In par with the development of global electronic and
electrical industry, Sri Lankan electrical and electronic industry has grown into an important manufacturing sector over the past few years contributing millions of dollars to the country’s revenue. Although it is relatively small compared to major industrial sectors such as apparel in Sri Lanka, there are many more growth potentials with in the industry, which makes it lucrative area to be part of. But today manufactures in this sector face several challenges in terms of cost, labor, financial & markets, which make them hinders from actively contributing to global industrial value chain. Therefore the purpose of this study is to examine those challenges faced by the electrical and electronic manufactures in Sri Lanka. Further it is intended to discuss some of the recommendations & proposals to the stakeholders, specially the Government, as of how they can actively contribute to reduce the burden of manufacturers in the industry, which will ultimately help manufacturers and industry as a whole to groom as a competitive industry while being a key player in the global industrial value chain


Data Collection was done mainly through secondary data sources. Secondary data required for the study was mainly gathered through online research methods via the internet, KPI reports and the discussions with the Managers of the selected companies. In addition relevant literature and data was also obtained from journal articles, publications and business magazines

Scope of the Study

Due to the time limitation, only three major players and two SMEs from the Sri Lankan electronic and electrical industry were selected to gather relevant data required for the study


Global Electrical & Electronic Industry

The electronic industry today plays a vital and important role in the development of most nations and it has grown substantially and strong over the past decades. The global electronics manufacturing industry, which is valued at USD 2.1 trillion in 2015, is the largest and fastest growing manufacturing industry in the world, and the industry is expected to reach USD 2.4 trillion by 2020.

Figure 1: Composition of world exports by product type

Source: What does world export? (1962-2014) available at

In the graph above, It is apparent that oil, machinery and electronics, have been traditionally large trading sectors since the 1960s. However, electronics have grown particularly fast compared to the others, and the importance of oil has declined. As a result today, electronics account for a larger share of world exports.

However, the shares within the global production of electronic products show that Asia is contributing around 60% of the global industry output (See Figure 2).

Therefore this is an industry that can be classified as a dynamic sector due to it showing high annual growth and significant increase in its share of world trade which makes it a lucrative industry to be part of.

Figure 2: Regional shares in global economic production, 2015

Source: The global Electrical & electronic Industry- Facts & Figures, ZVEI- German Electrical and electronic Manufacturers’ Association, July 2017

Sri Lankan Electrical & Electronic Industry

The electrical and electronic industry in Sri Lanka is relatively small industry compared to the other major industries such as apparel industry. This industry today mainly caters for automobiles, telecommunication, consumer electronics, industrial automation and medical sector. In 2016 industry contributed USD Million 317.75 to Sri Lanka exports, which accounts for 3.11% of the total export value, while absorbing over 30,000 skilled laborers.

Figure 3: Export performances from 2007- 2017 August

Source: EDB, Electrical & Electronic product export performances available at

Comparison with global players

As per the electronic and electrical sector baseline survey 2015, Sri Lanka positioned at 75th place in 2014 among other countries for this sector while neighboring India in 33rd place with a value of 9 billion (HS 85- trade map)

When considering year to year statics of the industry, In Sri Lanka electronic and electrical industry shows a slow growth, which is the right opposite to the world trends. All countries that witnessed an exponential growth in GDP per capita recently, had a robust electronics manufacturing industry. In those countries, the contribution of electronic industry to GDP is significant. For example, it contributes 15.5% to GDP in Taiwan and 12.7% in China.

In Sri Lanka total manufacturing contribution to GDP is 15.4%. Among that the electrical equipment subsector declined by about 9.3 per cent during 2016 (Factory Industry production Index, Central Bank Annual Report, 2016).

Figure 4: Share of Electronics Manufacturing in GDP, 2013

Source: Invest in electronics available at

Figure 5: Comparison of electronic trade balance (HS85), 2016

CountryGDP (US$)GDP Per Capita (US$)Export Value (US$)Import Value (US$)Electronic trade balance
Japan4.12 Trillion32,47798.15 Billion89.83 Billion8.32
South Korea1.37 Trillion27,221134.35 Billion75.14 Billion59.21
Taiwan0.47 Trillion31,900124.14 Billion58.44 Billion65.7
China10.87 Trillion7,924557.06 Billion414.33 Billion142.73
India2.07 Trillion1,5818.21 Billion37 Billion-28.79
Sri Lanka0.082 Trillion3,9260.24 Billion1.37 Billion-1.13

Source: International trade in good and services based on UN comtrade data, available at

Figure 6: Sri Lanka trade in Electrical and Electronic equipment (HS 85) with world 1990-2016

Source: International trade in good and services based on UN comtrade data, available at

As figure 6 shows in Sri Lanka exports shows a slow steady growth (11.2 million in 1990 and 241.8 million in 2016) while imports show a dramatic increase (135 million in 1990 and 1.37 billion in 2016) over the past years. As a result the electronic trade balance become more and more unfavorable, which needs the quick attention of all the stakeholders. It is important to identify the growth potential of this industry, where Sri Lanka economy can take advantages. For the countries in the developing world, electronic industry has proved to be an important sector when trying to diversify their export and to improve their trade performances

Electronic Industry Value Chain


One negative constraint in the value chain is the non availability of most of the raw materials, parts, machineries and components in the local market. The industry must import essentially all necessary raw materials, parts, components, sometimes indirect materials and consumables. As a result relative cost and response times of this industry are higher, due to the need of air transport and the distance with supply points. (Most electronics parts are small in nature, but due to their sensitivity to environmental conditions, they are usually air freighted). Apart from the material cost manufacturer’s have to bear all the transport cost, cost of insurance, all taxes and duties on the goods. As a result cost of materials of the industry goes up which adversely resulted in the value addition of the industry.

Positive basic factors for the industry value chain in Sri Lanka includes a highly literate and trainable workforce, with over 200 engineering graduates output to the sector from state universities, Free trade zone facilities & Favorable BOI incentives. However these are some basic factors affecting the competitiveness of the industry and Sri Lanka lacks more advanced factors.

Figure 7: Structure of the Sri Lankan electronic industry value chain

Source: EU-Sri Lanka trade-Related Assistance, National export strategy of Sri Lanka, Second Consultation, July 2017


Apart from the local assemblers of consumer electronics and other products for the domestic market, there are around 30 export oriented electronic and electrical companies in Sri Lanka. The major players are foreign owned and operate under BOI status. Industry is mostly limited to the manufacturing of component parts or subassemblies to foreign markets for their mass scale consumer electronics products, automobile products and telecommunication products and therefore value addition is minimal.


Industry exports their products to relatively demanding clients in Switzerland, India, USA, Germany, Hong Kong, China & Japan.


Challenges facing by the industry can be summarized as follows

Limited incentives for R&D in the sector

For a middle-income country seeking to embark on a knowledge based growth, Sri Lanka’s expenditures on R&D are considerably low (0.16 percent of GDP), and enterprise R&D is insignificant compared to the economies in the region. But there are small island of R&D progresses in Sri Lanka. Electronic Industry is now equipped with several agencies such as Arthur. C. Clark institute for modern technologies (ACIMT) to formulate research and development initiatives. Also the major players of the industry work closely with Universities and other academic institutions to produce innovations which led to the successful manufacturing of products and cost effective supplementary equipment. But most of these innovations are limited to prototypes and have failed to use in mass scale manufacturing due to lack of R&D incentives in the sector.

Figure 8: Sri Lankan Patent applications by field of technology, 2001-2015

Source: World intellectual property organization Database, Available at

According to World Intellectual property organization Sri Lanka ranked 57 in 2015 with patent application 263 and 405 industrial designs in 2015, while neighboring India ranked 3 with 23,946 patent applications and 8,246 industrial designs in 2015. Therefore it is clear that much attention & incentives from all the stakeholders are needed to up bring the Sri Lankan R&D sector & industrial innovations to be competitive in the global market place.

Figure 9: R&D Tax incentives

CountryTax incentive
JapanMaximum credit of 25% of total tax liability plus 5% special R&D cost based credit
India200% Super deduction for capital and revenue expenditure for approved in house R&D expenditure
China150% super tax deduction and 15% reduced corporate income tax rate for high and new technology enterprises

Source: Global R&D incentives, PWC, April 2017 available at

In Sri Lanka enterprises that incur expenditure on R&D carried out through a government or private institution is eligible for a triple deduction or double deduction respectively, only if a technology advancement and yield development is proved. Also A five-year tax holiday is granted for the profits from the new undertaking of a company that is engaged solely in R&D in the field of science or technology with the objective of using the results thereof for the production or improvement of products with a minimum investment of LKR 2 million prior to 1 April 2014

Even though there are several tax incentives in relation to R&D activities most of them are under utilized, therefore Sri Lanka needs to re examine and must modify under utilized tax incentives that was in place to promote R&D while encouraging individuals and firms to engage in such activities and to promote innovations within the industry

Limited access to finance

In electronic industry, compared to larger firms SMEs are more constrained by different obstacles, and limited access to finance is an important one of these. A study in relation to access to finance in the SMEs in Sri Lanka has revealed that even though there was developed and competitive formal financial markets in Sri Lanka, majority of SME owners prefer commercial bank loans. The main constraint to firm’s access to finance from commercial bank is the cost of finance. Sri Lanka should reduce interest rates and extend bank networks for the effective functioning of SMEs. Currently the borrowing rate works out around 15% on financial cost which was around 8.5% in 2014. This represents an 80% rise on financial cost

Limited access to new global markets

According to the results of Electronic and Electrical export sector baseline survey 2015, out of top 15 electronic global manufacturers, 9 among them were Asian countries. The common reasons for this development are strong government assistance, low operating and labor cost, large consumer market within the countries, economic and political stability, highly developed transportation and infrastructure facilities, investment friendly policies. The other main advantage of those countries is having multiple Trade Agreements. When compared to those countries the major disadvantage for Sri Lankan trade is not having multiple Trade Agreements.

Figure 10: Free Trade Agreements with key partner countries


Source: Plugging into global value chain: Role of trade and investment Policy, MISI, June 2014

AU=Australia, NZ=New Zealand, Indo=Indoneasia, SNG=Singapore, MAL=Malaysia, CN= China, HK=Hong Kong, JP=Japan

Sri Lanka currently having bilateral free trade agreements only with India and Pakistan, while having multilateral agreement with South Asia (SAFTA, SAARC) & Asia Pacific countries (APTA)

Limited International Recognition

Sri Lanka is only a component manufacturer and caters markets for mass scale consumer electronics products, automobile products and telecommunication products. We have are not being developed as consumer product manufacturer and are not representing world knowing brands. We only take the advantage of specialized products and Minimum order quantity. The other important initiatives taken by the pioneers in global electronic industry are encourage global investors to establish in those countries. The government support was given to facilitate major investors such as automobile brands, consumer electronic brands and telecommunication brands.

Figure 11: Top Asia Pacific Electronic companies’ investments

CountryTop Asia Pacific electronic companies invested
JapanPanasonic, Flextronics, Toshiba, Sharp
KoreaSamsung, LG, Sony, Flextronics
TaiwanPanasonic, Flextronics, Sharp, Foxconn
ChinaSamsung, Panasonic, Sony, Flextronics, sharp, Toshiba, Foxconn
MalaysiaSamsung, Panasonic, Sony, Flextronics, sharp
IndiaSamsung, Panasonic, Flextronics, Sharp

Source: Multiple Sources

According to the world Bank, For Sri Lanka Net inflows of Foreign Direct Investment (FDI) in 2016 is US$ 898,083,819 whereas in neighboring India US$44,458,571,549.

Figure 12: Foreign Direct Investment of BOI Enterprises

Source: Central Bank Annual Report 2016, Available at

FDI inflows in manufacturing sector represent 30.9% of total FDI inflows which is 17% decline compared to 2015. Therefor necessary actions should be taken to attract more direct inflows to the country.

Low Labor retention & high cost of labor

In current marketplace, employee turnover has been a major problem as it has directly influenced on the day to day operations.

Figure 13: Average Labor Turnover of selected EE manufacturers

YearAverage Labor Turnover
2017 (Up to August)6.39%

Source: company MIS Reports

According to the researches cost of employee turnover has been estimated to be up to 150% of the employee remuneration package. (Schlesinger and Heskett, 1991). In fact organization need to bear the responsibility for both direct cost related to exit interviews, new recruitment, training & compensation and indirect expenses, which are non financial in nature.

In addition Labor shortages remain as a challenge for both local and foreign manufacturers in Sri Lanka, given the country’s limited pool of workers. This problem is due to the fact that many graduates prefer “white collar” jobs to work or semi-skilled positions in the manufacturing sector. Additionally, some skilled workers tend to seek higher-paid work overseas, making it difficult for companies to hire or retain skilled workers.

On the other hand Sri Lankan labor is not any more cheaper, they are higher than most of the countries in the region

Figure 14: Basic minimum wages in selected Asian Countries, 2015


Figure 15: Average Cost of productive employees per month (selected EE manufacturers)

DescriptionGeneral shift ( 9 Hours)Shift Work (8 Hours)Night shift work (8 hours)
Basic Salary15,500.0015,500.0015,500.00
Over time payment4,000.004,000.004,000.00
Shift Allowance1,860.001,500.002,100.00
Average Basic salary of a productive employee21,825.0023,325.0023,925.00
Cost of Meals3,300.003,300.003,300.00
Cost of transport2,500.002,500.002,500.00
Attendance Bonus1,500.001,500.001,500.00
Performance Bonus Amount3,000.003,000.003,000.00
Cost of Insurance175.00175.00175.00
Cost of Medical expenses100.00100.00100.00
Cost for recreational activities1,000.001,000.001,000.00
Total Cost per productive employee in LKR33,400.0034,900.0035,500.00
Total Cost per productive employee in USD217227231

Source: company MIS Report

Apart from basic salary, manufactures usually provide performance bonuses, attendance bonuses, free meals & etc. According to the information given by one EMS manufacturer for an entry level productive worker company bears on average LKR 33,000-LKR 36,000 per month (See Figure 15). Therefore remain competitive in terms of labor is major challenge faced by the manufacturers. Without relying on labor manufacturers now have the challenge of seeking new means of competitive advantage.

Expensive input materials and depending on imports

As per the industrial statics, imports of electronic industry accounts for US$ 1.56 billion (total) (See figure 16). This high value due to the fact that manufacturers in electronic industry procure almost all the raw materials from international market due to lack of material availability in local market. Another major reason for the high cost of raw materials is the high rate of taxes and duties on imported goods (See figure 18). As a result industry value addition is at a minimal level and no initiatives have been taken up to now to set up import substitute industries in local markets where Sri Lanka economy can take advantages of.

Figure 16: Sri Lanka Electronic imports 2016

Source: EU-Sri Lanka trade-Related Assistance, National export strategy of Sri Lanka, Second Consultation, July 2017

Figure 17: Import & Export values of 2016 for selected HS codes

HS CodeDescriptionImport value US$ millionExport Value US$ million
8504Transformers & inductors80.5134.05
8537PCB Assembled31.0274.87
8534Printed Circuits26.885.23
8517Telephone sets452.21

Source: EU-Sri Lanka trade-Related Assistance, National export strategy of Sri Lanka, Second Consultation, July 2017

Therefore government should take necessary actions to implement import substitute industries which will help to reduce electronic trade balance. And also necessary actions must be taken to improve the quality of local substitutes, where manufacturers can rely on local input materials without depending on imports. Also it is appropriate to charge a tariff on imported products where we can find quality products at local market.

Until that it is appropriate to reduce taxes and duties on imported items where manufactures cannot find them in the local market.

Figure 18: Customs tariff rates for BOI enterprises

NoTax typeTax baseRate
QuantityUnit price
2PALCIF Value7.5%
4NBTCIF + 10% OF CIF + CID +2%
Value or QuantityRate


Followings are the recommendations and proposal which will help the manufactures and the industry as a whole

  • Reduce or eliminate taxes on ESD materials

According to the information given by the selected manufacturers, they are consuming ESD material worth 8.5 million on average per year. This amount excludes import taxes such as CESS, PAL & NBT. ESD materials are essential in electronic industry to protect the electronics from Electro Static. Currently there are no ESD material manufacturers in Sri Lanka and have to import all the materials from the international market. Therefore we propose

  • To reduce the import taxes on ESD materials until local manufacturers setup plants and supply materials to the industry
  • Invite ESD manufacturers to set up plants in Sri Lanka in the foam of foreign direct investments
  • Introduce a separate HS code for ESD materials
  • Elimination of Tax components on temporary importation of machines

On regular basis Tool kits & machineries required by manufacturers are imported under temporary imports regulations for calibration purposes. For approximately 2 week’s time it retains in Sri Lanka until calibration is completed. This Tool kits/ machineries are very expensive and under current tax policy even for BOI enterprises are subject to 7.5% of PAL and 2% of NBT. Therefore we proposed to eliminate or reduce this tax component on temporary machine imports.

  •  Utilize proposed 75% pal rebate on high tech machinery

In 2017 Budget proposes 75% PAL rebate on High-tech machinery imports considering process improvement and some cost relief to industries. But due to some reasons this has not been granted to Manufacturing industries up to now. Therefore we propose to reactivate this under utilized budget proposal

  • We propose following recommendations regarding CESS collected on Electronic Exports
  • A certain % should be diverted through Soft Loans for local Manufacturers (Similar to Kapruka Loan for Coconut Industry).
  • Certain % of CESS should be given through EDB for EEM promotions.
  • Training of Engineers and Technicians for the Industry

Most of the EEM Engineers out from the University go to the Service Industry such as SLT, Dialog, Mobitel etc. There should be a proper way to avoid this industrial brain drain. Therefore to attract EEM engineers to the industry we propose

  • During the first 2 years part of the allowance to be borne by the Government.
  • There should be a Training Fund Allocation for EEM Disbursement through a Government Authority.