The United States Trade Representative, Ms. Katherine Chi Tai, may not be fully aware that most of the high-tech mass market electronics gadgets such as laptops, tablets and personal computers under global US brands exported to India are not manufactured in the US. They are built in China by US multinational corporations (MNCs) and exported to India. She seems to be unnecessarily worried about India’s new licensing regime that may impact shipments from the likes of Apple and Dell to India and force the companies to make products in India. The new rules will come into effect from November.
Katherine Chi Tai was in India to attend the recent G20 trade ministers meet. The US firms themselves are, however, less concerned. They find the market for their brands in India is now good and growing fast. India’s dividend payment and royalty rules are much more attractive and open than those in China. The adjudication system is good and reliable. Apple is already here with its Taiwanese contract manufacturer, Foxconn, to make iPhones. Maybe, in due course, more Apple products such as iPad, Mac, Apple Watch, Apple TV and AirPods will also be manufactured in India for the local market and export. Apple’s global competitors are unlikely to stay behind.
Katherine Chi Tai, daughter of a Taiwanese immigrant, may not be aware that Foxconn, a US$10-billion Taiwanese contract manufacturer boasting some 30 factories around the world, thinks that the supplier ecosystem that took over 30 years to build in China is expected to come up much faster in India. With Apple and Foxconn already here, it is a matter of time before other electronics giants make India their manufacturing base. Foxconn’s chairman cum CEO Young Liu had reportedly said the company would expand its operations in India as business grows to meet higher consumer expectations.
“Foxconn continues to expand its presence in India in response to consumer needs,” Liu said recently in a statement in Taiwan as he outlined the company’s India growth plans. He believes that India will “become a new manufacturing centre.” Liu is certainly aware that the size of India’s consumer electronics market was worth $73.73 billion, last year. The market is expected to expand at a compound annual growth rate (CAGR) of 6.8 percent from 2023 to 2030. India provides a worldwide opportunity for short to medium-term growth in consumer electronics spending.
The market size matters for foreign as well as local manufacturers. What matters to be equally important to a foreign investor is the government regulation concerning taxes and repatriation regimes, including dividends, technology fees, royalties and head office maintenance fees and free judicial system. Currently, the India government regulations in these areas seem to be appreciably investor friendly and far more preferable to those practised in China. For foreign MNCs in China, cash repatriation from their subsidiaries have always been a challenging task. According to reports, China maintains a strict system of foreign exchange controls. The Yuan’s exchange rate is tightly maintained. Funds flowing into and out of China are highly regulated. Laws and regulations – such as the company law, relevant tax rules, as well as China’s transfer pricing controls – impose additional barriers to foreign repatriation. Under such an environment, foreign investors need to understand and incorporate a profit repatriation strategy from the very beginning to ensure access to the profits they earn.
An MNC’s China-based entity could directly pay dividends to the foreign promoter subject to several prerequisites. Many MNCs use inter-company payments, such as service fees or royalties, to remit cash from China. Some remit undistributed profits by extending a loan to a foreign related company with which it has an equity tie-up. MNCs in China are subjected to a phenomenon known as the “cash trap.” It is perceived by MNCs to exist regarding their operations in China. The cash trap means that, while an MNC’s affiliate or subsidiary operations in China may be profitable, there are no legal and effective means of getting out some of the cash representing those profits, so that in a sense a portion of the profits (the cash) is effectively trapped in the country. The cash trap phenomenon exists because of the way the different layers of Chinese regulations— foreign exchange regulations, company law on foreign-invested enterprises, tax regulations, and, the last but not the least, China’s transfer pricing rules—are applied to interact with one another in the context of MNCs operating in China.
On the contrary, India’s repatriation rules for foreign firms would appear to be less complex. India itself has traditionally been a net importer of technology and high-end services from foreign firms or organisations. As a result, Indian multinational companies often pay substantial royalties to related and unrelated foreign entities for the utilisation of technologies and fees for technical services (FTS). India continues to import and use foreign intellectual properties. Lately, India’s license fee payments have increased exponentially. In 2021, such payments amounted to $8.63 billion, 72 percent more than the fees paid in 2015. A recent study showed that the contribution of IPs to the market value of S&P 500 companies had significantly increased from 17 percent in 1975 to 90 percent in 2020. A focus solely on short-term financial impact may be myopic and may fail to recognise the strategic and long-term value of the IP.
Global IT hardware majors such as HP, Dell, Acer, Asus, Lenovo and Apple may be seen as taking more time to set up manufacturing bases in India. Among the problems they cite are lack of components ecosystem in India, poor supply chains and expensive logistics. But, the situation is fast changing. While it may take a little time to fix, the government wants foreign MNCs to make a start, which will help iron out the issues.
Eventually, in a few years, when component manufacturing takes off and supply chain issues are sorted out, it will be a win-win situation for all stakeholders. In fact, the latest licensing regime provides protection to foreign investors against “dumping” by China-based and similar other foreign exporters to corner a big slice of the growing Indian market. Foxconn boss Young Liu’s confidence in India is expected to influence the decisions of the company’s global competitors as the Taiwanese IT giant plans to actively deploy work in the area of key components to raise its competitiveness in India. (IPA Service)