Why India's curbs on Chinese investment may spell bad news for its plans?

Vietnam clearly means business. After bringing home Samsung’s mobile phone business from China -- which translates into an investment of over 18 billion dollars -- it is now on the prowl for more majors.   

A few days ago, the southeast Asian country’s Prime Minister Pham Minh Chinh met Apple Inc CEO Tim Cook at the latter’s headquarters in Cupertino, California.

And Pham returned home smiling, with a promise. Cook assured Pham that Apple would consider increasing the number of domestic suppliers from the country and involve them in the global giant’s supply chain.

Vietnam now accounts for over half of Samsung’s global smartphone output. It is eyeing Apple now.

Ninety-five per cent of Apple’s products are still assembled in China, which clocks revenues of 365 billion dollars. But, stringent Covid-19- lockdowns in the country are prompting Apple to explore other destinations. And it sees Vietnam as one such attractive option.

Last year, the Vietnamese government granted Foxconn -- which is Apple’s biggest contract manufacturer -- a licence to invest 270 million dollars for a plant to make laptops and tablets.

According to analysts, Apple produced around 1.67 billion dollars worth of phones in 2021 in India.

So as Apple and other tech companies are looking for options outside China; Vietnam, Malaysia, Indonesia and even Thailand are vying to step into the breach.  And then there is Brazil, which is also assembling the latest iPhones and will also look for more volumes from Apple.

These countries are set to pose a challenge before India which has rolled out an ambitious Production Linked Incentive Scheme (PLI) to woo foreign companies.

Speaking tp Business Standard, Pankaj Mohindroo, Chairman, India Cellular & Electronics Association says Brazil's high levels of protection rule it out as competition for India. Vietnam has seen great success in electronics manufacturing. Now, India must leverage its demographic dividend and other strengths, he says.

Clearly, India will have more competition. The potential of Apple’s bigger shift from China, which could lead many other multinationals to follow suit, has already been given as an example by US government officials to highlight the economic benefits of joining the recently formed Indo-Pacific Economic Framework.

They say countries that have signed up for the forum will have an advantage in getting business from US companies.
 

So, India has a good head start. Unlike the other potential competing countries, the factories of the three big Taiwanese vendors of Apple Inc — Foxconn, Wistron and now Pegatron — are up and running.

They are targeting over 47,000 crore rupees worth of phones in FY23 -- a more than threefold increase over the previous year under the PLI scheme.

According to Counterpoint Research, India accounted for 3.1 per cent of Apple’s global manufacturing base in 2021, up from 1.3 per cent in 2020, while that of other Southeast Asian countries put together is just touching one per cent. Counterpoint expects India’s share to hit 5-7 per cent in 2022.
 

While it is good news, but India’s plan to match up to China may faces a big hurdle. Companies whether global or Indian --  that are eligible for PLI incentives-- are finding it challenging to build a substantial ecosystem of suppliers within the country. And without it one cannot build economies of scale and a global hub for exports.

Chinese suppliers dominate the mobile device supply chain globally for both mobile devices, laptops and tablets. They do so at the lowest cost and own the technology, too. That is the case not only for Apple’s contract manufacturers but also for all Indian domestic manufacturers that are trying to leverage their PLIs to become “domestic champions” with an eye on exports.

 This means these Chinese suppliers need to set up shop in the country, bringing their technology with them. But after the India-China border clashes in 2020, India tweaked its foreign direct investment policy to effectively exclude Chinese companies from the automatic clearance route.

That has made it very difficult for them to set manufacturing units on their own or in joint ventures in India.

This restriction effectively hands the advantage to countries like Vietnam, which has a larger supply chain, a huge cost advantage even factoring in PLI, and no special scrutiny on Chinese investments. The only advantage India enjoys is a well-trained workforce and engineers, an area where a small country like Vietnam is facing challenges.

The option of focusing on non-Chinese suppliers or developing domestic alternatives is a suboptimal one given the dominance of Chinese players in all critical supply chains and their ability to produce components at the lowest cost. In Apple’s top suppliers list of 2020, one-third come from China. And building a domestic supply base is the long-term answer but that will take time.

Mohindroo of India Cellular & Electronics Association says it is almost impossible to build supply chain efficiently without the Chinese players. In fact, China built its electronics industry with help from so-called 'enemy countries' like Japan and Taiwan.

India should take a leaf out of China's notebook, says he.

In response to these constraints, the government a few months ago made some Chinese companies eligible for PLI in LED parts subject to FDI approval. Other players in the electronics PLI sectors said one solution is to permit joint ventures that are dependent on what technology and skills the Chinese bring to the table. The ball is clearly in the government’s court to balance geopolitical challenges with business realities.