India Requires Chinese Phonemakers to Have Indian Capital and Indian Management| TiPost Focus

BEIJING, June 14 (TiPost) — As the global mobile phone market is declining, India is becoming a market that major mobile phone manufacturers are competing to seize, even Apple has started to increase relevant investments. However, as an old player in the Indian mobile phone market, Chinese manufacturers including Xiaomi have encountered “new troubles”.

According to reports, the Central Enforcement Bureau (ED), the agency responsible for combating financial crimes in India, has issued formal notices to Chinese mobile phone manufacturer Xiaomi Technology’s Indian branch, company executives and three banks, accusing them of illegally transferring funds abroad and suspected of violating the “Foreign Exchange Management Act”.

Previously, the Indian authorities had seized a total of 55.51 billion rupees (approximately RMB 4.8 billion) in funds from Xiaomi, and this notice may mean that the frozen funds will be formally confiscated.

Not only that, Chinese manufacturers such as Xiaomi, OPPO, and vivo will also face new challenges in the Indian market. According to the Indian Economic Times, the Indian government requires Chinese smartphone manufacturers such as Xiaomi, OPPO, realme, and vivo to appoint Indian nationals as executives and introduce Indian equity partners in their Indian businesses.

An analyst who declined to be named told TiPost App that as the world’s newest largest population country, India’s market prospects are huge business opportunities for any manufacturer. However, manufacturers need to better balance, evaluate and comply with their operating environment, laws and regulations, infrastructure, foreign exchange controls, geopolitical relations, import and export controls, and other aspects.

The identification of privilege usage fees is disputed, and Xiaomi’s 4.8 billion yuan fund may be confiscated

In Xiaomi’s global layout, India has always been an important part of it. As early as 2014, Xiaomi made its debut in India and gradually became the largest smart phone brand locally with high cost performance.

In 2017, Xiaomi also said that it plans to invest US$1 billion in 100 Indian startups in the next 5 years. According to publicly available data from Canalys, Xiaomi’s market share in the Indian smartphone market is 20%, ranking first.

Regarding the “Xiaomi may be confiscated 4.8 billion funds” incident, it needs to be traced back to May last year, and the controversy is also on the determination of privilege usage fees. At that time, the Indian Anti-Money Laundering Executive Bureau accused Xiaomi and its Indian subsidiary of remitting money to three overseas entities including Xiaomi Group since 2015 under the name of “privilege usage fees”, which “violates” India’s “Foreign Exchange Management Act”. Therefore, the law enforcement department seized the relevant account assets of Xiaomi’s subsidiary, and the Indian Central Enforcement Bureau froze 55.51 billion Indian rupees from Xiaomi’s bank account.

In response, Xiaomi India stated that as a brand dedicated to India, all of the company’s operations strictly comply with local laws and regulations. We carefully studied the authority’s order, and we believe that the license usage fees and bills we paid to the bank are legal and true.

Xiaomi also pointed out that the royalties paid by Xiaomi India are all used for authorized technology and intellectual property rights used in our Indian version products. More than 84% of the amount seized by the law enforcement bureau was paid to Qualcomm for patent licensing fees.

One year later today, the Indian Central Enforcement Bureau (ED), responsible for combating financial crimes, issued a formal notice to the Chinese smartphone manufacturer Xiaomi Technology’s Indian branch, company executives, and three banks, and this notice may mean that the frozen funds will be formally confiscated.

In response to this, Xiaomi officials also responded to the matter in line with the previous response: “Xiaomi adheres to legal and compliant operations worldwide, and complies with relevant laws and regulations in the place of operation.” It is worth noting that as early as the end of 2021, the Indian Income Tax Department conducted relevant investigations on Xiaomi and other mobile phone companies.

The above analysts told TiPost Focus that the related license usage fees, such as patent licensing fees, are a very complicated issue in many countries, and there are certain differences in the relevant determinations.

According to Xiaomi’s latest annual report data, Xiaomi’s full-year revenue in 2022 was 280 billion yuan, and its adjusted net profit reached 8.5 billion yuan. The frozen funds of 4.8 billion yuan have exceeded 50% of its net profit last year.

In addition to operational difficulties, Xiaomi also faces sales pressure in the Indian market. Analysts pointed out that unfavorable news in the market and investigations by the Indian law enforcement bureau will also have an impact on Xiaomi’s sales to a certain extent.

According to data released by Counterpoint, in the first quarter of this year, India’s smartphone shipments fell by 19% year-on-year to just over 31 million units, and Xiaomi was surpassed by Samsung and Vivo, falling from first to third place.

Previously, when discussing the development of the Indian market, Xiaomi Group President Lu Weibing pointed out that the company’s operations in India are normal, and Xiaomi will improve the efficiency of its operations in India in the future. Xiaomi believes in the fairness of the Indian judiciary and believes that its operations in India are legal and compliant.

Chinese smartphone manufacturers face “new conditions”

Even though Xiaomi has grown to become the No. 1 smartphone brand in India, the development process still encounters obstacles. Not only Xiaomi, but also domestic smartphone manufacturers such as OPPO and Vivo have encountered obstacles in the development process. Now, India has put forward more requirements.

According to the Indian Economic Times, the Indian government requires smartphone manufacturers such as Xiaomi, OPPO, and Vivo to appoint Indian nationals as CEOs and other high-level executives. The Indian government also requires Chinese smartphone manufacturers to introduce Indian capital equity partners with a continuous 51% Indian stake in their Indian business. At the same time, India also requires Chinese smartphone brands to entrust relevant manufacturing work to Indian companies to enhance local manufacturing capabilities and export through local distributors.

As of the time of writing, Xiaomi, OPPO, Vivo, and other companies have not responded to the new requirements.

According to data released by Counterpoint, Vivo, Xiaomi, OPPO, and Realme ranked second to fourth in the Indian smartphone market in the first quarter of this year, with a market share of 54%. Lava, an Indian local brand, was the third fastest-growing brand in the first quarter of 2023, with a year-on-year growth of 29%, but it focuses on the low-end mobile phone market.

“Under the new conditions, with the help of Chinese smartphone manufacturers, it will inevitably promote the development of Indian local manufacturers, which is also an important measure to promote “Make in India”,” said an analyst who has been following the Indian and Southeast Asian smartphone market for a long time.

In addition to domestic smartphone brands such as Xiaomi and OPPO, some relocated manufacturers have also encountered problems of “adapting to local conditions.”

In recent years, in addition to domestic mobile phone manufacturers such as Xiaomi and OPPO, many manufacturers have started investing and building factories in India due to low labor costs and government support, especially with the help of Apple, more and more companies in the Apple supply chain are setting up shop in India.

In April of this year, Apple CEO Tim Cook visited India and expressed his hope to expand production scale and smartphone sales in the country. JPMorgan predicts that by 2025, Apple will produce a quarter of its iPhones in India. The Counterpoint report also stated that in 2020, iPhones produced in India accounted for only 1.3% of its global production, rising to 4% in 2022, and is expected to reach 7% this year.

“The establishment of factories by Apple’s supply chain in India has a lot to do with Apple, but it is difficult for many manufacturers to take root due to the impact of market environment and policies, aside from factors such as infrastructure,” said a supply chain insider. “The differences in market environment and policy constraints make it difficult for many manufacturers to adapt.”

Recently, Apple’s contract manufacturer Wistron announced that it will withdraw from India as a whole and dissolve its related business in the country. After the withdrawal, local giant Tata Group will acquire Wistron’s factory in India and undertake its production tasks in India.

As mentioned by analysts earlier, India is a huge business opportunity for any manufacturer. However, companies need to make better assessments, evaluations, and compliance in terms of operating environment, laws and regulations, infrastructure, foreign exchange controls, geopolitical relations, import and export controls, and other factors. “This is also an important consideration for Chinese companies when going overseas and for future business planning and development, whether it is the Indian market, Southeast Asia, or other regions around the world, a comprehensive consideration is needed.”

(This article was first published on TiPost App, Author/Du Zhiqiang, Editor/Zhong Yi)

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