Explained: How MSMEs in electrical, electronics manufacturing are impacted due to high commodity prices

The transmission and distribution equipment segment comprises 85 per cent of the electrical equipment sector in India. (File)

Ease of Doing Business for MSMEs: High commodity prices globally over the past 12 months have been keeping businesses and governments on their toes as the world recovers from the Covid impact. The price rally for various raw materials, involved in making almost every industrial product including steel, copper, zinc, aluminum, nickel, lead, cement, and more along with higher crude oil prices due to multiple factors has had cascading effect on micro, small and medium enterprises (MSMEs) in electrical and electronics manufacturing sector in India among others. 

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MSMEs are scattered across segments in the sector manufacturing and supplying goods. The electrical equipment market in India comprises generation equipment such as boilers, turbines, and generators; transmission and distribution (T&D), and allied equipment such as like transformers, cables, transmission lines, switchgear, capacitors, energy meters, insulators, and more. According to experts, the price rise impact has taken a toll on the operations of small businesses with a severe liquidity crunch. 

“The price impact is very high in terms of plastics or metals or even the electronic components in comparison to pre-Covid. And unfortunately, MSMEs are not able to pass on this cost to customers. Steel and aluminum, copper, etc., have almost doubled. So is the situation in plastics. Polyamide and polycarbonate have also doubled. The other challenge has been in logistics, especially for exports with respect to container load and the cost of the container. For example, if you were exporting to the Middle East earlier, it was practically free, but today you would rarely get the container and if you get it, it would be at a very high cost,” Vipul Ray, Managing Director, Elmex Controls told Financial Express Online.

Also read: How bank-fintech partnerships have evolved in India to ease lending, payments for MSMEs, others

Elmex Controls manufactures electrical terminal blocks and is also into electric wire termination technology. Ray is currently the President of the Indian Electrical & Electronics Manufacturers’ Association (IEEMA) that has around 1,000 members. The T&D equipment segment comprises 85 per cent of the electrical equipment sector in India while generation equipment makes up for the rest 15 per cent. As per industry estimates, the industry production for FY21 was estimated at $22.6 billion with exports worth $7.9 billion and imports worth $8.6 billion. 

Along with the impact on production, the challenge for MSMEs has been on the supply chain side as well while many have reduced their operations. ” In our business, we have downsized our operations by half to what we were at one-and-a-half years back. The key impact on MSMEs has been that their working capital requirement has gone up with the increase in raw material prices. Then there are challenges related to transportation, material availability, and supply chain. Freight rates have also increased by 2-8X. The bottom line is that many MSMEs have scaled-down operations,” Harish Agarwal, CEO at Kolkata-based Supreme & Co. Told Financial Express Online. The company manufactures and exports overhead line fittings and accessories for power transmission, distribution, and sub-station. 

Per kilogram prices, for instance, for major products such as hot rolled coils have around doubled since July last year from Rs 35-36 to Rs 70, while Zinc has increased from Rs 120 and to Rs 280, Aluminum from Rs 125 to Rs 260 Copper from Rs 400 and to Rs 700 apart from miscellaneous input prices, said Agarwal. 

Then there is the ongoing shortage of semiconductor chips, which power almost every electric device including smartphones, desktops, cars, refrigerators, washing machines, medical devices, and more. Covid-led disruptions in the manufacturing of new chips led to the shortfall and consequently, manufacturers have been unable to cater to the growing demand for months in the post-Covid world. During the ongoing festive season, experts have been pointing towards the impact on companies making different electronic products from cars to tablets amid the lack of enough chips. 

“Most of the semiconductor manufacturing is in China. It is important to attract manufacturers to set up units in India so that downstream can open up. We are really looking at the government to pass special packages to attract investment into the segment. But I believe all this is already in discussion at the highest level in the government, and MSMEs are ready to grab that opportunity. But there has to be a certain anchor manufacturer that has to start in India,” Charu Mathur, Director General, Indian Electrical and Electronics Manufacturers’ Association told Financial Express Online.

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Nonetheless, the government in February this year had approved the Production Linked Incentive (PLI) Scheme for IT Hardware Products such as laptops, tablets, all-in-one personal computers, and servers worth Rs 7,350 crore over four years for manufacturing of these products in India. According to a statement by the Ministry of Electronics & IT in February, production worth Rs 3.26 lakh crore and exports worth Rs 2.45 lakh crore are estimated in four years. Also, it is expected that the scheme will bring additional investments of Rs 2,700 crore, earn direct and indirect revenue of around Rs 15,760 crore and create 1.80 lakh jobs. 

This assumed significance as the government is looking at the Indian electronics manufacturing sector to become around $300 billion in size by 2024-25, PTI had reported citing Minister of State for Electronics and IT Rajeev Chandrasekhar last Friday at an event by the Public Affairs Forum of India (PAFI). The minister said that the electronics production grew to Rs 5.5 lakh crore in five years from around Rs 1.8 lakh crore earlier in the country. Electronics is the second largest traded commodity after hydrocarbons and petroleum, the minister had said. Moreover, earlier in the past week, the minister had said that the government will soon roll out a five-year plan to make India “a significant player in the tech space.”

While the government is looking to tap into the opportunity in the overall technology space, commodity price volatility may create a challenge for countries ahead in adopting the right policies, according to the World Bank’s latest Commodity Markets Outlook published last week. “The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession,” Ayhan Kose, Chief Economist and Director, World Bank’s Prospects Group had said in a statement last week. 

For instance, crude oil prices (an average of Brent, West Texas Intermediate, and Dubai global benchmarks) are expected to average $70 in 2021 and projected to be $74 a barrel in 2022 as oil demand strengthens and reaches pre-pandemic levels. On the other hand, as global growth softens and supply disruptions are resolved, metal prices are forecast to fall 5 per cent in 2022, after rising by an estimated 48 per cent in 2021, as per the World Bank report.