Inside the game plan of Chinese phone makers

The list mentioned every action that the Union government has taken to check Chinese businesses in India—from tighter scrutiny on new investments and delayed clearances at customs to rules that restricted public procurement from countries that share a land border with India.

“Unwritten instructions were communicated that no GoI (government of India) incentive will be given to Chinese companies," stated the slide, a copy of which has been reviewed by Mint. “No Chinese company has subsequently participated in any scheme such as PLI," it added.

The PLI or production-linked incentive scheme is the fulcrum of India’s new manufacturing thrust and has a triple objective—attract foreign investment, help domestic manufacturers to scale up production, and make the country globally competitive in exports. In October 2020, at least 16 mobile phone makers and component manufacturers from Taiwan, Korea, Europe, US and India were selected for the scheme.

“Approval for all new government incentive schemes for which Chinese companies had applied have been put on hold too," the “fallouts" document noted. In short, life isn’t easy for a Chinese phone maker in India at the moment. And it is likely to remain difficult for quite some time, given the mistrust that appears to be widespread in the corridors of power. “The government will continue to be cautious. There is no question about that. Because our engagement with China on the border is serious," said Gopal Krishna Agarwal, national spokesperson on economic affairs for the ruling Bharatiya Janata Party. “In trade, there is some relaxation, but investments are surely of concern," he added.

But here’s the dichotomy. Indian consumers are lapping up Chinese phones at a furious pace. Many models get sold out within seconds of a sale being announced on either Amazon or Flipkart.

The Galwan clashes proved to be a minor blip as far as business is concerned, data from Counterpoint Technology Market Research suggests.

Five companies commanded the lion’s share of the Indian smartphone market—86%—in the June quarter of 2021. Four of them are Chinese firms. Xiaomi led the market with a 28.4% share, followed by Vivo (15.1%), Realme (14.6%) and Oppo (10.4%). Samsung, the only non-Chinese firm in the top five, had a share of 17.7% in the overall pie. Even in feature phones, Itel Mobile led the market with a 24% share, followed by Reliance Jio Infocomm Ltd, Lava International and Samsung. Itel’s parent company Transsion Holdings is headquartered in China’s Shenzhen city.

In the June quarter of 2020, when the border clashes took place, Samsung’s overall handset market share in India was nearly 25%, underlining a somewhat poor sentiment towards Chinese phones. One year down the line, Samsung’s market share is currently down to 17% while firms such as Xiaomi, Realme and Itel have all grown their share.

“The Chinese brands play on scale," Prachir Singh, senior research analyst at Counterpoint, said. “They can provide a very competitive product with the highest-level specs at a competitive price. Their product innovation is good."

The fact is that Chinese phone makers are quietly going about their business and investing in local assembly and offline distribution. They have all fallen back on a charm offensive strategy, marketing that a majority of these phones are now ‘made in India’—meaning they employ a good number of locals and thereby contribute to the local economy. Boosting offline sales and services also “encourage entrepreneurship" across towns and villages.

“Almost all our phones and all our TVs are locally manufactured. Some components are locally manufactured or sourced," Manu Jain, the global vice president of Xiaomi and the managing director of Xiaomi India, said. “In 2020 alone, we created over 10,000 job opportunities and grew 20% in terms of our direct and indirect employment," he added.

The promise of additional investment along with the prospect of new jobs have caught the attention of several state governments, even as the Union government continues to give the Chinese companies a cold shoulder.

Lifeline from states

Pooja Kulkarni, the managing director and chief executive officer of Guidance Tamil Nadu, the state’s nodal agency for investment promotion, has been keeping a close watch on the shifting fortunes of the Chinese phone makers.

Tamil Nadu has one of the largest electronics manufacturing ecosystems in the country, accounting for 16% of the total production capacity. Over the past two years, the state has attracted $5 billion in investments in electronics. About 50% of it is in mobile phones. Three of Apple’s critical suppliers—Foxconn Technology Group, Salcomp Manufacturing India Pvt. Ltd and Pegatron Corp.—already run plants in Tamil Nadu.

“We are at the higher end of the mobile value chain," Kulkarni said. “We are agnostic to the flag that an investor carries. We are pursuing Chinese companies as well. But it is the government of India’s policy we are guided by," she said.

“What was earlier automatic FDI (foreign direct investment) now requires the approval of a committee that the government of India has set up. There is a fair bit of investment that is waiting to be approved. We have ₹10,000 crore worth Chinese investments awaiting the approval of the committee," she added.

Tamil Nadu faces stiff competition from Andhra Pradesh and Telangana. They are all trying to woo deep-pocketed investors with sops above and beyond the written policy. An executive from a Chinese phone maker, who requested anonymity, said that his firm wants to “maximize this opportunity". The southern Indian states, he added, have identified the discomfort of Chinese firms. “We are persona non grata when it comes to the Union government. The southern states have stepped in and promised to go the extra mile if we set up mega projects," the executive added.

The Chinese do like setting up mega projects. For instance, Oppo‘s 110-acre manufacturing campus in Noida, Uttar Pradesh has the capacity to produce 6 million units a month. Asking for huge parcels of land is a typical move in the Chinese playbook; they plan for the next 20-30 years and are okay with absorbing losses for the first 10 years. “Typically, if you take a large plot (of land), you get a red carpet treatment. You get benefits that are over and above what’s stated in the policy," the executive quoted above said. “The Chinese know how to maximize the use of this system."

One of the southern states, he said, is offering a wage incentive of ₹5,000 per woman worker employed. Considering that the average salary is around ₹15,000 a month for a mobile phone assembly worker, this kind of incentive reduces a firm’s wage bill by a third. The Chinese firms, meanwhile, are hoping that if the states lend their weight behind proposed investments, it may get a tad easier to deal with the Centre.

The sticking points

One of the sticking points in government circles is the view that some Chinese brands don’t declare profits even when they make huge revenues—the assumption being, they manipulate purchases and expenses. A second concern relates to supply-chain cartelization. Chinese firms often rely on Chinese suppliers, which limits the scope of Indian firms.

A second executive with a phone maker who also didn’t want to be quoted said that there is some truth to the second concern. “A non-Chinese company will procure components from China, but they will be opportunistic about importing components from anywhere else provided they get a good deal. But a Chinese company won’t opt for a non-Chinese supplier," he said. “The Indian government is now arm-twisting Chinese phone makers to take in Indian suppliers. But there is a lot of resistance," he added.

In some large phone making companies, the suppliers are also investors in the parent company in China. “That’s a system followed by many Chinese companies," the executive explained. Ultimately, the modus operandi of the Chinese manufacturers appears to be to hold on and maintain some sort of a status quo. If pushed to the wall, they will give in but only a bit. “A company may need 30 component suppliers. Five of them can be Indian. The fact is there are not enough quality Indian component suppliers for mobile phones yet. As long as that remains the case, the government has to allow Chinese component makers to set up shops in India," said a third executive who also requested anonymity.

Most Chinese phone firms refused to provide details about their component suppliers. But in the post-pandemic world, Chinese companies may also be thinking about de-risking their supply chain.

Xiaomi’s latest annual report, for instance, mentions the concentration of suppliers in China as a risk. “The majority of our suppliers’ production lines are concentrated in China. Our global operation, including freight, pricing and timely delivery, is subject to risk due to this situation," it stated. “We continue to diversify supplier sources to reduce the risks of uncertainty brought by a single source. We expanded the capacity of our overseas factories in India and Indonesia to enhance the efficiency of our supply chain and to address the potential risks associated with having a single production base," it further added.

In 2021, two of Xiaomi’s contract manufacturers—DBG Technology (India) Pvt. Ltd in Haryana and BYD Auto Co. Ltd in Tamil Nadu—went live.

Believe in India

Meanwhile, all the Chinese phone makers are pressing ahead with their marketing and sales plans. India is one of the largest smartphone markets and all the firms have bought into the Indian consumption story. Xiaomi is heavily investing in offline sales after making a name by selling its phones online. Xiaomi India’s managing director Manu Jain said that the firm will double the number of exclusive stores—from 3,000 to 6,000—over the next two years.

Similarly, Realme is boosting its distribution channels in India, especially in tier-4 and tier-5 cities and wants to cover over 35,000 mobile stores. “Our online business has grown. But offline is the backbone of the industry and the touch and feel is not going to go away," Realme’s vice president and chief executive officer of India and Europe, Madhav Sheth, said. The firm, like other Chinese phone makers, has ambitions in a slew of product categories, ranging from smart TVs and audio products to laptops and tablets.

Oppo, which has already invested ₹2,200 crore in its manufacturing plant in Noida, Uttar Pradesh has set up a 5G innovation lab at its Hyderabad research and development (R&D) centre. “We are just not bringing in products from global markets to sell in India; there is a deep sense of acknowledgment (regarding) the needs of the Indian consumer," Damyant Singh Khanoria, chief marketing officer of Oppo India, said. “As a company, we believe in the India story".