Disputes and restrictions hurt Chinese firms in India’s booming smartphone market
On October 6, an Indian High Court refused to lift Xiaomi’s $676 million asset freeze, dealing a blow to the company’s operations in India. The company, the world’s third-largest smartphone maker, said the court ruling had “effectively halted” its operations in the Indian market, according to a Reuters report.
The move comes amid growing difficulties for Chinese companies in the Indian smartphone market. Xiaomi is among the major Chinese smartphone makers that have been accused of money laundering and tax evasion in India over the past year.
Xiaomi entered the Indian market in 2014. At the end of 2017, it overtook Samsung and became the largest smartphone vendor in the Indian market. However, Xiaomi’s market performance in India has fallen sharply since the start of this year due to alleged breaches of Indian law.
According to a study by global industry analyst firm Counterpoint, Xiaomi’s market share in the second quarter in India was 19%, compared to 28% in the same period last year, although it retains its leading position in the market.
On January 5, Xiaomi India received a fine from the Indian tax authorities demanding the recovery of customs duties due from April 1, 2017 to June 30, 2020, Xiaomi admitted in its latest financial report (pdf). The amount owed was 6.53 billion rupees ($84.37 million).
In February, the Indian Enforcement Directorate (ED), a financial crime agency, opened an investigation into the company’s dealings.
On April 29, Xiaomi India was accused of illegally transferring money out of India “under cover of royalties”, and India’s financial investigation agency froze the equivalent of 55.5 billion rupees ($725 million) of funds from the Chinese smartphone maker.
The agency accused Xiaomi India of lacking commercial substance in remittances, violating relevant provisions of India’s Foreign Exchange Control Act and providing misleading information to banks.
Xiaomi denies any wrongdoing
Xiaomi India has denied any wrongdoing. He told the court that more than 84% of the assets confiscated by the enforcement agency were used to pay royalties to US chipmaker Qualcomm for the right to use its intellectual property, according to Business Standard, an Indian newspaper. of English language.
After hearing arguments, the court said it would issue a temporary release order if the company could provide sufficient bank guarantee to cover the value of the frozen assets.
In response, Xiaomi said providing such bank guarantees would affect its ability to pay salaries, make inventory purchases and maintain operations ahead of the Hindu festival of Diwali, India’s peak consumption season. Instead, Xiaomi offered to set up an escrow account to start making payments from the company’s smartphone sales from January.
However, the court insisted that a bank guarantee would be required to lift the freezing order.
Xiaomi’s setbacks in the Indian market this year have had a negative impact on the company’s share price.
Its share price on the Hong Kong Stock Exchange fell from HK$18.6 (approximately $2.37) per share at the start of the year to HK$9.25 (approximately $1.18) per share on October 21, a loss of more than half of its market value.
More allegations against major Chinese smartphone makers
Indian authorities have accused other major Chinese smartphone makers of tax evasion, including Vivo, Oppo and Huawei.
In July, the ED blocked 119 bank accounts containing 4.65 billion rupees ($58.75 million) linked to Vivo’s Indian operations for tax evasion.
The agency said Vivo India transferred 62.47 billion rupees ($7.9 million), or nearly 50%, of its total sales proceeds outside the country, mainly to China, to to show apparent losses and avoid paying taxes in India.
He raided 48 Vivo India-owned sites and 23 related entities on July 7 after an initial investigation found shareholders were using “false identification documents and falsified addresses at the time of incorporation”, according to an ED statement (pdf).
On August 3, India’s Directorate of Tax Intelligence (DRI) said it found that Vivo had evaded 22.1 billion rupees ($280 million) in taxes in India, accusing the company of “deliberate misrepresentation” in the description of certain imported articles.
On July 13, the DRI issued a legal notice to Oppo, another Chinese mobile phone maker, demanding that the company repay 43.9 billion rupees (about $551 million) in evaded taxes.
Chinese telecoms giant Huawei was also investigated for tax evasion in India in March.
India’s finance ministry said the telecom group had failed to record revenue of 4 billion rupees ($52 million) on its books and failed to account for expenditure of 4.8 billion rupees, according to a Reuters report.
Indian income tax authorities have reportedly raided Huawei offices and the residences of senior executives in several Indian cities.
Increasingly difficult environment for Chinese companies
A recent Deloitte report highlighted the huge potential of the emerging Indian smartphone market. The report predicts that India will have 1 billion smartphone users by 2026 and become the world’s second largest smartphone maker within the next five years.
However, Chinese smartphone companies are facing an increasingly difficult operating environment in India, with the recent spate of litigation threatening to erode their share of the Indian market.
Additionally, in June, the Indian Department of Telecommunications required its telecom operators to exclude the use of equipment and products from Chinese suppliers for all purposes. This includes upgrades and expansion, India’s Economic Times reported.
India has taken a tough stance against China-based companies amid heightened border tensions over the past two years. A June 2020 skirmish in the disputed Himalayan border region left 20 Indian soldiers dead and saw hundreds of thousands of troops lined up along the border. Despite some withdrawals, tensions remained high.
Chinese apps banned in India for security reasons
In February, the Indian government issued an order banning 54 Chinese mobile apps it says pose a threat to the country’s national security, according to local reports.
India’s Home Ministry has warned that the apps have the ability to collect sensitive user data through phone cameras and microphones for spying and surveillance activities.
The move was the latest in a series of similar bans instituted amid the protracted border dispute between the two sides. Overall, the country has banned more than 321 apps.
Banned apps range from mobile games to video chats and selfie camera apps from Chinese companies such as Tencent, Alibaba and NetEase. Some of the apps are clones or rebrands of apps that were previously banned.
India last year upheld a ban on 59 Chinese mobile apps, including ByteDance’s popular video-sharing app TikTok, Tencent Holding’s WeChat and Alibaba’s UC browser, after giving companies apps a chance to answer questions about censorship of content, worked on on behalf of foreign governments or lobbying influencers.
A government panel investigating the app ban decided, after reviewing the responses, that there would be no change in the country’s position, as the ban was in the interest of national security and of India’s sovereignty, a source said.
Reuters contributed to this report.