EXCLUSIVE: India-China standoff may delay foreign investments in mobile handset manufacturing

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India’s Production-Linked-Incentive (PLI) scheme to boost mobile handset manufacturing has started off on the right note. Two large Taiwanese manufacturers, already present in India, have submitted their applications under the scheme.

The government is optimistic.

“We expect mobile handsets to become the biggest export commodity in the next 4-5 years,” an Information Technology Ministry official told CNBC-TV18. “Many companies are still finalizing their annual accounts and we expect their applications once the paperwork is ready,” the official said, adding that the deadline for application was unlikely to be extended.

Yet, it is unclear if other manufacturers and investors looking to reduce reliance on China, will see India as the logical alternative. The changed geopolitical environment following the standoff between the two countries at the Ladakh border could delay investment plans of potential investors.

Apple has been looking to reduce its reliance on China and wants to export mobile handsets worth $40 billion from India in the next five years. Apple, like most other brands, does not manufacture its own handsets and instead, sources them from contract manufacturers.

Two of Apple’s Taiwanese contract manufacturers – Foxconn and Wistron – have already submitted their applications under the PLI scheme.

However, South Korean giant, Samsung, which plans to manufacture and export handsets worth $20 billion from India in the next five years is yet to submit its PLI application. Given that Apple and Samsung control almost 35 percent of the world’s mobile handset market, their investments in India have the potential to change the mobile handset manufacturing landscape in the country.

“There is a total incentive of Rs 50,000 crore and there are 5-6 large companies that control 80 percent of the global mobile market. Initially, we will pick five global champions who under the PLI scheme will be permitted to participate,” India’s IT Minister had told CNBC-TV18 on June 2.

Foxconn’s, as well as Wistron’s applications for the PLI were probably expeditious because they already have a presence in India. But the question remains, whether the incentives offered under the PLI scheme are compelling enough to attract other investors in the current geopolitical environment.

India’s advantage

The political risks emanating from the tension between the US and China and the post-COVID realization of over-dependence on Chinese factories has prompted many companies to adopt a China-plus-one strategy. In fact, some countries are also incentivizing their manufacturers to reduce dependence on China. For instance, Japan has earmarked $2.2 billion to incentivize its manufactures to move production out of China.

UBS’ Evidence Lab’s CFO survey, released in March 2020, found that over 76 percent of the respondents were planning to shift their supply chains away from China and 66 percent were planning to also shift their production facilities from there. The same survey found that 10 percent of such companies were eyeing India for new incremental investments. However, that is something likely to play out over the longer term for mobile handset manufacturers. During the initial years of transition, given the frail electronics manufacturing ecosystem in India, they will have to import at least some components from China.

Border standoff a spoiler

Over the last couple of days, some consignments from China have been held up at major ports for additional clearances. This, despite there being no formal directive from the Indian government to the Customs department.

“Authorities have abruptly halted the clearance of industry consignments coming in from China (and perhaps other destinations) at most major ports and airports,” US-India Strategic Partnership Forum told the Indian Ministry of Commerce in a letter dated June 23.

Shipments of companies like Apple, Dell, Cisco, Ford Motors, and Foxconn were held up at the port. In such a scenario, investors might adopt a wait-and-watch approach or invest in other countries.

Companies can submit their applications under the PLI scheme until 31 July 2020 and the Indian government remains confident that despite the China-India standoff several top manufacturers will invest in the country.

“Companies don’t need to start investing until early next year. Currently, we are only accepting applications. We will review them and ask shortlisted applicants to submit additional information. Eventually, only five companies will be given incentives under the scheme. There is a design to this policy,” an Information Technology Ministry official told CNBC-TV18.

India’s aspirations of becoming a global mobile handset manufacturing hub, and the global denunciation of China after the COVID-19 outbreak, does create a favorable environment for attracting investment. At such a time, the government’s proactive approach to announce a policy to attract investments into India is definitely noteworthy. However, the success of this policy will to some extent depend upon two things. One, India’s ability to convince global investors that they will be insulated from the India-China border tensions which surface periodically. Second, on the country’s ability to create a favorable ecosystem for electronics manufacturing that reduces dependence on Chinese imports.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow