In search of fair weather: Can Nokia shift base from India?

There are big tradeoffs involved and it has invested heavily here; an unfriendly tax regime, though, might push it out to a country such as Vietnam

Can Nokia shift a part of its production from India to places such as China or Vietnam? Going by reports, it has conveyed to the government that India has become one of the least favourable of markets. And, it believes that with the taxation issues, it is more cost- effective to transfer the manufacture of mobile phones to China and then import these to the Indian market.

According to a source, the letter was written a few months ago. While Nokia would not speak, except for a general statement, those in the mobile devices business say it will be impossible for them to sell imported devices at the prices they presently do in this country. However, they could shift a part of their export from India to other markets. Especially to Vietnam, where they have set up a unit with the capacity to produce 60 million (by 2018, to 180 mn annually, say experts) phones a year; that country is emerging as a cost-competitive manufacturing hub, with the government there having offered attractive incentives. And, of course, they have China, the other key centre.

Nokia’s Chennai facility can reportedly produce about 150 mn units of handsets every year. The Indian Cellular Association (ICA) says the country exported mobiles worth Rs 13,000 crore last year and Nokia was surely the king. It exports about 50 per cent of its Indian mobile phone production annually.

The Chennai factory is also their largest in the world. The company churns out their popular Asha series of smartphones, their best seller in the domestic market, for Rs 3,500 to Rs 7,000. They claim it is the country’s best selling mobile device. They also sell phones for as little as Rs 1,000. At this price, it would be impossible for them the shift the production of these items to any other country, especially when the rupee has depreciated by 16 per cent in the past eight months, making imports expensive. Also, the government has recently imposed a tax on mobile handsets costing more than Rs 2,000.

<B>Whether to shift</B><BR>
However, it could if it found it more attractive shift a substantial portion of the phones it manufactures to its new plant in Vietnam and to some in China. In March this year, the finance ministry had Nokia India pay Rs 2,080 crore over evasion of tax on its royalty payment to Finland-based parent Nokia Oyj for downloading software on the mobile devices manufactured at its Chennai facility since 2006. Royalty paid for downloading software attracts 10 per cent tax deducted at source.

And, promises or assurances made by the government to the company when they set up shop have not been kept. For instance, the Tamil Nadu government was supposed to refund the four per cent value added tax imposed on output from the Chennai factory; it has not done so. Also, the government had earlier offered a 10-year tax holiday for units in special economiz zones; Nokia’s factory is in one. However, it has since imposed a Minimum Alternate Tax on such units, changing the equation.

However, a source said the Tamil Nadu Government has admitted that it would have to pay the company.

In Vietnam, on the other hand, Nokia has recieved numerous incentives. It has been recognised as a high-tech enterprise, bringing its incentives at par with what Samsung was also given. These include a preferential corporate income tax of 10 per cent for the first 15 years. The high-tech enterprise tag also helps it get tax exemption on profits for its first four years of operation. After that, it has to fork out half of this 10 per cent rate in the following nine years. Responding to a query, Nokia said: “Nokia can confirm that it has been in discussions with the central government and state government over ways to bring greater clarity to the business environment in India. These discussions have been both constructive and productive, and both sides have worked in a true spirit of cooperation. Evidence of this is the Tamil Nadu government’s recent issuing of a Government Order to us.”The Chennai factory has produced 800 mn handsets since inception in January 2006, the company said.According to Nokia’s annual and quarterly reports, it sold 335.6 mn units of handsets in 2012 globally, about 20 per cent lower than the 417.1 mn units it sold in 2011. Of the total 335.6 mn sold in 2012, only 35.1 mn were smart devices. However, it has been dislodged from being the largest mobile phone player in India by the Korean giant. A Voice & Data survey shows Samsung with 31.5 per cent share of the mobile device market has taken the top slot away from Nokia, which has 27.2 per cent. “Nokia is committed to India. The country is a priority market for us, and Chennai plays an integral part in our global manufacturing strategy. To date, Nokia has invested $285 mn in its manufacturing operations in Chennai, providing direct and indirect benefits for tens of thousands of residents,” the company added.