The story so far: Having experienced income tax searches, exclusion from 5G telecom trials and increasing restriction on research collaborations, The Hindu learnt from sources that Chinese telecom major Huawei may downsize its research and development (R&D) facilities in India — indicative of an endgame for its Indian operations. Other than Huawei, sector peers ZTE, Vivo, Xiaomi and Oppo too have had their offices searched in the past few months. This is believed to be part of a series of government measures aimed at checking Chinese corporate influence in the country.
What are the allegations against various Chinese companies?
In India, Vivo, Xiaomi and Oppo have been broadly accused of tax evasions, discharging illegal remittances, forged identifications and incorrect disclosures.
In April this year, the Enforcement Directorate (ED) seized ₹5,551.27 crore from the Xiaomi’s India unit. It alleged that the company had remitted foreign currency equivalent to the mentioned amount to three foreign-based entities, including one Xiaomi group entity, under the guise of ‘royalty’. The company was alleged to have not availed any service from either of the entities and that the remittances ultimately benefited its group entities. This was seen to be in violation of certain provisions of the Foreign Exchange Management Act (1999). Xiaomi denied the allegations and said that the payments were made for in-licensed technologies and IPs used in their Indian products under the purview of a legitimate commercial arrangement.
Continuing this trend, in July, the ED carried out searches at 48 Vivo locations in the country. The ED was acting on an FIR by the Ministry of Corporate Affairs that the Grand Prospect International Communication Pvt Ltd (GPICPL), one of Vivo’s associated companies, had used forged identification documents and falsified addresses at the time of incorporation. As per the ED, the company’s registered address was that of a government building and the house of a senior bureaucrat. This pointed to the presence of a shell company carved to sidestep taxation. The companies were said to have transferred “huge amount of funds to Vivo India”. Moreover, Vivo India allegedly remitted about 50% of its total sale proceeds to China to disclose huge losses in Indian-incorporated 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) detected customs duty evasion of ₹4,389 crore. The DRI’s searches placed evidence that alleged Oppo had wilfully declared incorrect descriptions of certain imported items for manufacturing their mobile phones in India. This resulted in the company wrongfully availing duty exemption benefits of ₹2,981 crore. Further, the import of intellectual rights acquired from outside the Indian territory was not accounted in their balance sheets for imported products. This is in violation of various provisions of the Customs Act (1962) and Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
Why is China’s ‘cyber-image' under constant scrutiny?
Across the world Chinese companies have been disfavoured for providing critical infrastructure for essential telecommunication services. The list includes the U.S., U.K., Australia and New Zealand among other countries. This is despite the fact that Huawei and other Chinese companies offering significantly lower prices than domestic competitors.
In a separate context, Senior Fellow at the Observer Research Foundation (ORF) Sameer Patil stated in April, “Not just cyberattacks, China has even utilised overseas business contracts and activities to pursue its cyber-espionage campaign. A crucial part of this campaign is the telecom network and fibre optic communications infrastructure provided by Chinese companies like China Telecom, Huawei, and ZTE.”
In a recent example of this concern, Reuters reported in July that the Biden administration is investigating Huawei over concerns that cell towers in the country were fitted with gear that could capture sensitive information from military bases and missile silos, that could be transmitted to China.
Are we also looking at cyber-attacks?
On multiple occasions, China has been accused of cyberattacks aimed at collecting information of a sovereign’s critical infrastructure. North American cybersecurity firm Recorded Future stated that the October 2020 Mumbai blackout was carried out by China-linked hacker group ‘RedEcho’ as a follow-up act to the Galwan Valley clash between the armies of the two countries.
Not just sovereigns, companies such as Vodafone and Microsoft too have spoken about such attacks by “state-sponsored" actors. Moreover, 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 Serum Insitute of India. The two companies were believed to be prominent participants in India’s ambition for fostering 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 its price-competitiveness in a price sensitive market. According to Counterpoint Research, Chinese players have a 75-80% share in the sub-$150 segment that contributes to 31% of the overall smartphone market. There has therefore, emerged an urgency to find a perfect competitive replacement for Chinese products.
Associate Fellow at the ORF, Soumya Bhowmick told The Hindu, “Not just India but several other countries are so dependent on Chinese products. This is primarily because China has mainly monopolised the lower ends of the global value chains.” The latter refers to the basic components required for a product, such as a pen cap for a pen. He added that ‘Make in India’ does possess the bandwidth to provide an alternative but it would be a “plan for many years”.
Counterpoint Research opines that an outright ban for Chinese smartphone players is unlikely. As for an overall replacement, it stated, “They need a strong portfolio, distribution, and after-sales services mix, which is currently missing from Indian brands.”
Notwithstanding the recent regulatory scrutiny, and the presence of alternate markets in Bangladesh, Thailand and Vietnam, Mr. Bhowmick believes it is unlikely that Chinese firms would want to exit the Indian market so soon.
THE GIST
In India, Vivo, Xiaomi and Oppo have been broadly accused of tax evasions, discharging illegal remittances, forged identifications and incorrect disclosures.
Across the world Chinese companies have been disfavoured for providing critical infrastructure for essential telecommunication services. Reuters reported that the Biden administration was investigating Huawei over concerns that cell towers in the country were fitted with gear that could capture sensitive information from military bases.
However, an outright ban for Chinese smartphone players is unlikely.
Published - August 23, 2022 11:01 pm IST
