Opinion: How India’s tacit strategy to drive out Chinese firms could backfire

It is generally believed that it is difficult for Western firms to manage their business operations in China. However, it is even more challenging for businesses to operate in India, especially for Chinese businesses.

In early October, four executives of Chinese smartphone maker Vivo, including one Chinese national, were arrested in India in connection with a money laundering investigation. These arrests have added to the legal woes of various Chinese phone makers in India. In 2022, Chinese mobile phone companies Vivo and Xiaomi operating in India were accused of tax evasion under the Money Laundering Prevention Act, which came into force in 2005.
Although Chinese firms have denied the allegations, the accusations come amid rising tensions between Beijing and New Delhi over issues ranging from border disputes to growing Indian checking Chinese business and investments.
India is officially open for Chinese business. Attracting Indian Prime Minister Narendra Modi Made in India” campaign in 2014, the Chinese company Vivo set up its own mobile phone manufacturing facility in the state of Uttar Pradesh. The move was a huge success, making Vivo the second largest smartphone brand in India after Samsung.
Behind the official narrative, Modi is trying to protect and grow its productive sectors hoping to expand its export markets. To do this, India needs to reduce its dependence on China and develop its end-to-end supply chain solutions domestically, from parts manufacturing to final assembly.

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India has filed a formal protest against China over the new map, which claims disputed territory

India has filed a formal protest against China over the new map, which claims disputed territory

As a strategy, the Indian government is developing tools to make life in India difficult or impossible for Chinese firms. Using arguments based on national security, India banned hundreds of Chinese apps such as TikTok as well as Chinese telecom equipment manufacturers such as Huawei and ZTE.
India also uses tariffs to discourage imports. In 2018, in an attempt to reverse the death of Indian assembling a mobile phone in the hands of Chinese rivals, the government imposed a 20 percent tax on imported devices. In 2020, he tripled tariffs to 60 percent on toy imports, most of which come from China. By 2023, import tariffs have increased to 70 percent, reducing India’s toy imports by 75 percent since 2019.

Bureaucratic friction is India’s forte to find fault with businesses that are out of favor and to pressure Chinese firms operating in the country. For example, Indian tax rules are known to be complex and compliance with all the rules is considered almost impossible.

BBK Electronics, which owns Vivo, was accused in August of evading more than US$280 million in customs duties. Also the Indian arm of Chinese car maker BYD is being investigated on charges that he failed to pay US$9 million in tax on parts imported from abroad.
To top it off, the Indian government has changed its foreign direct investment (FDI) policy. in 2020, making it mandatory for foreign firms to obtain government approval for foreign direct investment received from countries that share a land border with India. While this updated rule may affect FDI from various countries other than China, such as Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan, the target appears to be China.

Since this updated FDI policy came into force, India has approved less than a quarter of the 435 investment applications from China. For example, after two years of unsuccessful attempts to get US$1 billion foreign direct investment approvals from India, China’s largest sports car maker Great Wall Motor announced its plan to exit India in July 2022.

India has adopted these tools to deter Chinese firms from entering the country. To build its domestic manufacturing sector, India is using policy to displace China as the leader in various markets. Specifically, India introduced a production-related incentive (PLI) in 2020 to provide incentives to companies for sales of products made in India.

The scheme has grown to a US$24 billion program focused on 13 sectors, including automotive components, electronic systems and telecommunications equipment, many of which are dominated by Chinese companies. The PLI scheme can create jobs for Indian workers, stimulate economic growth, promote exports, reduce trade deficit and help improve the quality of Indian products.

However, this program increases the fiscal burden on the government. It can also distort the market and create inefficiencies as some sectors receive preferential treatment over others, leading to rent-seeking and lobbying. The net effect of the PLI scheme remains to be seen.

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Meanwhile, by discouraging Chinese imports and deterring Chinese firms from setting up manufacturing units in India, this strategic move could hinder India’s plan to grow its manufacturing sector.

For example, India celebrated in June when Apple announced plans to transfer 18 percent of its global iPhone production from China to India. At the same time, there is an unspoken total ban by the central government on new facilities owned by Chinese companies.
That created a major delay for Luxshare Precision Industry, a major Chinese supplier of devices to Apple, to open its own factory in Tamil Nadu, even though it signed an agreement with the state in 2021. Luxshare won a contract in July as Apple’s sole assembler of Vision Pro Mixed Reality Headset.

Unless there is an immediate plan for India to develop local manufacturing of all major parts of Apple products, it will be a challenge for India to woo big brands to manufacture their products there.

Getting Western firms to manufacture in India is relatively easy as the United States and Europe try to distance themselves from China, but getting them to stay will require some rethinking.

Christopher Tang is a distinguished professor at the UCLA Anderson School of Management

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