What made Nokia suspend manufacturing in India?

End of tax holiday, unfavourable policy, business model, freebies by Vietnam are some of the attributes

Nokia’s decision to suspend production in India left many wondering what triggered the move, as the company had earlier said its factory in Sriperumbudur was among its most productive globally. While the tax holiday for the factory coming to an end might be a factor, many say the business model of Microsoft (which acquired Nokia’s handset division last year), as well as freebies offered by the Vietnamese government, might also have played a role.

Responding to a detailed questionnaire sent by Business Standard, Microsoft said, “As part of Microsoft’s mobile devices strategy announced in July, we are in the process of realigning our manufacturing operations. As such, we have determined we no longer require the manufacturing services of the Chennai factory and have informed Nokia we will end our agreement on October 31.”

The US firm said it would focus on the mass smartphone market.

“There is no future if you don’t have share. We will build scale and share. We will unlock more products in the $100-200 price range to address the mass market,” Chakrapani Gollapali, country general manager (consumer channels group) at Microsoft Corporation India, had said earlier. The company’s “affordable” smartphones would hit the market in three-four months, he added.

Currently, the company has one product in this category — the Nokia Lumia 520.

The Sriperumbudur facility, now a contract manufacturing unit for Microsoft, doesn’t manufacture smartphones. What has baffled many is why the two companies aren’t making additional investment to manufacture smartphones at this facility, especially as the unit has given rich returns. While Nokia has invested about Rs 700-800 crore in the facility (about Rs 1,800 crore, if vendors are included), the factory has been making phones worth about Rs 30,000 crore a year.

Nokia’s Sriperumbudur facility wasn’t transferred to Microsoft after the acquisition, as it was frozen by the Income Tax Department, which slapped a Rs 21,000-crore notice against Nokia. Following this, Tamil Nadu had issued a Rs 2,400-crore sales tax notice.

Sources in the company said “unfavourable” governments and policies were other reasons behind the suspension of operations.

“Microsoft has informed Nokia it will terminate the manufacturing services defined in the agreement, effective November 1. In absence of further orders from Microsoft, Nokia will suspend handset production at the Sriperumbudur facility from November 1. Unfortunately, the continuing asset freeze imposed by the tax department prevents Nokia from exploring potential opportunities for the transfer of the factory to a successor to support the long-term viability of the established, fully functional electronics manufacturing ecosystem,” said a statement by Nokia.

Sunil Rallan, president of the Tamil Nadu Association of SEZ Infrastructure Developers, says the state and central governments haven’t brought about a “good-feel factor” for the company. Other factors that led to the suspension of operations at the Sriperumbudur facility were an “unstable policy and the company’s business model”, Rallan said.

Under a special scheme, the government provided units in SEZs an incentive of 20 per cent of the capital expenditure during the first 10 years; for non-SEZ units, this stood at 25 per cent of the capital expenditure. However, following the imposition of minimum alternate tax on such units, the equation changed.

According to reports, when the factory was set up, the Tamil Nadu government had told the company it would refund the four per cent value-added tax imposed on output from the factory, but this wasn’t the case.

Sources said it was more cost-effective to transfer mobile phone operations to China and, subsequently, bring those to the Indian market.

In Vietnam, Nokia has set up a unit capable of manufacturing 60 million phones a year; experts say the capacity will be increased to 180 million a year by 2018. The country is fast emerging as a cost-competitive manufacturing hub, owing to various incentives offered by its government.

The Sriperumbudur plant was Nokia’s largest globally. Here, the company manufactured its popular Asha series, priced at Rs 3,500-7,000 in the domestic market. The company also sells phones for as little as Rs 1,000. At these prices, it won’t be able to shift the production of these items to another country, especially at a time when the rupee has depreciated against the dollar in the past few months, making imports expensive.

At its peak, the Sriperumbudur facility accounted for about 20,000 jobs, including about 8,000 direct ones. Now, the number stands at 1,100, including about 850 in operations.

“Nokia exited the devices business once the transaction with Microsoft closed in April this year. Following the news announced today, Nokia will continue to do the best it can to minimise the impact on its employees,” the company said. “In the long term, we will continue to engage with the government so that the tax department’s asset freeze can be lifted. This has to happen before any next step can be considered for Chennai.”

Eventually, Microsoft might not be interested in a facility that lags others in terms of technology, while Nokia doesn’t want, as it will be a burden on the company’s new focus. And, the facility cannot be sold owing to the tax litigation involving a huge sum and the freeze by the tax department.

Amid all this, the workers, many past the age to join another company, don’t have many options. Their only hope is prompt action by the central government; more so, as the Centre is promoting the cause of its ‘Make in India’ campaign, to act promptly. The end of Nokia factory might also be the end of a large chapter of India's electronic manufacturing history.