ESTADO ACTUAL DEL DESARROLLO Y DEL ACONDISIONAMIENTO TERRITORIAL

Product TM Volumes

(Million units)

TDM Volumes for Local Sales (Million units)

TDM Volumes for Exports (Million units) 2010 0.50 0.025 0.00 2011 0.58 0.029 0.00 2012 0.70 0.035 0.00 2013 0.80 0.04 0.00 2014 0.90 0.045 0.00 2015 1.10 0.055 0.00

Industry SWOT

The Payment terminal value chain comprises various component and subsystem suppliers, assemblers and the downstream retailers and consumers. While local manufacturing is restricted to just assembly activities, the country is highly reliant on imports for all the electronics components in the product. The cost of investment involved in component manufacturing and also the EMV certification act as huge barriers for local manufacturers to explore local value addition.

The Payment Terminals value chain is depicted in the figure below.

Component and Sub-system Suppliers Processor ROM Processor Module Battery Circuits Interfaces Communication Module Software Dial Up Printers Displays GPS Operating System Applications Assemblers Downstream Payment Terminals - OEM Banking/Financial Licensors Utilities Retailers Payment

Terminals - EMS Certification Licensors

Government

In this product market, prominent players like Ingenico and Verifone together account for 95 per cent of market share. The remaining is accounted for by very small local manufacturers like Visiontek, Analogix who offer customization services to serve applications like utilities reading, transport, bill generation etc., which do not require an EMV certification. This is because the cost of certification is huge and is unaffordable for smaller manufacturers. The indigenous manufacturers import all of the electronics components required and execute assembly activities while packaging and integration, and casing manufacturing is done locally. There are design houses present in Bangalore which develop product design and also have IP capability. The very minimal local sourcing in this product market results in a very minimal local value addition. With regard to components, the electronic modules, processors, communication modules, interfaces, battery circuits, displays and printers are imported. Local capability exists for the casing, packaging and integration. The table below captures the capability in India across the Payment Terminals value chain.

Category Product Local Supply Local Manufacturing Local IP Capability Company Names Level of Local

Value Add Remarks

Components and Sub systems

CPU Module Offices; Total Only Sales

Imports No No NA

Product design exists, involves high setup cost for Foundry Communication Module and Interfaces Only Sales Offices; Total Imports

No No NA Product design exists, involves

high setup cost for Foundry

Battery Circuits

Only Sales Offices; Total

Imports No No NA

Product design exists, involves high setup cost for Foundry Displays and

Printers

Only Sales Offices; Total

Imports

No No NA Product design exists, involves

high setup cost for Foundry Integration

and Casing (Packaging)

Developed

locally Yes No High

Sheet metal and Plastic produced locally, including electrical cables.

Payment Terminals

OEM Yes Yes, Low value _add

Yes, at product design level Ingenico, Verifone, G&D, HCL, Visiontek, Analogix Low

EMS Yes Yes, only Low Value Add Assembly Yes, at product design level Flextronics, SGS, Kanes Low

The proportion of the retail market that employs POS systems is still less than 15 per cent. The use of plastic money is still nascent and the conversion rate is very high;this acts as a huge opportunity for POS installations. The first step to encourage the use of plastic money is to create awareness amongst the citizens to have banking facilities and hence own a transaction card. Also, it is noted that there is lack of standards which necessitates manufacturers to make customized terminals for clients. Lack of client demand leads to a volume issue, hence manufacturers are unable to manufacture in mass thus leading to many cheaper product imports.

STRENGTHS

Huge consumption demand

Continuous improvement to reduce product cost Various design houses present locally who carry out entire product design

Good skillset availability and reasonable labour cost Other raw materials like sheet metal and plastics is made cheaper

OPPORTUNITIES

Increasing average online spend per person Escalating manufacturing and labour costs in China driving manufacturers to invest in facilities in India Increasing adoption of debit and credit cards, significant rise in online transactions, Micro ATMs

Mobile phones: Best medium for cashless payments New policies such as MSIPS incentivizing local manufacturing investments

WEAKNESS

Reliance on imports for most of the critical components – Processor, Communication and interfaces module, battery circuits, display, printers

High certification costs prohibits local manufacturers to invest

Volume demand of certain raw materials is very low and hence rely on imports to get it cheaper. Penetration of PoS systems is still very less; Retail not more than 15%

THREATS

High cost of manufacturing; capital intense Well established manufacturing ecosystem in neighbouring China

Incentives on sales and excise duty in certain pockets of India thus attracting industries to one particular geographic location

Infrastructure inadequacy – sufficient power, water and

other utilities – uninterrupted availability

SWOT

Component SWOT

The component ecosystem for payment terminals is diverse in accordance to the application segments it caters to. The cost of certain components varies depending on the application that it performs. Modules such as processor, communication and battery circuits are common for all types of systems whereas the high end terminals may have smart chips, Bluetooth, GPS, etc. The top 4 components that contribute to majority of the payment terminals bill of materials (BoM) irrespective of the type or price are: 1. Communication module

2. LCD/ TFT 3. Printers 4. Processor

Analysing the payment terminals component value chain in India, it is observed that sustained and growing demand for POS systems is a key strength for the industry. Key strengths include design capability, EMS services and also PCB development, but the critical challenge is that there is no feeding industry present and most of the components are imported. This creates a lack of basis or fundamentals for developing the local manufacturing for this market. Huge investment costs to set up foundry, fabs and certifications acts as a major challenge for local manufacturers. Another major challenge is the volume; the demand is very high and outstrips the indigenous manufacturing capacity. Hence, the market is import-heavy and incidentally importing in large volumes from China and Taiwan also presents cheaper acquisition costs for companies.

The SWOT chart below captures the analysis for the Payment terminals market.

Strategic Conclusions

General

The current customs duty for terminals is 12 per cent on 80 per cent of the product price against a 14 per cent excise duty on the product price. This makes it economical for OEMs to import rather than produce locally especially when there is lack of incentives for component sourcing. Reduction in sales, VAT and excise duty would attract more manufacturers to consider local manufacturing. A notable issue is that although the Indian Governments gives a tax rebate of SAD for local manufacturers, the complexity of the process is a major challenge. Making the whole system as an Internet Online portal (similar to Income Tax) and creating awareness of the same would act as a boon to manufacturers. Allocation of funds by the Government for providing domain training in the payment industry would be of great help for people in the manufacturing sector of POS and payment enabling products.

Current Limitation Solution to Promote Ecosystem

Tax Structure a. Excise duty varies from state to stateb. Current duty is at 12% on 80% of the product price

a. Reduce excise duty, sales and VAT b. Incentivize tax on component imports

Value Addition

a. Lack of Feeding Industries

b. High EMV certification costs leading to a halt in progress for local manufacturers

a. Promote design through setup of design houses b. Collaborate with academia to carry out design activities,

both product and component level c. IP generation for local design

d. Incentivize certification costs for local manufacturers Component

Ecosystem

a. Reliance on imports

b. High demand volumes – makes it cheaper while importing

a. Offer incentives to source raw materials locally b. Set up Semiconductor fabrication, packaging and

testing facilities Policy

Initiatives

a. Lack of policies to encourage citizens to have banking facilities

b. Lack of standardization policies leading to many cheap imports of terminals

a. Create awareness to attract citizens to have bank accounts

b. Bring about standardized protocols for local manufacturing and component quality

IP development

EMV certifications, which are a mandate for PoS system authorization incurs huge cost. This is a huge roadblock for local manufacturers. This is where the need for an expansion of a national switch like NPCI comes in. The expansion will act as huge clearing houses and will abrogate the current VISA/ Master/ Maestro certifications thereby reducing the cost for local PoS system manufacturers. The brand name of the NPCI switch is called “RuPay” which currently is applicable only for ATM cards, and few debit cards is much cheaper when compared to the EMV costs. Their expansion to all debit cards, credit cards and merchant sites will encourage manufacturers to invest in local manufacturing and also help the entire value chain (banks, merchants and customers) to move towards plastic money.

Any certification like EMV/ product or component import is very complex. The number of processes and signatory documents

involved is too complex thus making it difficult for manufacturers to consider this option. Simplification of the process by hosting

the certification online with upload of scanned documents will make the process simple and easy to adopt. With software development being one of our core strengths, allocation of funds by the government to enable the Indian IT entrepreneurs to develop the ‘EMV Kernel’ targeting various emerging platforms including Android will help in strengthening the ecosystem. The end customers’ requirements are very niche and are very specific to this market, thus creating a volume issue for manufacturers. Manufacturers are unable to produce in bulk due to this customization issue. Lack of standards or policies for product design paves way for cheaper product imports as substitutes. Devising an appropriate manufacturing standard will help in manufacturing of quality products and will forfeit the volume issue.

Component ecosystem

India is largely dependent on imports for most of the critical electronic components which constitute about 60% of the BoM value. Incentivising component imports by providing tax rebates for local manufacturing and encourage fabless design companies by providing seed capital will promote higher local value addition. Setting up local design houses and leveraging R&D tax credit will attract global OEMs to invest in local manufacturing of components.

Product development

The Micro ATMS once established will quicken the process to a plastic economy. The Indian cash economy has to be encouraged to get converted to plastic economy. Encouragement for the usage of no frills debit cards with no surcharge and creating awareness about usage of the same is pertinent. Tax rebate to merchants, if at least 50 per cent of transactions in value terms are through cards, needs to be mooted. The NPCI (National Payment Corporation of India) must be brought to force thereby creating an infrastructure for “RuPay” as clearing houses and ultimately enabling the use of plastic money and necessitating a PoS implementation. The government has to initiate steps to fund and encourage the indigenous development of EMV Kernel and setup EMV and PCI-PTS test facilities to help the indigenous product manufacturers. Setting up of labs is an urgent need to prevent dumping of sub-standard devices. The Indian government should consider setting up of Accredited Labs for EMV Certification and PCI-PTS test facilities which are easy and cost effective for device manufacturers.