Even as Modi government attacks Chinese phone makers, it can’t kick them out

On October 11, the Enforcement Directorate arrested four persons in a money-laundering investigation against Chinese smartphone manufacturer Vivo. Among other things, the central agency has accused Vivo of illegally remitting money to China to evade taxes. These allegations came just a week after the Delhi Police claimed that people accused in the NewsClick case had written to defend Vivo and another Chinese phone maker Xiaomi in cases related to violating foreign funding norms and forming shell companies in India.

Since bilateral relations between New Delhi and Beijing soured after a bloody border clash in 2020, several Indian agencies have investigated several Chinese companies in cases related to tax evasion, foreign exchange irregularities and money laundering. In a reply to the Rajya Sabha in July, the government said that since the financial year 2019-’20, it has detected Rs 9,075 crore worth of tax evasion by Chinese phone companies.

Industry experts pointed out that despite this friction with China, it is unlikely that they will be barred from India. The Modi government’s hands are tied because if Chinese smartphone makers were to leave, Indian manufacturers do not have the capacity to replace them.

Lion’s share

India’s smartphone sales are dominated by the big four Chinese players – Vivo, Xiaomi, Realme and Oppo. In 2020, when the Galwan Valley clash took place, Chinese firms accounted for an incredible 77% of all phones sold in India. This was up from 72% in 2019, data from research and analysis firm Canalys showed.

The trend has remained firm and is unlikely to change anytime soon, said Tarun Pathak, the research director at technology market research firm Counterpoint Research.

“Anti-China sentiment did not reach the consumers even at its peak in the months that followed the Galwan clash,” he told Scroll. “We saw another peak when the government banned a bunch of Chinese apps, but that’s a different story.”

Pathak explained that India has the expertise and skill when it comes to software development. “So it is easy to replace a product like TikTok,” he said. “But for the smartphone industry, you need manufacturing infrastructure and access to raw materials like semiconductors which India does not have. Only 15% of the components required to build a smartphone can be locally sourced at this point.”

The government cannot also risk losing out on long-term investments made by Chinese companies, Sanyam Chaurasia, technology market analyst at Canalys, told Scroll.

“These companies are here for the long haul,” he said. “Given the size of India’s market, even they cannot pack their bags and go even as they face heat from the government…And the government knows that as well. It is only trying to keep the Chinese under pressure so that they comply with the rules.”

Manufacturing gap

Could India bridge the manufacturing gap? The short answer is no. This is even though the Union government has promoted local smartphone manufacturing as part of its production-linked incentives, or PLI scheme, which provides subsidies in order to promote local manufacturers.

The government has claimed some success on this front. It cited trade data which shows that India’s mobile phone exports jumped from $300 million in the financial year 2017-’18 to $11 billion in 2022-’23. Meanwhile, the country’s mobile phone imports have shrunk from $3.6 billion to $1.6 billion during the same period.

However, in a paper published in May, former Reserve Bank of India Governor Raghuram Rajan and two other economists showed that even as India’s imports of mobile phones had come down, those of components like display screens, cameras, batteries and circuit boards had shot up. The economists cited this to argue that manufacturers were not making phones in India from the scratch, but simply assembling them.

Faisal Kawoosa, the chief analyst at technology research firm, Techarc, agrees with this argument. “The infrastructure for manufacturing phones cannot be developed overnight,” he told Scroll. “We have missed every generation of cellular technology. Yes, China has reserves of semiconductor material which increases our dependence. But if the government wants to have significant Indian phone brands in five years, it needs to incubate the startup ecosystem in that direction. That is not happening.”

Way forward for the industry

While there could be some changes in the business models of the Chinese phone companies, they would continue to dominate the Indian market, experts told Scroll.

“Nobody can exit this market…Honor did so last year, but they have now re-entered under a different name,” said Chaurasia of Canalys. “Apple holds just 6% of the market share. So, other than Samsung there is simply no other player which isn’t Chinese.”

Chaurasia added that his sources within the government have said that it would push Chinese firms into further ramping up exports from India.

The only way some Indian players could emerge in the smartphone market is if companies manufacturing wearable technology like smartwatch decide to diversify their business, Kawoosa of Techarc said. However, even in that case, Kawoosa strikes a note of caution. “These would still be fictitious brands,” he said. “They could find a way to route their investments and raw materials from countries like Vietnam, but eventually they would still be ventures backed by China.”