How India’s unspoken strategy to drive out Chinese firms can backfire

[Nan Yang]

A man cleans the logo of Chinese smartphone company Vivo outside a store in Ahmedabad, India, on October 10. Officially, India is open to Chinese business. But the government has used various measures to make Chinese firms’ lives in India difficult or impossible. Photo: Reuters

Opinion
Christopher Tang

How India’s unspoken strategy to drive out Chinese firms can backfire

• As much as foreign firms might complain about difficulties operating in China, India makes doing business there even more challenging
• New Delhi’s legal and bureaucratic scheme to squeeze out China risks adding to India’s budget woes and holding back manufacturing growth

Christopher Tang
Published: 8:30pm, 17 Oct, 2023

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

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 added to the legal troubles of various Chinese phone makers in India. In 2022, Chinese mobile phone companies Vivo and Xiaomi, which operate in India, were accused of tax evasion under the Prevention of Money Laundering Act that came into effect in 2005.

While the Chinese firms denied the allegations, these accusations come amid rising tensions between Beijing and New Delhi over issues ranging from border disputes to India’s increasing scrutiny of Chinese businesses and investment.

Officially, India is open to Chinese business. Piggybacking on Indian Prime Minister Narendra Modi’s “ Make in India” campaign in 2014, Chinese firm Vivo established its own manufacturing facility to produce mobile phones in the state of Uttar Pradesh. This 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 manufacturing sectors with the hope of expanding its export markets. To do that, India needs to reduce its dependence on China and develop its end-to-end supply chain solutions domestically, from making parts to final assembly.

As a strategy, India’s government develops tools to make Chinese firms’ lives in India difficult or impossible. Using arguments on the grounds of national security, India has banned hundreds of Chinese apps such as TikTok, as well as Chinese telecoms equipment makers such as Huawei and ZTE.

India has also used tariffs to discourage imports. In 2018, in an effort to reverse the demise of Indian mobile phone assembly at the hands of Chinese rivals, the government imposed a 20 per cent levy on imported devices. In 2020, it tripled tariffs to 60 per cent on toy imports, most of which come from China. By 2023, the import tariffs increased to 70 per cent, reducing India’s toy imports by 75 per cent since 2019.

Bureaucratic friction is India’s forte to find fault with businesses that are out of favour and squeeze Chinese firms operating in the country. For instance, Indian tax rules are known to be complex, and complying with all the rules is seen as almost impossible.

BBK Electronics, which owns Vivo, was accused in August of evading customs duty of more than US$280 million. Also, the Indian arm of Chinese car manufacturer BYD is under investigation over allegations that it underpaid tax of US$9 million for parts imported from abroad.

To top it off, the Indian government amended its foreign direct investment (FDI) policy in 2020, making it mandatory for foreign firms to obtain government approval for FDI received from countries that share a land border with India. While this updated rule can 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 took effect, India has approved fewer than a quarter of the 435 applications for investment from China. For example, after two years of failed attempts to obtain US$1 billion FDI approvals from India, China’s largest sport utility vehicle manufacturer Great Wall Motor announced its plan to exit India in July 2022.

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

The scheme has expanded into a US$24 billion programme focusing on 13 sectors including auto components, electronics systems and telecoms equipment, many of which are dominated by Chinese companies. The PLI scheme can create jobs for Indian workers, boost economic growth, promote exports, reduce the trade deficit and help improve the quality of Indian products.

However, this programme increases the fiscal burden on the government. In addition, it can 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 can hinder India’s plan to grow its manufacturing sector.

For example, India celebrated in June as Apple announced plans to shift 18 per cent of its global iPhone production from China to India. At the same time, there is an unspoken blanket ban from the central government on new facilities owned by Chinese companies.

This has created a major delay for Luxshare Precision Industry, a big Chinese device supplier for 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 headsets.

Unless there is an immediate plan for India to develop domestic production of all major parts of Apple products, it will be a challenge for India to woo major brands to produce their products there.

Getting Western firms to produce in India is relatively easy as the United States and Europe try to distance themselves from China, but making them stay would take some rethinking.


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