India's aversion to Chinese investments and how geopolitics impacts PLI

India's stringent restrictions on Chinese investments have hampered the creation of a robust supplier ecosystem for mobile and IT device makers

A few days ago, Vietnamese Prime Minister Pham Minh Chinh met Apple Inc CEO Tim Cook at the latter’s headquarters in Cupertino, California, to urge the consumer electronics giant to step up business in their country. Reportedly, as many as 31 companies with a workforce of over 160,000 are producing various components and electronics for different Apple products. 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 clearly means business — it has successfully attracted Samsung to shift its mobile business from China, investing over $18 billion. Vietnam now accounts for over half of the South Korean company’s global smartphone output. There is no reason it cannot play a similar role for Apple. Only last year, the Vietnamese government granted Foxconn — Apple’s biggest contract manufacturer — a licence to invest $270 million for a plant to make laptops and tablets.

Vietnam’s moves are being closely watched by mobile device makers and the electronics industry in India. The country is Apple’s jewel in the crown outside of China, assembling its latest iPhones mostly for export. But the volumes are still small. Apple produced around $1.67 billion worth of phones in 2021 in India, according to analysts. Ninety-five per cent of Apple’s products are still assembled in China, which clocks revenues of $365 billion.

But draconian Covid-19-related lockdowns in that country are prompting Apple to push its suppliers to look elsewhere to expand production. In its second quarter conference in May this year, the company warned that the supply shortages due to the lockdown in China would reduce its sales by over $8 billion.

Sensing a big opportunity, Vietnam, Malaysia, Indonesia and even Thailand are vying to step into the breach. According to Bloomberg, some of the new Mac studio configurations are being assembled in Malaysia and some M1 iMacs are being made in Thailand. And then there is Brazil, which is also assembling the latest iPhones and will also look for more volumes from Apple.

So 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.

On this score, India has a 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 Rs 47,000 crore worth of phones in FY23 — a more than threefold increase over the previous year under the production-linked incentive (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.

Though this is good news, the reality is that, unlike many emerging competitors, mobile makers, whether global or Indian, that are eligible for PLI incentives are finding it challenging to build a substantial ecosystem of suppliers within the country, without which one cannot build economies of scale and a global hub for exports. The equation is simple: with value addition, costs go down and the country also saves on foreign exchange. That is why eligible PLI players, which include Apple Inc’s contract manufacturers, have also been made to commit a doubling of value addition from 10-15 per cent to 30 per cent by 2025-26.

That looks unrealistic. 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 PLI’s 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. For instance, Chinese contract manufacturer BYD wanted to come to manufacture tablets for one of its clients but eventually stayed away. “No Chinese supplier in the mobile device space has been given FDI clearance in the last two years. So, building a supply chain will take companies like us five to seven years or more before we can reach even reasonable value addition,” said a senior executive of a leading Indian mobile device maker.

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.

Apple has around 12 suppliers in India, the bulk of them non-Chinese companies such as Foxlink, Flex and Jabil and the three contract manufacturers (there are also Chinese companies which set base in India before FDI restrictions). Vietnam has over 31 suppliers, a large number of them are Chinese companies and many more are looking at diversifying out of their home base on account of lockdown disruptions and rising wage costs.

Taiwan is another route many mobile device and IT PLI-eligible companies are exploring. It is Apple Inc’s second-largest supplier base. “They have the technology and companies in Taiwan that can provide you with the same components and of top quality. We are talking to them. But they are conservative, take time in technology-sharing or transfer and are surely more expensive,” said a top manufacturer of mobile phones and laptops. He argued that despite the political problems between Taiwan and China, the bond of common language and historical relations make them prefer to set operations in China rather than come to India.

The option of focusing on non-Chinese suppliers or developing domestic alternatives as part of the “Atmanirbhar” drive is also 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.

Building a domestic supply base is the long-term answer but that will take time. The Tata group has been working with Apple Inc closely to supply mechanical parts for the last two years, say sources in the know, and is expected to get into the supplier list sometime this year or next. Apple is talking to many others but it could take three or four years before they meet Apple’s stringent standards.

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.

THE CHALLENGE FOR INDIA

• Vietnam, Malaysia, Thailand, Indonesia and Brazil are bracing up to get a larger share of Apple's pie as it shifts assembly operations from China. So, India will have more competition
• Despite PLI incentives, Vietnam’s cost of production is cheaper than India
• These countries don’t have restrictions on entry of Chinese suppliers, many of whom are shifting there
• Apple has no plans yet to assemble laptops and iPads in India although numerous companies are already eligible for PLI in IT products
• Looking for Taiwanese suppliers of mobile device and IT products is a slow process and their costs are higher
• Building home-grown companies from scratch is a possibility but a long drawn process