Indian government's aggressive measures to take control of the mobile phone supply chain from China are putting Chinese smartphone manufacturers, including Xiaomi, OPPO, and Vivo, under increasing pressure in the country.
According to a June 13 report from The Economic Times of India, the Indian government has presented several new demands to Chinese smartphone manufacturers looking to enter the Indian market:
- Chinese smartphone manufacturers, including Xiaomi, OPPO, Realme, and Vivo, should engage Indian equity partners in their local businesses. The Indian capital is expected to hold a 51% stake in the joint venture companies.
- Key positions within the company, such as CEO, CFO, COO, and CTO, should be filled by Indian citizens.
- The government is encouraging Chinese manufacturers to outsource their contract manufacturing operations to designated Indian manufacturers, to increase local manufacturing capabilities to the component level and expand India's export scale.
- These companies should also employ local Indian distributors.
Chinese companies like Xiaomi, OPPO, and Vivo were part of these discussions, although the timeline for implementing these changes hasn't been disclosed yet.
Xiaomi, OPPO, and Vivo, already have investments and local manufacturing in India. But the recent guidelines which dictate the majority stake and key position holding by Indian citizens could significantly impact their operations. This essentially implies that Indian executives will gain controlling rights over the Indian operations of these Chinese smartphone companies.
Over the past decade, Chinese smartphone companies have established a solid supply chain base in India. However, these recent actions by the Indian government have been seen as bullying tactics, akin to a disguised acquisition of Chinese companies. Some Southeast Asian investors believe that Chinese investors should have withdrawn from India earlier, as these changes were not entirely unexpected.
The turn of events started in 2020.
Since entering the Indian market in 2014, Xiaomi, OPPO, Vivo, and other smartphone manufacturers have been operating in India for nearly a decade. Between 2014 and 2019, Chinese smartphone manufacturers saw a period of success in the Indian market.
According to IDC, India's smartphone shipments increased nearly twofold from 80 million in 2014 to 152.5 million in 2019, making India the second-largest smartphone market globally, second only to China. Counterpoint data showed that in the fourth quarter of 2019, the top five smartphone brands in India were Xiaomi (27%), Vivo (21%), Samsung (19%), OPPO (12%), and Realme (8%). The shipment volume of these four Chinese smartphone manufacturers accounted for 68% of the Indian smartphone market.
However, things changed in 2020 when Indian Prime Minister Narendra Modi implemented policies to replace Chinese industries, which included industrial policies, economic and trade policies, and new economic policies.
To bypass import tariffs and save costs, Xiaomi, Vivo, and OPPO began investing in factories in India and initiated local production from 2015. Currently, Xiaomi has seven factories in India, and 99% of Xiaomi phones sold in India are manufactured locally. Vivo employs about 10,000 people in India with an annual production capacity of about 60 million mobile phones. An OPPO smartphone is manufactured at the OPPO super factory in Noida, India, every three seconds.
Since the beginning of 2022, the Indian authorities have carried out at least eight raids on Xiaomi, Vivo, and OPPO, with the sole aim of freezing and seizing funds in these companies' accounts in India for various reasons. Xiaomi was hit with the largest seizure of funds.
The Enforcement Directorate (ED) of India has confiscated approximately 68 billion rupees ($680 million) from Xiaomi, citing alleged violations of the nation's Foreign Exchange Management Act (FEMA), according to documents released on June 9.
This confiscated sum represents nearly 57% of Xiaomi's adjusted net profit of 8.5 billion yuan for 2022, as shown in the financial reports.
When accused of "illegally transferring funds to foreign entities" in June last year, Xiaomi India defended itself, explaining that over 84% of the funds were paid as license fees to Qualcomm and for intellectual property rights of Xiaomi's Indian version smartphones. However, this has not swayed the stance of the ED.
Besides Xiaomi, Vivo and OPPO also found themselves under the microscope of Indian authorities. Shortly after Xiaomi was accused of violating FEMA, Vivo and OPPO faced legal hurdles as well.
On July 7, 2022, the ED accused Vivo of violating the Prevention of Money Laundering Act, blocked 119 of Vivo's bank accounts, and froze around 4.65 billion rupees in cash and assets. A week later, the Directorate of Revenue Intelligence (DRI) accused OPPO of evading nearly 43.9 billion rupees in duties.
Based on the experiences of Xiaomi and Vivo, it seems the Indian authorities are going to extreme lengths to support the development of local electronics manufacturing. These harsh measures seem to be effective, based on the market share.
Data from Counterpoint indicates that since the second quarter of 2022, Xiaomi's market share in India has declined significantly due to regulatory pressure. However, this market share was not transferred to local Indian manufacturers, but rather, Samsung benefited.
In the fourth quarter of 2022, Samsung regained its position as the top mobile brand in India with a 20% market share. Xiaomi's market share fell from 23% in Q1 2022 to 16% in Q1 2023.
The Indian government's new regulations against Chinese smartphone manufacturers suggest an ambition to directly control the Chinese mobile industry within the country. From this perspective, Chinese manufacturers have little room to maneuver in the Indian market.
Despite the "unfriendly" stance of the Indian authorities towards Xiaomi and OV, it is difficult for Chinese manufacturers to completely withdraw from the Indian market, given the significant size and importance of the market.
In fact, some Chinese mobile brands and industry chain companies have already chosen to abandon the Indian market, following a series of tax and regulatory investigations. In July last year, after Xiaomi, OPPO, and Vivo faced these challenges, Honor's CEO, Zhao Ming, announced Honor's withdrawal from India, retaining only some business with partners.
"Eighty percent of domestic mobile industry factories in India have gone bankrupt. Those that haven't are also considering leaving the market. Companies like OPPO, Vivo, and Xiaomi, which still operate in India, are having a hard time due to local government crackdowns," Zhao said.
According to IDC data, in 2022, Xiaomi, OPPO, and Vivo shipped 153 million, 103.3 million, and 99 million mobile phones worldwide, respectively. The Indian market contributed 20%, 17%, and 23% to their global shipments, respectively.
A direct exit from the Indian mobile market would mean a loss of a 20% market share. Furthermore, neither Xiaomi nor OV could find a new market to fill the void left by India in the short term.
However, the development of India's domestic electronics industry also relies heavily on Chinese mobile manufacturers. The prosperity of the Chinese mobile industry chain in India not only creates tax revenue and jobs for India but also accelerates the development of India's manufacturing industry.
China is India's largest trading partner. Despite India's "China industry replacement" policy, many intermediate products still need to be purchased from China.
Additionally, India's scrutiny of mobile manufacturers is not limited to Chinese enterprises. As Samsung regained its position as the top mobile brand in India, Samsung Electronics India has become a new target of the Indian government's "examination."
In January, the DRI accused Samsung Electronics India of wrongly classifying remote radio heads to evade 17.28 billion rupees in import duties. In response, Samsung Electronics India stated, "This is a tax dispute involving legal interpretation."
As India strives to bolster its domestic electronics manufacturing industry, the top five mobile manufacturers are all under pressure. This aggressive approach to Chinese companies is indicative of India's ambition to control the entire mobile industry chain globally.
