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Why were the offices of Chinese companies Vivo, Xiaomi and Oppo searched? Will these companies leave the Indian market?
The story so far: After experiencing an income tax hunt, exclusion from 5G telecom trials and growing restrictions on research collaboration, sources have learned that Chinese telecom company Huawei may downsize its research and development (R&D) facilities in India – signaling an endgame for its Indian operations. In addition to Huawei, the offices of ZTE, Vivo, Xiaomi and Oppo have also been searched in recent months. It is believed to be part of a series of government measures aimed at controlling the influence of Chinese firms in the country.
What are the allegations against various Chinese companies?
In India, Vivo, Xiaomi and Oppo have been widely accused of tax evasion, illegal money transfers, fake identification and incorrect information.
In April this year, the Enforcement Directorate (ED) seized ₹5,551.27 crore from Xiaomi’s Indian unit. It alleged that the company transferred foreign currency equivalent to the said amount to three foreign-based entities, including one entity of the Xiaomi group, under the guise of a “license fee”. It is alleged that the company did not use any service from any of the entities and that the transfers ultimately benefited the entities in the group. This was held to be in breach of certain provisions of the Foreign Exchange Management Act (1999). Xiaomi has denied the allegations, saying the payments were made for licensed technologies and IP used in its Indian products as part of a legitimate business arrangement.
Continuing the trend, the ED conducted searches at 48 Vivo locations in the country in July. The ED was acting on an FIR by the Ministry of Corporate Affairs that Grand Prospect International Communication Pvt Ltd (GPICPL), one of Vivo’s affiliates, had used forged identification documents and falsified addresses at the time of incorporation. According to the ED, the company’s registered address was that of a government building and a senior bureaucrat’s house. This pointed to the presence of a shell company that avoided taxation. The companies are said to have transferred “a huge amount of funds to Vivo India”. In addition, Vivo India allegedly diverted around 50% of its total sales revenue to China to expose huge losses in India-based companies to avoid paying taxes. This was in violation of the Prevention of Money Laundering Act (2002).
In the same month, Oppo was issued a show cause notice after the Directorate of Revenue Intelligence (DRI) found duty evasion of ₹4,389 crore. During the DRI searches, evidence was found that the alleged Oppo had deliberately declared incorrect descriptions of certain imported items for the manufacture of their mobile phones in India. This resulted in the company taking undue advantage of duty exemption to the tune of ₹2,981 crore. Further, the import of intellectual rights acquired outside Indian territory was not accounted for in their balance sheets for imported products. This is contrary to various provisions of the Customs Act (1962) and the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
Why is China’s “cyber image” under constant surveillance?
Chinese companies are disadvantaged around the world for providing critical infrastructure for essential telecommunications services. The list includes the US, UK, Australia and New Zealand, among others. And this despite the fact that Huawei and other Chinese companies offer significantly lower prices than domestic competitors.
In a separate context, Sameer Patil, Senior Fellow at the Observer Research Foundation (ORF) said in April, “Not only cyber attacks, China has even used overseas trade agreements and activities to carry out its cyber espionage campaign. A key part of this campaign is the telecommunications network and optical communication infrastructure provided by Chinese companies such as China Telecom, Huawei and ZTE.
In a recent example of this concern, Reuters reported in July that the Biden administration was investigating Huawei over concerns that cell towers in the country were equipped with equipment that could intercept sensitive information from military bases and missile forces that could be transmitted to China.
Do we also monitor cyber attacks?
On several occasions, China has been accused of cyber-attacks aimed at gathering information on the state’s critical infrastructure. North American cyber security firm Recorded Future said the October 2020 Mumbai outage was carried out by the Chinese-linked hacker group “RedEcho” as a follow-up act after the two countries’ armies clashed in the Galwan Valley.
Not only sovereigns, but also companies such as Vodafone and Microsoft have spoken about similar attacks by “state-sponsored” actors. Additionally, in March last year, another cyber intelligence firm, Cyfirma, reported that Chinese state-backed groups had targeted the IT systems of Indian vaccine makers Bharat Biotech and the Serum Insitute of India. The two companies were seen as prominent participants in India’s ambition to promote vaccine diplomacy.
What happens to the market in the face of a potential exit?
What has helped the growth of Chinese telecom companies in India is their price competitiveness in a price-sensitive market. According to Counterpoint Research, Chinese players have a 75-80% share of the sub-$150 segment, which accounts for 31% of the total smartphone market. Therefore, there was an urgent need to find a perfect competitive substitute for Chinese products.
Soumya Bhowmick, ORF Associate, said, “Not only India, several other countries are so dependent on Chinese products. This is primarily because China has primarily monopolized the lower ends of global value chains. The latter refers to the essential components required for the product, such as the pen cap for the pen. He added that “Make in India” has the bandwidth to provide an alternative, but it would be a “many year plan”.
Counterpoint Research believes that a total ban on Chinese smartphone players is unlikely. Regarding the overall compensation, he said, “They need a strong portfolio, distribution and aftermarket mix, which is currently missing from Indian brands.”
Despite recent regulatory scrutiny and the presence of alternative markets in Bangladesh, Thailand and Vietnam, Mr Bhowmick believes it is unlikely that Chinese firms will want to exit the Indian market so soon.
In India, Vivo, Xiaomi and Oppo have been widely accused of tax evasion, disbursement of illegal remittances, fake identification and incorrect information.
Chinese companies are disadvantaged around the world for providing critical infrastructure for essential telecommunications services. Reuters reported that the Biden administration is investigating Huawei over concerns that the country’s cell towers are equipped with equipment that can intercept sensitive information from military bases.
However, a total ban on Chinese smartphone players is unlikely.