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Numbers Game

Despite the Indian government’s crackdowns on Chinese smartphone makers, Chinese brands still view the India market as indispensable to their global strategies

By Yu Xiaodong , Chen Weishan , Meng Qian Updated Dec.1

On September 30, an India appellate authority upheld an order issued by the country’s antifinancial crime agency, the Enforcement Directorate, to seize 55.5 billion Indian rupees (US$680m) from the bank accounts of Xiaomi India, owned by China’s smartphone maker Xiaomi Group, for evading customs duties. The order was issued in April but put on hold in May by a lower court.  

Xiaomi responded on October 2 that it was “disappointed” by the decision, saying that 84 percent of the 55.5 billion rupees to be seized was a royalty payment for US chipset company Qualcomm Group.  

The seizure of its assets is just one of the investigations that Indian authorities launched against the Chinese smartphone maker. Earlier in January, the Indian Ministry of Finance fined Xiaomi 6.53 billion rupees (US$80m) for evasion of customs duties, saying that it found Xiaomi India under-valuated imported goods, to which Xiaomi responded that it disagreed with the pricing method for imported goods used by the authorities. 

Tensions and Crackdowns 
Since border tensions escalated between the two countries in 2020, Chinese technology firms have had a tough time in India. In the immediate aftermath of the border clashes in which at least 20 Indian soldiers and four Chinese soldiers were killed, India banned more than 200 Chinese apps from China, including the popular video platform TikTok, owned by Beijing-based ByteDance.  

While there had been calls for a boycott of Chinese products in India, Chinese smartphones remain very popular in the Indian market. Four of the top five brands in India’s smartphone market are Chinese, with South Korea’s Samsung coming in second to Xiaomi in the second quarter of 2022.  

According to data released by the global technology market research firm Counterpoint Research, with a market share of 19 percent in Q2 2022, Xiaomi is the most popular smartphone brand in India, followed by Samsung (19 percent), Vivo (17 percent), Realme (16 percent) and Oppo (11 percent). The four Chinese brands have a combined market share of 63 percent and if smaller brands are included, Chinese smartphone makers’ market share amounted to 79 percent in June 2022, up from 75 percent over the same period of 2021.  

But in recent months, almost all major Chinese brands have found themselves in hot water with the Indian authorities.  

In July, the India Directorate of Revenue Intelligence (DRI) raided 48 locations of Vivo and 23 related entities and blocked 119 bank accounts linked to Vivo India that were holding 4.65 billion rupees (US$57m). On August, the DRI said it detected a customs duty evasion to the tune of 22.17 billion rupees (US$272m).  

Also in July, the DRI searched Oppo’s offices under similar accusations. India’s Ministry of Finance said that it has found evidence that Oppo India “willfully” made false custom declarations, which allowed it to wrongly obtain duty exemption benefits of 43.89 billion rupees (US$538m). 

‘Hostile’ Environment 
The business environment for foreign investors in India has long been perceived as rather hostile, given its strict tax code and the Indian government’s protectionist policies. It is not uncommon for foreign investors to engage in lengthy lawsuits with the Indian government.  

According to Li Qin, a lawyer from Link Legal, an India-based law firm, while India has high-standard regulations, government agencies are understaffed and do not offer any guidance on regulatory compliance. “The result is that regulations are seldom and only selectively enforced, and it is very difficult for a foreign business to achieve absolute compliance,” Li told NewsChina.  

According to Yang Shucheng, secretary general of the India China Mobile Association (CMA), an industry body that represents the Chinese mobile phone industry in India, the recent investigations were obviously targeted at Chinese brands.  

Yang estimates that about 60 percent of Chinese enterprises in the smartphone industry in India have been investigated since December 2021, including smartphone giants and smaller manufacturers. Many believe that the deteriorating relationship between India and China is one reason for the recent crackdown.  

Chinese smartphone makers started their forays in the Indian market after Prime Minister Narendra Modi’s government launched the “Make in India” initiative in September 2014, which coincided with the best period of the China-India relationship in recent history.  

Within just two years, over 100 Chinese mobile phone and component manufacturers made investments to allow access to the Indian market. Yet as geopolitical tensions between China and India escalated, things changed.  

Even before the border clashes between India and China in May 2020, India had already tightened controls on investment from China. In April 2020, the Indian government revised its foreign direct investment (FDI) policy to require all investment from India’s neighboring countries to obtain clearance from the federal government. 
The result is that FDI from China to India rapidly declined. According to data released by China’s Ministry of Commerce, China’s FDI outflow to India dropped sharply from US$534.6 million in 2019 to US$210 million in 2020, a drop of more than 60 percent. In 2021, the figure dived to just US$63.2 million.  

As China shut its borders to foreign visitors amid the global pandemic, barring students and professionals from India from returning to China, India retaliated by tightening the issuance of visas to Chinese. Not only are tourist visas for Chinese nationals completely suspended, but it is also difficult for Chinese tech firms to send in managerial and technical staff.  

Yang said that in the pre-Covid period of 2019, there were over 10,000 Chinese professionals working in Indian offices of Chinese phone makers. Now, only about 1,000 are working in India, although several thousands more are waiting for visa approval.  

Chinese smartphone makers have helped the local economy by creating about 400,000 jobs for local workers, Yang said. “But given Chinese brands’ dominant position in the market, the Indian government may think that they haven’t done enough to boost the government’s tax revenues.” 

With probes still ongoing, Bloomberg News reported in early August that the Indian government is seeking to drive Chinese smartphone makers out of the lower-end smartphone market. Citing insider sources familiar with the matter, the report said that India will restrict Chinese firms from selling handsets cheaper than 12,000 rupees (US$147) in order to protect domestic manufacturers.  

“What’s special about the Indian market for Chinese smartphone makers is that most other developing countries don’t see Chinese firms as direct competitors,” Li Nan, former VP of Chinese smartphone maker Meizu, told NewsChina. “India obviously thinks otherwise.”  

Li added that as a part of the overall strategy of India’s policy in the smartphone market, the recent crackdown may be aimed at forcing Chinese firms to further localize their manufacturing in India.  

India imposes heavy basic customs duties on imports of finished smartphones and parts and components. A complete handset attracts a hefty 22.5 percent duty while most parts are subject to basic custom duties of 2.5-15 percent.  

Customs duties are a major reason why smartphone makers, including Chinese and other international manufacturers like Apple and Samsung, have relocated phone manufacturing to India. After years of operation, Chinese smartphone makers in India still import most components from overseas, mainly from China, which are assembled in factories in India.  

Yang Shucheng estimates that currently only 15 percent of all components and parts of smartphones made by Chinese brands are locally sourced, though the ratio could increase to 20 percent by the end of 2022.  

According to Li Nan, the crackdown sends a clear message to Chinese smartphone makers that “If you want to have a share in the Indian market, you need to help India to develop its domestic smartphone industry.” 

Models pose with Oppo F1 Plus handsets at a smartphone launch event in New Delhi, India, April 5, 2016

A Vivo store at the LAJAT NAGAR Mobile Phone Shopping Center in downtown New Delhi, India, April 15, 2018

Leave or Stay? 
India’s crackdown has drawn Beijing’s attention. In July, China’s embassy in India criticized New Delhi’s moves, warning that its crackdown disrupted the “normal business activities” of Chinese companies, and this would erode “the confidence and willingness of market entities from other countries, including Chinese enterprises to invest and operate in India.”  

There is no doubt that the probes pose serious challenges to Chinese smartphone makers. Xiaomi saw its market share drop from 23 percent in Q1 of 2022 to 19 percent in the second quarter. In Q1 2021, it had a 28 percent market share. However, it is unclear whether it is related to the investigations.  

On July 22, Zhao Ming, CEO of Chinese smartphone brand Honor, told China’s State-sponsored media outlet Securities Times that the company is pulling its team out of India “for obvious reasons” and that its businesses in India will be operated by local partners.  

Previously owned by Huawei, Honor is a major player in China’s smartphone market and topped China’s smartphone market in Q2 2022 with a 19 percent share.  

Known to primarily focus on the premium smartphone market in its overseas expansion, the company’s presence in the Indian market is negligible, reaching only a 3 percent share at its peak in 2018.  

But most Chinese brands are there to stay. Several Chinese brands pledged to expand their investment and increase localization efforts. In its India Impact Report 2021, Vivo said it is currently sourcing 95 percent of its smartphone batteries locally, pledged to increase its charger localization rate from 60 percent to 75 by 2024 and source 65 percent of displays locally by 2023.  

Just two weeks after Oppo’s offices were raided by the Indian authorities, it announced on July 29 that it would invest US$60 million over five years to boost its local supply chain.  

Mutual Need 
According to Yang Shucheng, none of the Chinese brands that already have a major presence in India can afford to abandon the market. Not only does India offer cheaper labor, it has great growth potential, which is particularly significant as the global demand for smartphones has declined in 2022 amid economic headwinds.  

“India may be the only major market where smartphone sales will continue to grow in the following years,” said Sun Yanbiao, head of Shenzhen-based industry intelligence provider Mobile World (Shoujibao.com). According to Counterpoint Research, India is the world’s second-largest smartphone market with a total shipment of 169 million units in 2021, about half of the Chinese market. Moreover, with 86 million feature phone shipments in 2021 in India, it is estimated that many will replace their old feature phones with smartphones as India’s economy continues to grow.  

“With a population of 1.4 billion people, India’s smartphone shipments eventually will reach the current level of China,” Yang said. Besides total shipments, the average price of smartphones in India is expected to grow.  

According to the International Data Corporation (IDC), a global market intelligence firm, the average selling price of smartphones in India has grown consistently since Q4 2020, reaching a new high of US$213 in Q2 2022, though still well behind the global average of about US$400.  

As the bulk of India’s smartphone market will continue in the lower- and mid-range segment, an area where Chinese makers have proved to be very competitive, the Indian market is an indispensable part of their global ambitions.  

India is not ready to decouple from China in the smartphone industry either. Offering good-quality phones with a variety of features at affordable prices, there are few alternatives to Chinese brands in the Indian market.  

With its high price tag, Apple only has a market share of 3 percent, while India’s domestic brands, such as Micromax, Intex, Karbonn and Lava, focus on the entry-level market, and they import most parts from Chinese suppliers.  

According to Yang, few Indian smartphone firms can enter the supply chain. He estimates that India’s domestic smartphone industry is still 15 to 20 years behind China and still has a long way to go before they can challenge Chinese brands.  

Yang said that the existing probes do not pose existential threats to Chinese smartphone makers, especially when they still have the chance to challenge the government. “There are a lot of gray areas in law enforcement in India and there is room for negotiation,” he said.  

While the disputes between the Indian government and Chinese smartphone makers may take a long time to settle, Chinese brands are in for the long haul in the world’s fastest-growing market.