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Chinese cellphones face off against Indian nationalism

China and India have stepped back from the brink. How the collateral damage for China’s cell phone companies plays out could be interesting

Chinese consumer electronics have been doing well in India in recent years. They should be able to weather the geopolitical tensions between the two countries, too.

The deadly border clash between the world’s two most populous countries earlier this month has further fueled anti-Chinese sentiment in India. Even before the latest flare-up, which killed 20 Indian soldiers, there was already an online campaign in India to delete Chinese smartphone apps. Indian officials said last week that they would ban state-owned telecom companies from buying equipment from Chinese suppliers like Huawei and ZTE for future 4G mobile networks. The government also privately warned carriers against working with Chinese vendors on new 5G networks.

Moving away from Chinese telecom gear, especially given potential national security concerns, may be possible even if it’s costly. But to boycott Chinese smartphones and computers would be more difficult.

Gadgets from Chinese brands have taken market share in India from other foreign brands in the past few years. Chinese smartphone brands had 81% of the Indian market in the first quarter, with Xiaomi as the clear leader, according to Counterpoint Research. Lenovo was the largest personal-computer maker in India in 2019.

Offering the most bang for a buck is the obvious reason: Smartphones from Xiaomi, for example, are priced much cheaper than those from Apple or Samsung, while still offering solid performance. Their products have hit the sweet spot in India, which still only has a gross domestic product per capita of around $2,000. And there are few viable domestic alternatives since many local brands are still far behind the curve.

Moreover, many of these Chinese brands already assemble at least some of their products locally, even though less than 10% of the value added is in India, according to Bernstein. Nonetheless, these local assembly bases still create jobs, which could make them safer from potential political blowback.

It’s perhaps telling that Xiaomi’s share price has been resilient amid the scary headlines. The company is one of the Chinese firms with most to lose: it made 15% to 20% of its revenue and 5% to 7% of its profits in India in the past few quarters, according to Morgan Stanley. The stock jumped 9% Wednesday after Indian and Chinese security forces agreed to defuse tensions; some of the worst scenarios seem to be off the table.

India will almost certainly not be the last neighbor China tussles with in the coming years given its more assertive foreign policy. Still, ditching Chinese consumer electronics entirely remains a tough sell even when tensions escalate. And if Chinese companies continue to outsource the labor-intensive, low-value-added parts of their supply chains to those same neighbors, hot nationalist fires may still struggle to burn through the insulation.

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