical workshop where all your favourite gadgets are created.
Let’s take a smartphone as an example. When a smartphone company wants to launch a new device, they don’t just design it and start manufacturing right away. Instead, they team up with an ESDM company. Together, they design the product. Once the design is ready, the ESDM company takes over the manufacturing. The smartphone company then focuses on marketing and selling the final product to you, the consumer.
A great example of ESDM in action is the iPhone. Apple, one of the world’s top brands, relies heavily on ESDM companies like Foxconn to produce its iconic products.
Foxconn excels at making high-quality electronics. By partnering with Foxconn, Apple can bring products to market faster, maintain top-notch quality, cut costs, and keep customers happy—all crucial for growth.
And it’s not just smartphones. From smartwatches to crucial products used in a commercial aircraft, the manufacturing of many electronic products depend on these companies. Its importance cannot be understated, as ESDM accounts for about 35% of the global electronics industry.
Key stages involved in electronic manufacturing:
Now, let’s dive deeper and look at different products are from the perspective of ESDM companies.
Not All Devices Are Equal
To get a clearer picture, let’s break down the ESDM industry by the volume and profit margins of the products they make.
Volume and Margin Categorization – By End User Industries
High Volume Low Margin (HVLM)
This category includes consumer electronics like smartphones, tablets, and laptops, made in large quantities to meet global demand. These products have high production volumes but low profit margins per unit. The business model relies on economies of scale and automation to keep costs low.
Indian companies like Dixon Technologies specialize in manufacturing these consumer electronics, as well as home appliances, lighting products, mobile phones, security systems, and power supplies for high-demand sectors.
High Margin Low Volume (HMLV)
This category includes products like industrial electronics, aerospace, and defense electronics, which are made in smaller quantities but have high profit margins due to their customization. Companies in this category build strong, long-term relationships with their customers because of the specialized nature of their products.
Companies like Kaynes Technology, Avalon Technologies, etc. are great examples. They offer a wide range of electronic manufacturing services across industries such as industrial, aerospace, telecommunications, defense, etc.
There’s no right or wrong between these two; they just have different business models, each with its own specializations and priorities.
By now, it’s clear that ESDM is a B2B business with customer being highly dependent on ESDM companies. As a result, strong customer loyalty observed across players.
There are solid reasons why OEMs stick with their ESDM partners.
Here are some key reasons for this loyalty.
Trust and Confidentiality
- – IP Protection: Long-term relationships build trust, ensuring that sensitive IP, such as proprietary designs and technologies, is protected. ESDM companies are more likely to safeguard the IP of OEMs they have established relationships with.
- – Confidentiality Agreements: These relationships often include robust confidentiality agreements that protect the IP from being disclosed or misused.
Quality and Consistency
– High Standards: ESDM companies familiar with an OEM’s standards can consistently meet quality expectations, reducing the risk of defects or inconsistencies.
- Continuous Improvement: Long-term partners can work together to continuously improve products and processes, leading to better quality and innovation.
Cost Efficiency
- – Economies of Scale: Long-term relationships can lead to cost savings through bulk purchasing of components and materials.
- – Reduced Development Costs: Familiarity with the OEM’s products and processes reduces the time and cost associated with new product development.
When an OEM and an ESDM company end their partnership, it can seriously affect both their business operations and market positions.
Indian Companies are now Planning to Manufacturing Outside India
This is something that is quite exhilarating to witness. Our home-grown companies are manufacturing products in India for both domestic and export markets, leveraging specialized capabilities, cost advantages, and scale. Now, some of these companies are even setting up manufacturing in the USA, the hub of R&D.
Cyient DLM – Q4 FY24 Update
Cyient DLM incorporates Cyient DLM Inc. to provide design-led manufacturing services
Avalon Technologies
Avalon Technologies already owns two manufacturing facilities in the USA enjoying a significant presence.
Kaynes Technology
Acquired Digicom Electronics Inc. in December 2023 to expand in the USA
Now, I know most of you may ask, why are these companies setting up a manufacturing base in the US where manufacturing is relatively expensive to India? Well, we believe it could be because of The Inflation Reduction Act, introduced by the USA government where sourcing goods manufactured in the US will be given a higher priority.
That’s all great, but what about growth in India?
India’s Opportunity:
Indian ESDM companies have seen explosive growth in the past few years, especially after COVID. However, India’s share in the global ESDM market is still small compared to China. To give you an idea, in FY21, China held about ~47% of the global ESDM market, while India had only 2.16%.
Due to rising costs in China, geopolitical tensions, and supply chain issues post-COVID, many companies are looking to reduce their reliance on China. This has given rise to the “China Plus One” strategy, where India is emerging as a key player. While India won’t match China’s manufacturing scale anytime soon, we believe even attracting a small portion of this shift could potentially grow India’s electronic manufacturing industry multifold in the next few years. Numbers mentioned below could give you some sense of what I mentioned above.
(Source: Kaynes Technology IP, Q4FY24)
(Author: Abhi Mevawala Twitter)
If reading about ESDM has got you interested and you want to know more, we have a related podcast to share. Recently, we published the first episode of our newly launched podcast series “Made in India” where we took a deep dive into the business of Kaynes Technology Ltd. with our dear guest Krishna Appala. Enjoy the show!
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