FINNISHED

In the throes of Make in India, why is Nokia shutting a factory that once employed 8,000 people?

Obsession
Modi's Moment
Quartz india
Obsession
Modi's Moment
Quartz india

The year was 2005. Nokia was at the top of its game as a handset manufacturer with total sales of $43.49 billion. And in India—its fourth largest market in the world—the Finnish giant held a staggering 60% share of the mobile phone market. Samsung was a speck in the rearview mirror, with a measly 8% share.

So it made perfect sense for the company to start a manufacturing unit in India, then a mobile market waiting to explode. In April 2005, the Espoo-headquartered firm signed an agreement with the Tamil Nadu government to start a manufacturing facility in Sriperumbudur, 31 miles from the capital city of Chennai.

Nokia’s first ‘Made-in-India’ model was the immensely popular Nokia 1100, a cheap and durable cellphone that became the largest selling handset in the country. (Eventually, the series even became the world’s highest selling consumer electronics product). Such was the company’s dominance in India that the five most popular mobile phone models in the country were all made by Nokia.

Predictably, the Sriperumbudur factory grew to be one of Nokia’s largest facilities in the world with some 8,000 people producing around 15 million handsets a month. But after eight years of operation, the Sriperumbudur facility will be shuttered on 1 November.

Just as Prime Minister Narendra Modi is inviting investors around the world to come and make in India, why is a large and important manufacturing facility that has been making in India all along, shutting down?

It’s a story worth knowing.

Taxman raids

The closure is the final move in a year-long dispute that started when India’s income tax authorities raided Nokia’s corporate offices in Gurgaon and the Sriperumbudur facility in January 2013. The taxman alleged that the Finnish company owed the Indian government Rs2,080 crore ($369 million) in unpaid taxes (paywall).

This amount was related to payments that Nokia India made to its parent company in Finland, Nokia Oyj, for supplying the software that was used in the handsets manufactured in India. The income tax department considers these payments as “royalties”, which are taxable in India.

“Prima facie, there appears to be some defaults with respect to TDS deductions on royalty payments made to its parent company based at Finland. It is also observed that the company has changed its accounting model and also it is in the process of re-organising the existing business model to by-pass certain direct and indirect tax liabilities,” the department said in a 2013 statement.

Nokia fights back

Within a month, Nokia pushed back, describing the income tax department’s actions as “excessive, unacceptable and inconsistent with Indian standards of fair play and governance.” The company argued that it had been given no prior intimation of the tax claims—and that nothing it had done was illegal.

 Domestic upstarts like Micromax and Karbonn were also intensifying the competition in the low-cost segment, once dominated by the Finnish giant. 

“Nokia notes its position is that it is in full compliance with local laws as well as the bilaterally negotiated tax treaty between the Governments of India and Finland, as far as withholding tax on supply of operating software is concerned,” it explained in a statement.

The company also clarified that since opening its factory in Chennai, its transfer pricing policy had been “regularly scrutinized and validated by the Indian and Finnish Tax authorities.”

Stalemate

On 21 March, the income tax department served Nokia with a notice for over Rs2,000 crore ($327 million) in unpaid taxes, in response to which the company moved the Delhi High Court the next day. The court then issued an interim stay on the notice, asking the tax department for clarifications.

Eventually, the court asked Nokia to take its appeal to the commissioner of income tax (appeals)—who, at the end of May, rejected the phone maker’s plea against the massive tax charge.

By then, Finland’s finance ministry had also got in touch with the Indian government, looking to resolve the issue under the double taxation avoidance agreement (DTAA) between the two countries.

Sliding share

Meanwhile, Nokia was struggling to keep pace with Samsung’s onslaught in the Indian handset market. Domestic upstarts like Micromax and Karbonn were also intensifying the competition in the low-cost phone segment, once absolutely dominated by the Finnish giant.

And the growth of smartphones sounded the death knell for Nokia. Samsung—with its Android handsets—rules the handset market while Apple has its loyal fans who wouldn’t trade iPhone for any other smartphone. Nokia, on the other hand, doesn’t even feature among the top five smartphone makers. The protracted tax dispute did nothing to help the unending slide of Nokia’s fortunes in the subcontinent.

Then came the big news.

End game

Microsoft announced that it would buy Nokia’s global handset business for $7.2 billion in September 2013. The acquisition was completed in April 2014, but the Delhi High Court ruled the Sriperumbudur plant could not be transferred to Nokia’s new owners. The tax department claimed that the Finnish firm didn’t have enough assets to meet the tax bill, which by then had been estimated at over Rs4,000 crore ($655 million).

As a result, the factory—with its fate undecided—stayed with Nokia, which entirely exited the handset business.

Nearly a year after the dispute began, Nokia finally made some headway after it convinced the Delhi High Court to lift its freeze on the Sriperumbudur facility. But the court also ordered the company to deposit Rs2,250 crore ($367.17 million) in an escrow account, as a pre-condition. Besides, the court held that if Nokia India lost the tax dispute and was unable to pay the penalty, Nokia Finland would be liable to pay upto Rs3,500 crore ($572.40 million), or the entire royalty payment that had been made to the Finnish parent. The case is ongoing, now being fought in the Supreme Court.

But amidst all this, the factory became an orphan. In April 2014, the plant eventually became a contract manufacturing unit for Microsoft, even as workers remained unsure of their future.

Finally, on Wednesday, Nokia said it is going to suspend operations in the Sriperumbudur plant after Microsoft pulled the plug on Nokia’s Asha series mobile phones—the facility’s mainstay. The company will, however, continue paying the salaries of 1,100 workers till a decision on the fate of the plant is reached.

And that is how the great Finnish ‘make in India’ adventure ended as a cautionary tale.

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