Can Chinese smartphones spark India’s long overdue manufacturing revolution?

Say cheese.
Say cheese.
Image: AP Images/Rafiq Maqbool
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Coolpad. Meizu. Gionee. These Chinese smartphone companies are virtually unknown outside their home country. But they’re fighting hard to become household names in India.

Chinese smartphone brands are entering India in droves, and they’re doing their best to make their presence known with flashy product launches, big marketing pushes—and, crucially, promising to make what they sell in India in the country. Prime minister Narendra Modi’s “Make in India” campaign, launched in September 2014, aims to boost the country’s manufacturing sector in an effort to improve the economy. Manufacturing now makes up only 17% of India’s overall GDP, compared to over 30% in China, and Modi hopes to get that number up to 25% by 2020.

If these Chinese phone manufacturers follow through on their promises, they’ll boost India’s economy, and get access to a the world’s next-biggest market in the process.

Who’s coming to India?

According to Counterpoint Research, the number of Chinese smartphone brands available in India has jumped from 12 to 57 in two years.

In recent weeks, Chinese companies have been aggressively putting down roots and rolling out new products:

  • Xiaomi, the market leader for Android phones in China, began assembling devices in India in early August, in a partnership with Taiwan’s phone giant Foxconn, and even released its recent Mi 4i device in India before China.
  • Shenzhen’s OnePlus, meanwhile, currently ships 7% of its devices to India, but is working to raise that figure. OnePlus co-founder Pete Lau told Quartz in July that the company will also partner with Foxconn in India to make phones, and intends to release an India-specific phone by year’s end.
  • Lenovo, which has been selling PCs in India for years, announced in August it had begun working with Singapore’s Flextronics to assemble phones in Chennai.
  • In mid-August, Meizu, the Guangdong-based smartphone maker with backing from Alibaba, held a press conference in Delhi to announce the domestic release of the MX5, a $305 handset. Like Xiaomi and OnePlus, Meizu also has plans to begin manufacturing in India, with Foxconn in Chennai.
  • Coolpad, which at one point had 10% market share in China before slipping in 2015, announced last May it would begin shipping its online-only Dazen brand to Indian consumers.
  • Oppo and Vivo, two brands that are enjoying robust sales in China right now, each entered India in 2014, and have both pledged to begin making devices in India by year’s end.

Meanwhile, the top 12 “tier-1” Chinese brands, which Counterpoint defines as brands shipping more than 100,000 devices in China each quarter, together make up 15% of all smartphone shipments to India.

Xiaomi, Foxconn, Meizu, Coolpad, and Lenovo declined to answer questions from Quartz about their current operations in India, or provide any information about or pictures of their facilities. 

The grass is greener

The reasons for the upswing of Chinese brands in India simple: as China’s smartphone market slows, India’s is rising. Smartphone shipments in China fell by 4% annually last March, but in India, a market of comparable size, shipments grew 44%.

But other factors are also making India, and particularly manufacturing in India, attractive to Chinese smartphone brands.

Prime minister Modi’s Make in India campaign is supposed to fix the weakest part of the economy, using broad measures at the national and state level that convince manufacturers to move operations directly to India. Electronics manufacturers in a wide range of categories that invest in plants and machinery in India are eligible for subsidies that range from 20 to 20% of capital expenditure. The government has also removed caps and red tape surrounding foreign direct investment, which helped pave the way for Foxconn’s pledged $5 billion investment in Indian facilities.

“In plain terms, if you invest $100 here, we will give you $25. Then state incentives are also available,” India’s communications and information technology minister Ravi Shankar Prasad told the Economic Times.

By moving assembly, manufacturing, and research to India, Chinese OEMs can dodge the rising labor costs in their home country, and also keep their operations in close proximity to their actual customers. The average hourly labor wage in India is 92 cents, versus $3.52 in China, Boston Consulting Group reported last year.

Beyond new production perks, India’s fragmented telecom industry, retail-driven sales environment, and penchant for pre-paid plans make the market easy for smartphone companies to enter. Whereas India has only just begun rolling out 4G nationwide, China has offered 4G for over one year, driven primarily by China Mobile’s aggressive nationwide rollout. This means that Chinese smartphones are already equipped to ride a wave of 4G upgrades in India.

Furthermore, 95% of Indian consumers purchase phones over-the-counter at retail stores and purchase plans separately, pre-paid. As a result, a single Chinese brand can simply ship as many of its 4G handsets as possible to as many different channels as possible, without worrying too much about conflicting standards or alliances with different telecom companiess. Already, Chinese brands make up 45% of all 4G-enabled smartphones in India.

“It’s easier for OEMs to generate scale [in India],” Neil Shah of Counterpoint Research told Quartz. “They don’t have to sell through carriers but can sell in an open retail market where phones are unlocked and not carrier dependent, and handsets can work on most of the carriers.”

But India’s phone market is brutal

Despite the influx of Chinese brands in India, becoming a smartphone leader is going to be tough. Indians on average remain much poorer than the Chinese, so the country will transition from feature phones to smartphones relatively slowly.

“A variety of factors have to fall in place, such as smartphone prices going further down, more smartphones making their way into rural areas and tier three-or-four cities, purchasing power improving, stronger rationale for using a smartphone etc, for the smartphone pickup to be faster,” says Kiranjeet Kaur, research manager at IDC, which studies the telecom industry.

Prices are also lower, meaning thinner margins. According to IDC, 20% percent of smartphones sold in India are priced under $100, compared to 50% in China.

Beyond competing with each other, Chinese smartphone brands will have to compete with Indian brands like Micromax, Lava, Intex, Karbonn. These brands have been selling phones India for years and have long-standing relationships with retail outlets, which could give them a competitive edge over foreign players new to the country. There’s so much competition that sales prices are actually falling:

With top local brands collectively already making up 35% of the market and very few differentiated qualities, it’s likely that India’s eventual market leader for Android devices will sit just a hair ahead of the competition—much like the industry in China. Android brands from any country will probably have to settle for a small slice of a big pie.

And “Make in India” is tough

Making in India hasn’t been easy for foreign companies. Manufacturing makes up 17% of India’s GDP, placing it alongside Vietnam and Bangladesh, but far from China which derives about 30% of its GDP from manufacturing.

McKinsey’s Rajat Dhawan tells Quartz that there are four main barriers preventing a flourishing manufacturing sector in India:

  • The country’s tight labor laws are are not conducive to setting up factories. Companies employing more than 100 people must first seek government approval before issuing layoffs, and trade unions can be formed easily.
  • India’s poor logistics infrastructure makes the physical transport of goods costly and inefficient. Only half of India’s roads are paved, and congested traffic leads to sluggish (and thereby costly) delivery.
  • Land aggregation for factories is also difficult. Most of India’s land is owned in small plots by farmers, and according to the law, landowners must give consent to a forced sale for industrial projects. The government attempted to amend this requirement in order to spur plant construction, but political pressures recently forced progress to stagnate.
  • Finally, India’s complicated taxation system makes it difficult for business to thrive in almost any capacity. Companies in India currently find themselves subject to a convoluted web of taxes that varies product-by-product, state by state. This includes final sales taxes—a cellphone sold in Bihar faces as sales tax of 5%, but 14.5% in Tamil Nadu, for example. For the manufacturing sector, taxes on inter-state goods transports that happen at any of 650 checkpoints throughout the country raises the costs and time spent on moving products from one place to another. Political infighting has stalled legislation to streamline taxes.

Autos should be the model

The success of India’s automotive industry shows how domestic manufacturing can work. A landmark policy from 2002 (pdf, pg. 34) allowed for foreign equity investment of up to 100% in auto manufacturing, spurring global car makers to come to India. Over the next 10 years, foreign brands like Ford, Suzuki, and Volkswagon poured hundreds of millions of dollars towards building plants. Manufacturing clusters formed (pdf, pg. 14) where components and parts were produced, sold, and assembled.

Thirteen years later, India is now the sixth-largest maker of vehicles, trailing South Korea and Germany. It has even become an exporter to neighboring Southeast Asian countries—shipments of cars outside of India have doubled in the past six years.

But the consumer electronics industry changes faster than the automotive industry, and it’s not clear if India’s business environment can keep up. Nokia opened a factory near Chennai in 2005, when it was at the top of the mobile phone market. Eight years later, a murky tax dispute with the government coupled with Microsoft’s acquisition of Nokia’s handset division, rendered the plant useless. Its shutdown put thousands of employees out of work.

To date, most of the manufacturing that smartphone companies have committed to doing in India is mere assembly—components are imported from abroad and slapped together. And while many Chinese smartphone companies have “pledged” to invest in India, the fruits of those investments have yet to emerge. Dhawan says he’s optimistic that India can manufacture smartphones at various parts in the supply chain, but it won’t happen all at once.

“I think the government’s intent to boost manufacturing is 100% genuine. But to unlock all of the barriers and turn on the ignition, it’s not an overnight job,” he tells Quartz. “We’re looking at a five to ten year agenda to release the full potential of India’s manufacturing sector.”

Others warn against expecting a revolution. “The Foxconn announcement is still just an announcement,” Rajeev Malik, an economist with CLSA told Quartz. Before India can become a tech manufacturing hub, it needs to sort out regulatory issues, inventory questions, labor laws and other broad policies, he said. Unlike in other Asian countries “I don’t think investors feel the red carpet treatment” when they come to India. “There are still many issues and impediments.”