Budget 2018: Don't panic yet! Most smartphone brands should not see a massive price hike due to rise in customs duty

It has been four days since the Union Budget was presented and it seems to have caused enough confusion in the smartphone space. As with all things “budget”, the government’s move to hike the customs duty on imported smartphones will affect not just consumers but smartphone makers as well.

Representational image. Reuters

As it happens every time after a customs duty hike is announced, a lot of online users started panicking considering the inevitable price hike on smartphones.

However, most smartphone manufacturers played it cool, supporting the government’s ‘Make in India’ campaign and stated how almost every one of them will not be affected by the hike, as most of the smartphones are already made (read: assembled) in India.

“At OnePlus, we are fully committed to the Indian market and welcome the proposed regulations. Currently, all OnePlus smartphones are produced locally and we are already exploring ways to further increase the share of local manufacturing to ensure there is minimal cost impact of any new regulations to the end customer,” said OnePlus India GM, Vikas Agarwal.

Local smartphone brand Micromax was least worried about the hike in import duty. “The government’s measures towards the import duty on printed circuit boards (PCBs), camera modules, connectors and other components that go into making smartphones, will boost the 'Make in India' initiative and will relentlessly pursue in curbing imports and building value addition in the country,” said Rajesh Aggarwal, the company’s co-founder.

So it appeared that most companies would pass that extra 5 percent (the customs duty has been hiked from 15 percent to 20 percent) in import duties to the customer. Indeed, it’s not as easy for smartphone manufacturers to simply hike the price tags of existing smartphones. At the same time, a hike in customs duty affects every smartphone maker (currently operating in India) differently.

So if you are an Apple iPhone fan, the hike will affect your next iPhone purchase a lot differently than it would for a Samsung smartphone customer as every smartphone manufacturer sources components (or entire smartphones) differently.

iPhones and Pixels

Google, for example, could possibly see a hike in prices. Both Apple and Google, import smartphones to India, which means that these among all manufacturers are expected to be the worst hit.

Apple has been chasing sweetheart deals with the Indian government for more than a year now and after the pilot with the iPhone SE assembling, rumours hint that Apple wants to begin manufacturing its two-year-old iPhone 6s in India next. As for Google, it is unclear whether the search giant is serious about hardware yet in the Indian market. A recent report in the Economic Times did hint that Google is looking to open its own stores.

Note that I said “possibly,” because now that the new rules have been set, manufacturers will have to brainstorm and come up with solid plans as to how this cost can be adjusted in their manufacturing processes. Then there’s also the option that a brand like Apple or Google decides to be generous and absorb the extra costs, leading to a negligible hike in price. This is more so in the case of Apple as the brand recently hiked the price of its smartphones when the government revised its import duty in December by 5 percent (bringing it to 15 percent until yesterday’s budget took it a notch higher).

Here's a list of Apple's updated prices for its iPhones selling in India. It has seen an average hike of 3 percent in the prices.

Apple iPhone price hiked after the rise of customs duty. But the rise in price is a mere 3 percent.

Chinese smartphones

Chinese smartphone manufacturers like Xiaomi, Oppo, OnePlus and the lot, manufacture (or rather, assemble) devices in India, but need access to certain components (like PCBs and camera modules) to sell a working smartphone to customers. The strategy works well in the sense that it works with the government’s ‘Make in India’ initiative and not against it like in Apple and Google’s case.

“Almost 3/5th of total handsets out of 300 million sold last year were assembled in India. The increase in duty will further increase the local assembling share as brands will ramp up their current output from local electronics manufacturing services (EMS) facilities as capacity is already there,” said Tarun Pathak, associate director with Counterpoint Technology Market Research.

He also pointed out how the Budget 2018 meant good news for local electronics manufacturing service (EMS) facilities, which should expect a greater participation and long-term engagement from an OEM’s perspective.

Representational image. Reuters

Sadly though, instead of forcing Chinese brands into component manufacturing (ie manufacturing chips, camera modules here instead of assembling them) locally themselves, the budget will end up ramping up production for EMS facilities that currently enjoy manufacturing smartphones for these brands. EMS facilities still provide plenty of jobs, so it's still a win-win for the government here (or at least it appears to be that way).

“This hike in duty was an expected move but it would have been great if duty hike was also on some of the components as well like PCB assembling of phones, camera modules and others,” added Pathak.

The ‘almost local’

This is the third category of "manufacturers" who are into component manufacturing using their own factories in India. Samsung is one of them and brands like these that should see the least disturbance in product pricing.

Making this possible is not easy but comes only after years of commitment (22 years to be precise for Samsung) to a certain market as the machines that build these critical components need to be imported into the country. However, once set up, it makes for a smoother ride especially when the rules change because you simply operate like a local instead of an outsider.

Budget smartphones

In the end, it all depends upon whether the smartphone brand is willing bear the extra burden or simply pass it on to customers by hiking the consumer price tags.

Navkendar Singh, associate research director at the IDC says, “This depends on the brand. We believe at the mid and premium end, the market can absorb certain price hike. At the entry level, it must be absorbed by the manufacturers.”

Indeed, the only smartphone brand that really needs to worry here is Apple, as it desperately needs a piece of the world’s fastest-growing smartphone and soon.