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USD 120bn electronics export target gives Chinese investments in India some leeway

Over the past few months, there has been a subtle shift in the Government of India’s stance towards Chinese investments. In 2020, as Sino-Indian border tensions escalated, investments from Chinese companies were stymied, foreign direct investment (FDI) rules tightened and prospective investors flatly told not to even apply to set up operations in the country.

Recently, responding to persistent demands from global and domestic mobile device and IT product players to help build a local supply chain ecosystem, the government has requested them to provide a list of their Chinese suppliers that would like to shift some capacity to India.

However, the preliminary screening and approval of the names comes with stiff riders. For one, it is meant only for Chinese companies that agree to set up a joint venture with domestic companies. The unwritten rule is that the latter should also have control, though many say that that could stifle choices since companies offering cutting-edge technology may look for majority stakes.

The good news is that many home-grown players that failed to meet eligibility commitments under the government’s Production-Linked Incentive (PLI) scheme, such as Lava and Optiemus, see this as an opportunity to get back in the game. Lava, for example, is in advanced talks with Chinese original design manufacturer Huaqin, the world’s largest player in this space for mobiles and tablets, for a joint venture and Dixon Technologies is discussing potential joint ventures in components with Chinese companies.

The second rider is that the government is not diluting its FDI rules, despite a request from some mobile device makers. So, Press Note 3 of April 2020, the relevant government order requiring FDI approvals for investment proposals by companies with which India shares a land border, will stay in force and the automatic route will remain closed.

For instance, under Press Note 3, Chinese giant BYD was asked not to apply for mobile device PLI and a move to set up an assembly plant for iPad assembly in 2021 in India was also turned down, forcing the company to turn to Vietnam. Now, Chinese applicants that pass muster in the preliminary screening will then be scrutinised on their joint venture proposals ahead of a final approval.

Mobile device makers see a pragmatic mid-way solution. “With the earlier level of uncertainty, Chinese companies lost their enthusiasm to even apply for entry. Now the preliminary screening by the government helps them take the first step, which is to find a joint venture partner — that could take three to six months or more — and then apply under the existing FDI rules,” said a senior executive of a leading mobile device maker.

It was under this policy shift that Apple Inc, which is aiming to shift 12-20 per cent of its iPhone assembly by value to India by 2026, managed to get approval for investments by 14 Chinese component suppliers out of a list of 17. Ten of these have been in India from pre-Press Note 3 days. But sources explained that preliminary approvals were taken even for these companies because they would have had to apply again to the government for a joint venture if they want to bring in more investment.

Many of them are in the big league.

Sunny Opotech, part of Sunny Optical, a global leader in camera modules, announced this month that it would set up a $300-million camera module factory exclusively for Apple in India and start manufacturing from 2024. It already makes modules for Chinese Android phone brands in the country. There is also Avary, a printed circuit board maker; ICT Luxshare, which assembles iPhones, hearables and watches for Apple in China and is buying Motorola’s shut phone manufacturing plant in Tamil Nadu; and Salcomp, the global king of mobile chargers that has taken over Nokia’s Tamil Nadu plant and supplies to many mobile companies in India.

What explains the change in the government’s stance? It’s simple: Nearly 80 per cent of the global mobile device supply chain is in China and is run by Chinese companies. It has been built over the past 15-20 years because the biggest mobile device brands from Apple, Xiaomi, Vivo and Oppo have their production bases there. Suppliers in Vietnam or Thailand are also owned by Chinese companies — and the governments of those countries have gone out of their way to encourage them.

India wants mobile devices to hit a value addition of 40 per cent by 2026 (it is currently 12-18 per cent after two years under the PLI programme). It’s a reasonable goalpost, both to stem the growing forex outflow on electronic components and to make India the world’s second-largest assembler of mobile phones.

Also, India’s ambition to become a global hub for exports by 2026 cannot be achieved without a vibrant domestic supply chain. India wants to hit $300 billion in electronics manufacturing in three years, with overseas sales touching $120 billion, more than half of it from mobile devices.

The alternative, for domestic companies to build scale, could take years and huge investments. The Tata group, for instance, has taken three years to begin supplying Apple with mechanical components. A possible stake in Taiwanese major Wistron, which is under discussion, could also help it emerge as a key assembler of Apple phones in the long run.

Short-term localisation can be achieved faster if Chinese companies brought in their time-tested technological expertise and experience to make the components in India with the stipulation of domestic joint ventures offering a way of ensuring that Press Note 3 continues in spirit.

In the medium and long term for India, the strategy is to enable India to replicate the China model of building a domestic supply chain and eventually creating global-sized Indian suppliers. This small policy shift outside the rubric of Press Note 3 is expected to mark the first step in the process, the government hopes. Business Standard

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