India and China after the Border Dispute: Implications for Huawei, ZTE, OPPO and Xiaomi
The most violent border clash between India and China since 1962 has spurred several new policy statements from the Indian government. What lies ahead for China’s top electronics producers working to tap the vast market of the subcontinent?
► China has been India’s main trade partner for decades and the biggest sourcing country for India’s trade deficit. Any trade disputes with India could drag down Chinese electronics vendors’ total sales by 10%.
► The Indian government plans to ban state-owned telecom operators from buying Chinese equipment, leading to anticipated sales losses for Huawei and ZTE.
► The financial recession of India is casting shadows for Chinese companies that rely on the Indian market to drive their revenues.
► Due to previously established local factories, the rising import duties may not be affected as much as other importing sectors such as raw materials.
► Chinese investment in India is under severe scrutiny from the Indian government and more cost may be needed to invest in the future and carry out projects successfully.
India and China, as geographical neighbors, have been closely linked for thousands of years culturally and commercially. Though political relations between the two countries have been tricky for decades, trade relations have shown an overwhelming development since the 2000s, and China has maintained its status as India’s largest importing partner for over 10 years. In 2019, the import volume in India from China reached USD 68.37 billion, accounting for 14.1% of total imports. Approximately half of the import volume comes from purchasing Chinese electric machinery and products, amounting to USD 33.83 billion.
As on June 17, the most violent border clash caused 20 casualties of Indian soldiers, consequently pushed the ties between the two Asian giants to a new low since 1962 the Sino-Indian war. Triggered by this deadly encounter, the Indian government is quite likely to accelerate the imposition of trade and investment restrictions, which have been long premeditated, on China. As electronic products have taken the largest part of India’s import volume from China, this sector has turned out to be the very first target of India’s sanctions.
Chinese vendors have profited from the enormous demand in the Indian market. This includes names such as telecom equipment providers ZTE (00763:HKEX) and Huawei and smartphone vendors like OPPO and Xiaomi (01810:HKEX). The following part will discuss how some of India’s anticipated reactions towards China-based companies are going to change the landscape of Chinese business operating in India and add investment risks.
From the Chinese point of view, the demand from the Indian market will definitely shrink. Three major factors have led to this projected shrinkage – government policies, local consumption decline and market sentiment.
India’s fastest response towards the border skirmish with China came from the telecommunication department, who have decided to ban state-own telecom operators Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) from using 4G equipment supplied by Huawei and ZTE. Private operators are also taking the risk of being banned from buying equipment from Chinese vendors.
As the world’s leading telecom equipment providers, Huawei and ZTE are both leveraged heavily on the Indian market. One of the traits in the state is the extreme competitiveness of the space as the world's top telecom equipment producers such as Ericsson and Samsung all have been working to profit from the vast market, which has been pushing vendors to be efficient cost-wise – that has pushed Huawei and ZTE to struggle for their places for over a decade. If Huawei and ZTE suddenly quit the game, the left player could have chances to lift prices for governement purchase orders. The trade-off is still for the Indian government to contemplate.
Heavily populated India is currently the world’s second-largest telecommunications market. If ZTE and Huawei are going to lose their carrier business market shares in India, the loss caused will be possibly in the millions of dollars. Other operational issues related to account receivables and inventory management will happen accordingly. However, it is not the first time that ZTE has faced sanctions from the Indian government. Back in 2006 and 2008, ZTE lost the bid initiated by BSNL for similar reasons. The later restored agreements of ZTE and Indian operators depicted the cooperation as mutually beneficial.
Similar policy-related issues could possibly bother Chinese handset maker OPPO and its peers. The ban of Chinese telecom equipment has been implemented out of two considerations. First, the Indian government believes its security systems and critical infrastructure cannot be run by the Chinese state. The second purpose is to boost local production and to be self-reliant, reducing dependence upon China. The first concern does not have many links to handset vendors as the terminals are mainly for sending back data rather than gathering and analyzing it. But for the second concern, it is likely that the Indian government will lavishly support some of the local brands to be the domestic champions.
The local consumption decline caused by the globally spread COVID-19 and the corresponding lockdown policies also cast a threat on the handset vendors’ Q2 and Q3 performance. According to IHS Markit, India’s PMI (Purchasing Managers’ Index) in April fell at 27.4 (a PMI reading under 50 represents a business activity contraction), reflecting a collapse of business activity with a record low in the 14-year survey history. For Xiaomi and OV (OPPO and vivo), which consider the Indian market one of their ‘cash cow’ businesses, they will face a steep downhill shift in the following months. A feasible counterplan is to drive revenue from their Internet service businesses and release promotions for highly cost-effective specs. Though this has never been a truly decent measure to boost sales, as it somehow harms the brand image and inventory smoothness, survival in the severe situation is even more important.
As a consequence of the border conflict, boycotts of Chinese product activities have taken place both on the Internet and in the streets. OPPO’s offline stores and Xiaomi’s official Instagram page were under attack due to the market aversion. The market sentiment will bring Xiaomi a greater threat since it has been selling the ‘Mi fan culture.’ How to make a more localized and ‘China-less’ brand is one of the key issues to fix for Chinese handset vendors.
Soon after the ban of Huawei and ZTE’s telecom equipment, Reuters revealed that India would impose extra tariffs on 300 imported products. Though did not mention the name, China, as the biggest sourcing country of India trade deficits, is apparently the main target of this rising tariff wall. After the ever-increasing import duty on finished smartphones, several original equipment manufacturers – including Xiaomi, Samsung and Apple – started assembling their phones in the country instead of importing a finished unit. Thus, the same old ‘Made in India’ criterion does not seem to be fatal for Chinese handset vendors as Xiaomi, and OPPO is following the plan that deems 99% of their smartphones should be assembled locally. Setting up factories locally turns out to be a good way to reduce political risks and drive up the production capacity. However, for other Chinese finished electronics and components providers, such as Nokia Shanghai Bell and DTT (600198:SHEX), there will be an instant effect regarding order decrease.
In April 2020, India announced a revised version of its FDI (Foreign Direct Investment) policy that would efficiently restrain the investment volume from neighboring countries (when talking about investment, the only one left is China) since it requires certain approval from the government first.
Chinese companies will face challenges in getting their approvals to invest, given that this could have national security implications for India in the wake of the recent border hostilities. Like Huawei, ZTE and smartphone vendors all need to invest in local factories to expand production, the decline of direct or indirect investment transactions could be a serious problem.
For Chinese firms that are running PE/VC investment in India, to pursue a larger volume of investments looks increasingly complicated. Over the past five years, Indian technology companies have been favored by Chinese investors. Nearly USD 4 million PE/VC has been poured into Indian unicorn companies such as Flipkart and Zomato. Yet most of the emerging excellent startups are in angel round; thus the investment barriers truly impede Chinese giants from staking their claims in the Indian Internet market.