India’s hi-tech joint venture plan is an olive branch to China – but will it work?

While the offer is open to other countries, it is most applicable to China, given its dominance in Indian electronics
But it remains to be seen whether such a partnership can bolster Indian electronics manufacturing or give greater security to Chinese companies in India

Kamala Thiagarajan

Published: 4:15pm, 17 Nov 2022

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After years of being accused of protectionism and wariness of Chinese investments, Indian government officials told Economic Times this month that the country was ready to accept proposals for hi-tech electronic joint ventures from not just mainland China but also South Korea, Taiwan, Vietnam and European countries. The hope is that this will bolster the growth of India’s electronic manufacturing.

While companies such as Xiaomi, OnePlus, Apple and Oppo have invested in India, this has mostly been through their contract manufacturers – where the manufacturing process is outsourced to Indian companies.

The proposal is far more applicable to China, given its dominance in Indian electronics, but there are strings attached – the foreign companies cannot set up independently. They must join hands with an Indian partner which will hold a majority stake and control the board.

This volte-face policy change, even in the face of Sino-Indian border skirmishes, is not surprising, industry insiders say. For one, there’s India’s growing reliance on Chinese goods, which surged last year.

China’s vice-like grip on India’s electronic manufacturing shows no sign of easing. For the year ended March 31, 2020, 45 per cent of India’s imports of electronic components for smartphones came from China. Last year, India imported US$26.39 billion worth of electrical and electronic components from China, up from less than US$18 billion the year before, according to the UN Comtrade database.

One important reason is price: it is at least 30 per cent cheaper to import components from China than any other competing global supplier.

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This deepening dependency on its neighbour to power its electronics industry often conflicts with India’s insecurities around digital threats. In June 2020, amid concerns over surveillance and data collection, India banned 59 Chinese apps, including Tik Tok. More than 220 Chinese apps are now banned, including battle royale-style games.

Last year, the government reportedly contemplated regulation to subject certain smartphones to in-depth testing before sale to ensure data security – a move seen as targeting Chinese smartphones. In spite of the heightened scrutiny, Chinese mobile phones continue to rule the roost in India.

After all the political mistrust, India’s joint venture proposal is quite an olive branch. India’s electronics market is attractive to any foreign investor looking for long-term gains: valued roughly at US$75 billion last year, it is projected to grow by 6-7 per cent annually for the next six years.

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One recent move has heightened its value: the launch of 5G last month is widely regarded as a game changer for technology-led services. It is expected to help the electronic and tech industries add as much as US$3 trillion to India’s gross domestic product by 2033, which would support Prime Minister Narendra Modi’s rather ambitious plan to make India a US$5 trillion economy by 2025.

For Chinese tech companies, the allure of 5G in India lies in the country’s huge and growing database of users. With all of India expected to gain 5G access by the end of this year, it could mean as many as 20 million more handset sales, in a market already two-thirds dominated by Chinese players. Existing Chinese smartphone models also stand to gain as many already come equipped for 5G.

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But China has also been shut out of India’s 5G network construction. India joins countries including the United States, Britain, Australia and Belgium in banning or avoiding the use of equipment from Chinese telecoms giants such as Huawei Technologies Co and ZTE Corp.

The West has been increasingly cracking down on what it perceives as data theft and surveillance from Chinese telecoms companies, and while India has not imposed an outright ban, restrictive policy measures have made it extremely difficult for Indian telecoms companies to collaborate with Huawei or ZTE for any network-related requirements. As a result, the two companies’ workforce in India has shrunk by 90 per cent over the last two years.

The Huawei Research and Development Centre in Bangalore was inaugurated in 2015, but today the company is scaling down its operations in the country. Photo: AFP

For India to invite foreign players to manufacture in the country is a move that comes after many hits and misses. In 2017, in an effort to rejuvenate its electronics manufacturing and particularly its mobile manufacturing, India introduced a phased manufacturing programme aimed at setting up what the authorities believed would be a “robust, indigenous, manufacturing ecosystem”.

Under this policy, duty was charged in a phased manner on the imports of electronic components, mostly from China, making these components that were vital for mobile phone manufacturing more expensive.

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But the policy was criticised for its many drawbacks and, in the end, failed to promote local manufacturing as the authorities hoped it would. Instead, when disruptions during the Covid-19 pandemic left the industry with acute shortages of semiconductors, it created an even greater demand for imported electronic parts. High import duties only made the finished products more expensive and less competitive.

By allowing foreign tech companies to invest directly in the manufacturing process and collaborate with Indian companies, the government is hoping to scale up Indian exports.

It remains to be seen whether such a partnership can meet everybody’s needs, whether it is to bolster India’s electronic manufacturing industry or to provide greater security to Chinese companies who see long-term potential in India in spite of the dramatic ups and downs of recent years.

Kamala Thiagarajan is a freelance journalist based in Madurai, southern India