“If you can’t defeat your enemies, join them.” “This sentence is the most appropriate bet for India’s home-grown mobile phone brands today. Chinese mobile phone manufacturers in India, local brands have basically disappeared from the Indian mobile phone market leaderboard, the original four local brands Karbonn, Intex has basically withdrawn from the mobile phone market, the rest of Micromax and Lava in addition to maintaining low-end function machine business, Startto thinking about using factory capacity to work as a mobile phone contract for Chinese handset makers.
However, as Chinese brands poured into the Indian market, the original local processing and manufacturing capacity in India has been seriously inadequate. Since Indian Prime Minister Narendra Modi proposed the “Made in India” development strategy, China’s mobile phone mature industry chain, including parts production, machine manufacturing, has also begun to shift to India.
Chinese companies are investing in factories in India, both in pursuit of profits and in helping India build a manufacturing base. This is not a “I come, I see, I conquer” process, but the Sino-Indian economic integration of the process of symbiosis.
Tariff pry industry chain transfer
Noida, an hour’s drive from the Indian capital, New Delhi, was upgraded from India’s “state-owned export development zone” to a “special economic zone” in 2003 and is now home to multinational sons in the Internet and electronic communications sector. More than 80 mobile equipment manufacturing plants have landed here, known as the “world factory of the future”, including Samsung, the South Korean handset maker, Chinese smartphone makers OPPO, vivo and others, as well as Xiaomi, the telex factory are gathered here.
For mobile phone manufacturers, India’s large population base, low smartphone penetration, large market size, is a rare blue sea market. According to IDC, India shipped 142 million smartphones and 181 million function handsets in 2018, a total of 323 million units, making it the second largest market after China and still in a period of rapid growth.
In the past few years, India has become an important stop for Chinese mobile phone brands to go out to sea, and from the Indian mobile phone market, Chinese mobile phone brands have taken more than 50% of the market share in India.
An industry veteran told First Financial that in addition to Samsung, OPPO, vivo and other brands set up in India, such as Xiaomi and other brands and ODM companies still have a market share of nearly 50%, need to rely on third-party foundry. The original two major manufacturers Foxconn, Vtech and China’s ODM enterprises set up in India, a number of small and medium-sized factories, the annual total capacity can not meet market demand, so the establishment of the first-tier mobile phone plant in India, will face huge market opportunities.
In the whole machine manufacturing of mobile phones, the number of SMT (surface mount technology) production lines is an important indicator to determine production capacity. In India, Vtech and Foxconn are now the top two mobile phone contract companies in the Indian market with 30 and 22 SMT production lines, respectively. At the beginning of 2019, The Group (603680. SH) joint venture Jin Hongyun Electronics (India) Co., Ltd. (KHY) has built a plant with 16 SMT production lines in Loida, Uttar Pradesh, India, making it the third largest in India and the largest mobile phone foundry in northern India.
More directly, in order to encourage the release of domestic labour, the Indian government began to review free trade agreements with ASEAN, South Korea and Japan, proposing “import substitution strategies” and “export-oriented strategies” to limit the large import of finished and semi-finished products in the electronics sector. For example, lower consumption tax on raw materials for electronic products and a punitive tariff of 25% to 30% on imported machines.
At the same time, the production and manufacturing enterprises in the Special Economic Zone of India, within five years of the operation of the enterprise, all their export profits can be deducted before tax, and the new machinery and equipment used in the manufacturing, production and power generation businesses may be depreciated at 20% of the actual cost of the machinery or equipment.
It is worth mentioning that India’s latest tax law amendment law provides for a 15% low corporate income tax rate, plus 10% of new enterprises that are incorporated after 1 October 2019 and started production before March 31, 2023 (inclusive), and who start production before March 31, 2023 (inclusive), subject to a 15% corporate income tax rate, plus 10% surcharges and 4% surcharges, the effective corporate tax rate is 17.16%.
“Manufacturing is the top priority of India’s future development strategy, more than two dozen Indian states are competing to attract investment, the introduction of a series of preferential policies, according to the company’s total investment, business model, how many jobs created, will be different amounts of investment financial return, the return of the total investment amount of 30% to 100%. Gagan Malik, Asia Pacific head of EY’s global tax network, told First Financial.
For the mobile phone industry, where margins are low and competition is particularly fierce, the change in tariffs is undoubtedly a huge cost. In close to the brand and the principle of users, mobile phone downstream industrial chain has been rushed to India to build factories.
Jin Hongyun Electronics (India) Co., Ltd. (KHY) has a total investment of nearly 700 million yuan, enabling the employment of thousands of local people. India’s demographics are younger, with a large young workforce with an average age of 29 and a lower labour cost than the current level in mainland China. Although local workers are far less productive than Chinese workers, it is not difficult to train professional workers who focus on one process on the factory assembly line for mature management experience from China.
India’s continued economic growth and rising disposable income are set to continue to grow, given the huge young people’s pay dividend, Modi’s government’s reform and opening-up policies, tax reform and the recent introduction of preferential policies, and the continued growth in India’s consumer demand for 3C electronics.
India to build “reef”
“Be sure to ask a good local law firm or accounting firm” to become a lot of Indian companies out to sea for later advice.
Imperfect infrastructure, frequently changing policies and regulations, complicated tax regulations, working methods and social cognitive differences, business credit environment, etc. have become potential risks for multinational companies to enter the Indian market. One of the biggest challenges is the localization of management, such as the way Indians work, their afternoon tea habits, their dislike of overtime, and their need to rest on two days, in stark contrast to Chinese factories.
From those successfully rooted in India’s corporate experience, often using the “China-India” core management team, and the Indian manager-based grass-roots management team combined approach, industrial workers resources are basically dependent on local staff, the whole machine to maintain a high degree of local employment.
In the case of Jin Hongyun Electronics (India) Co., Ltd. (KHY), the proportion of Chinese and Indian managers in the management team is close to 1:4, especially at the grass-roots level, where the primary management is mainly Indian employees who understand the habits and cultural characteristics of the local people in India, making it easy to communicate and manage Indian workers. Minimize the impact of Chinese variances in the management process.
Frequently changing policies and regulations and complicated tax regulations are another challenge for Indian companies. India is a democratically elected multi-party country, the ruling party every five years will be re-elected, different ruling party’s ruling policy will be different, which makes some of the country’s general policies can not maintain good continuity and integrity.
“The complexity of Indian taxes must not be overlooked. Zhang Shunyuan, a tax advisory partner at EY International and Mergers and Acquisitions, stressed that many domestic operational experiences and operating habits do not apply in India due to differences in thinking patterns and perceptions, leading to the frequent occurrence of tax litigation or tax audits in India by multinationals.
“Especially in the emerging industry of the digital economy, India’s relevant tax laws are still changing, the relevant laws and regulations change, supplement and change are very wide-ranging, once the tax litigation, will cause a huge time cost to enterprises.” Zhang Shunyuan told First Finance.
For example, EPC (Engineering Contracting Business) project contracts often lead to tax-related disputes, known as “turnkey projects”, for EPC projects, the Indian tax authorities tend to tax the profits of the overall contract, even if the design, engineering and supply-related activities of the project occur outside India, but also tax. Some rulings hold that business outside India does not need to pay taxes, which requires Chinese enterprises to elaborate as much as possible, clarify the location of implementation and related quotations, save all kinds of documents and complete project contracts in the project negotiations, and make full use of tax agreements to avoid related tax risks.
Zhang Shunyuan suggested that enterprises in India, must have a mature business plan and production planning, do a good job of long-term business plans, to carefully review the contract provided by all the documents and specific details, to put oral commitments into the written text, to avoid unnecessary commercial disputes.