BY S VENKAT NARAYAN
Our special correspondent
NEW DELHI, Oct 15: In 2020, Chinese automotive and electronics giant BYD, Apple’s largest iPad contract maker, was looking to transfer some of its capacity from China to India. India. But that move was put on hold after geopolitical tensions erupted between the two countries and India introduced strict foreign direct investment (FDI) rules for Chinese companies. Now, two years later, BYD has just started rolling out iPads from Vietnam. It has invested $268 million to set up a new factory capable of producing 4.33 million tablets per year.
Vietnam’s gain is India’s loss. Both Asian countries have been actively courting global companies and their suppliers to leave China. Rising geopolitical tensions between the US and China and supply chain disruptions from sudden factory shutdowns to combat Covid-19 have prompted many tech players to explore other investment destinations .
India has grabbed a crown jewel – Apple Inc. Its supplier Foxconn has recently started assembling the latest iPhone 14 within days of its global launch. And if all goes according to plan under the Production Linked Incentives (PLI) scheme, India will account for 12% of the global production value of iPhones, which could rise to 20% by FY26.
The PLI program, intended primarily to reduce the cost disadvantage between India and Vietnam for manufacturing mobiles, offers an incentive of 4 to 6 percent on production value for five years. But informed sources clarify that Apple Inc is not transferring the manufacturing of its AirPods to India. Overall, however, Vietnam is ahead of the game. Besides seizing iPads, The New York Times reported that Google is also moving assembly of its latest Pixel 7 mobile phones to Vietnam from China. Reports had indicated that India was also in on it.
Hanoi also bagged Chinese mobile player Xiaomi, which manufactures phones under contract with China’s DBG in Vietnam for export to Thailand and Malaysia. Microsoft manufactures Xbox consoles there. In the non-electronic field, the toymaker Lego, which was looking for a factory to meet growing Asian demand (it has a factory in China), recently opted for Vietnam where it committed a $1 billion investment.
Vietnam’s crowning glory was Samsung. Since 2008, the Korean chaebol has invested a whopping $19 billion in the country by transferring mobile capacity from China. He recently announced an additional $3.3 billion for semiconductors. Up to 50% of its phones are made in Vietnam, and annual exports in 2021 were $65.5 billion (three times what Apple promised to manufacture in India in FY26). The new battleground for both countries is PCs, laptops and tablets as brands seek to hedge against their overreliance on China: 75% of all laptops are made in this country.
Vietnam’s share of this space might be just 2% (contract manufacturing for Dell, Amazon and Google, according to reports), but it is furiously allowing contract manufacturers to build capacity and become a hub for the world here too. To that end, Hanoi recently signed a deal with Foxconn to invest $300 million in assembling laptops and tablets, and last year gave Wistron permission to manufacture computers and peripherals. Nikkei reports that Microsoft may start producing its Surface lineup, including laptops and desktops.
India’s response to woo laptops (most of which are imported from China), PC and tablet makers has been through a Production Linked Incentives (PLI) program for computer products, which failed to take off. Only about four of the 14 eligible players, domestic and global, have managed to meet their production targets, and they say the incentives (an average of 2 percent) are too low and only for four years.
The electronics ministry is reworking the plan to better meet the demands of global players, who have expressed interest in transferring capacity from China if the incentives are attractive enough. a supply chain that, in both mobile and computer products, is dominated by Chinese manufacturers. But India’s foreign direct investment (FDI) policy has effectively barred them from going through the automatic approval route, which means Chinese investment proposals must be vetted by the government. Even then, few have obtained clearance in the past two years.
For example, 10% of Apple’s top 200 suppliers are based in Vietnam, but the majority of them come from China. In India, Apple has about 12 global suppliers, but only three of them are Chinese companies that entered before the FDI restrictions were imposed. As companies like Apple dramatically ramp up production starting this year, more value is only possible if their Chinese suppliers are allowed in. India wants value added to increase from 15-20% to 35% over the next four years. Hanoi imposes no such restrictions; geographical proximity reinforces its attractiveness.
Vietnam has two other key advantages – much lower entry tariffs than India and the ability to take advantage of its plethora of Free Trade Agreements (FTAs) that allow duty-free entry for exports. A preliminary study undertaken by global companies points out that the average of the most advantaged countries domestic tariffs for mobile phones and its supply chain and some electronics for 122 products is around 9.9% in India compared to 5 .7% in Vietnam.
The other problem, according to the companies, is that, unlike Vietnam, there is a constant fear of divergent interpretations and misclassifications, with the revenue department suddenly increasing demands or even accusing global players of back and forth. “There is no pre-consultation and prior authorization like in Vietnam. Once claims are made, the only way out is litigation,” said a senior executive at a global electronics company.
Above all, Vietnam has also benefited from its FTAs with more than 56 economies which have helped remove tariff barriers and make it a potential strategic supply chain hub. For example, its recent FTA with the European Union lifted tariffs on 85% of Vietnamese goods. India, meanwhile, has abstained from participating in the most important of the FTAs - the Regional Comprehensive Economic Partnership (RCEP).
Of course, India has the advantage of an abundance of skilled labor available at even lower wages. The salary of workers in Vietnam is half that of China, where rising wages have become an obstacle to investment. But Indian workers’ wages are still a third of those in China, says an executive at a contract manufacturing company. That aside, Vietnam’s much smaller population has a limited number of skilled workers. But most global players say this advantage is not enough. Vietnam has a much more flexible labor law which partly neutralizes the advantage. Clearly, India will need more than cheap labor to take advantage of the China Plus-One strategy of global companies.