Not an Apple of all eyes

Knapps

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20, Jan 2017

India wants Apple to ‘Make in India’, but some in the ruling government are hesitant to agree to the company's "unprecedented" requests before commencing manufacturing in the country. Apple, the most valuable company on Earth, is asking for a long list of financial concessions - including a 15-year tax holiday - from India. Such concessions would be excessive and unfair to other manufacturers who have agreed to manufacture without customized concessions.

What is the current status of the Apple proposal?

Apple manufacturing its signature smartphone in India has hit a roadblock as some officials have raised concerns about Apple's demand of tax concession, calling it unfair for other companies who are already manufacturing their products in India.

  • As the spring deadline to launch the key project manufacturing is inching near, officials are mulling ways to keep the deal going even as Apple has sent a list of demands to the Indian government as necessary pre-requisites before it starts production of its iPhones in India.
  • Among the demands, it sought duty exemption on raw materials for manufacturing, components and capital equipment for 15 years for both domestic and export markets.
  • Apple also sought a change in rules that would govern how it could import defective iPhones to repair and export them again, a move it said was crucial for it to keep supporting and repairing older models of the iPhone. Currently, Indian rules restrict such imports to phones that are no older than three years.
  • Apple has also asked for the government's help in quickly processing a request for a ruling from Indian tax authorities on transfer pricing agreements between its affiliates.
  • It also identified India's customs procedures as a hurdle to manufacturing and asked the government to make them less onerous.

The government is still keen for the US tech giant to produce its signature smartphones in India, and Information Technology Minister Ravi Shankar Prasad said on Jan 18 that India would keep an "open mind" in negotiations."We will very much like Apple to come and have a base in India," he said.

To solve the ongoing issues with demands of Apple Inc, the departments of industry, information technology and electronics, and finance will meet Apple executives on Jan 25.

Why is there a dilemma in giving in to Apple’s demands?

Apple is throwing its weight around because, well, it is Apple. It can be successfully argued that Apple needs India’s market more than India needs its manufacturing facility. Apple wants to boost business in India as the country of 1.3 billion becomes the fastest-growing smartphone market and sales flatten in the US and China.

Apple's long list of demands, including tax concessions and several other policy exceptions, faces resistance from officials because they consider it excessive and unfair on foreign companies already operating in India.

  • "We have not done this for anyone," said a senior government official whose department is one of several involved in evaluating the Apple proposal."If we do this, we must see a lot of value addition.”
  • Another official involved in the review said the government should make policies for the industry, not individual companies. "Apple is coming here because it sees a lucrative market, this is not a favour being done to India."
  • Competitors such as South Korea's Samsung Electronics and China's Xiaomi have already set up manufacturing in the country without demanding any additional concessions.
  • India has insisted that Apple, like any single-brand retailer, source 30% of its components locally, though the country is relaxing those rules so technology companies can operate stores for three years before meeting that requirement.

While attracting such a household name would be a valuable advertisement for a country shaking off a reputation for stifling bureaucracy, officials are wary of tailoring rules to individual investors.

‘Make in India’ badly needs Apple to declare success, but India does need it that bad.

Note: India isn’t the only country pressing Apple for local manufacturing.US President-elect Donald Trump has said he wants to see iPhones made in Apple’s home market, part of a broader push to get companies to keep or create manufacturing jobs.

Since when has the government been pursuing Apple?

Apple's Chief Executive Tim Cook met Indian Prime Minister Narendra Modi last May to talk about its plans to enter the Indian manufacturing and retail space.

Cook visited the country for the first time as he sought government approval for Apple to open its own stores.

  • Making iPhones in India would help Apple lower iPhone pricing in the country, where the company is struggling to gain market share against Android, which currently powers 97% of India's 300 million smartphones (as of Aug 2016).
  • And having Apple make its flagship product in the country would help the government's "Make in India" initiative, which aims to boost India's manufacturing industry and create jobs.

Modi and Cook agreed to work towards a "package" of four projects: assembling iPhones, opening Apple stores, importing certified pre-owned iPhones and refurbishing them in India, according to the letter.

  • Apple said its initial focus was to set up manufacturing of iPhones in India over two phases, the first of which was to be introduced by spring this year.
  • But after conducting due diligence on what it would take to get the project going, it determined its entry was "dependent on government support on a number of pre-requisites."

Where does Make in India stand?

An analysis of the data released by the commerce ministry shows that ‘Make in India’ had little to contribute to the upswing in Foreign Direct Investment (FDI) that was seen during the financial year 2015-16.

  • The data show that a bulk of the $40 billion that India attracted by way of FDI during the financial year 2015-16 did not go into manufacturing, thereby putting a question mark over the efficacy of the ‘Make in India’ initiative.
  • The data show that during 2015-16, the first full financial year of the Modi government, three non-manufacturing sectors - services, computer software and hardware, and trading ­­­- attracted more than 41.5% of the FDI inflow, whereas core manufacturing sectors such as automobiles, chemicals, power, pharma and construction got only 14% of the FDI.
  • The data further show that apart from the aforementioned non-manufacturing sectors, hotels and tourism and telecommunications were the others areas that saw foreign investors pumping in money.
  • FDI into each of the three key manufacturing sectors actually registered a sharp decline in 2015-16 vis-a-vis 2014-15. Inflows into the automobile industry, for instance, fell from a little over $2.7 billion to $2.5 billion in the aforementioned period.
  • The pharma and construction sectors saw even sharper falls. While foreign investments into pharma companies nearly halved, the construction sector attracted less than a sixth of foreign money in 2015-16, as compared to the previous year.

Where are the reasons for Make in India not performing as expected

It is the complexity of the Indian tax system and frequent changes in tax laws that have discouraged both domestic and foreign investments in the country.

  • Costs and time needed to comply with the tax system are also relatively high in India.
  • The ease of doing business hasn’t improved as much as the government aimed which was evident from the Ease of Doing Business rank in 2016 having moved only one place above the previous year to 130 out of 189 countries.This is far away from Modi’s target of breaking into the top 50 by 2018.
  • Further, India is not really known for being a protector of intellectual property rights. Many potential investors are wary of transferring their technology to an Indian subsidiary.

Who has invested how much so far?

  • Huawei: In February 2015, Chinese handset major Huawei launched a 5,000-seater research & development (R&D) centre in Bengaluru, the company’s largest such facility outside China and the first R&D centre set up by a Chinese company in India. The investment in setting up the centre was more than $170 million (around Rs 1,050 crore). With the planned expansion of this facility, the company might look at bringing more work to India, Wilson Wang, chief operating officer of Huawei India R&D center said.
  • Foxconn: In August 2015, Foxconn, the world’s largest contract-manufacturing firm for consumer electronics, signed an MoU with the Maharashtra government to invest $5 billion (Rs. 33,500 crore) over three years in setting up a manufacturing unit in the state.
  • Micromax: Handset maker Micromax said it will invest Rs 300 crore over the next few months to set up three manufacturing units in India. The move is to ramp up domestic production and reduce dependence in imports from China. The three factories will be set up in Rajasthan, Telangana and Andhra Pradesh providing employment to some 3,000-3,5000 people in each factory.
  • Lava: Domestic handset vendor Lava will invest Rs 500 crore to set up a manufacturing plant in Tirupati, Andhra Pradesh. The plant which will be operational in 2017 has a target of producing five million phones a month once it starts functioning.
  • Gionee: Chinese smartphone maker Gionee has partnered with global manufacturers Foxconn and Dixon to invest Rs 330 crore to make handsets in India.
  • Optiemus-Wistron: In November 2015, India-based Optiemus Infracom, a $650-million telecom equipment maker, tied up with Taiwan’s Wistron Corporation to set up a facility in India to make smartphones. Over the next five years, the two are expected to invest $200 million (Rs. 1320 crore) in the manufacturing facility in Noida. Optiemus manufactures handsets for HTC.
  • Siemens: German engineering company Siemens said it will invest over Rs 7,400 crore in India adding up to 4,000 jobs under 'Make in India' initiative. One of the world's leading producers of energy-efficient, resource-saving technologies, Siemens is a leading supplier of systems for power generation and transmission as well as medical diagnosis.
  • General Motors: In July 2015, General Motors, the world’s third-largest automobile maker signed a letter of offer with the Maharashtra government to invest Rs 6,400 crore at its existing Talegaon facility in Pune for further expansion, to export its various models. The letter of offer was submitted by GM chief executive Mary Barra to Chief Minister Devendra Fadnavis, who was accompanied by the state industries minister Subhash Desai.
  • Volkswagen: German carmaker Volkswagen invested Rs 720 crore to roll out an India-specific compact sedan from its Pune plant. The investment is made towards development, setting up new equipment and ramping up the production of the new compact sedan which is scheduled to commence in the first half of 2016.
  • General Electric and Alstom Transport: In December 2015, Indian Railways signed two joint venture agreements with global transport majors General Electric and Alstom Transport for setting up two locomotive factories in Bihar with an investment of Rs 40,000 crore.

How can Budget 2017-18 boost Make in India?

The vital role played by the manufacturing sector is well known.No country in the world has grown and created jobs without a strong manufacturing base. India needs around 1.5 million jobs per month and 17-20 million jobs per annum. Thus, a fillip to Make in India is needed during Budget 2017 to bring manufacturing to the forefront of economic revival.

  • Minimum Alternate Tax: The rate of MAT has more than doubled from 7.5% in 2007 to 18.5% currently, which is inhibiting manufacturing competitiveness. To incentivise manufacturing, the Budget should consider withdrawing MAT in a calibrated manner and institute a uniform accounting standard for calculation of profits. If this is not possible, then MAT should be brought down to the level of 7-10%.
  • Dividend Distribution Tax: DTT leads to double taxation of the corporate sector and, hence should be abolished. Alternatively, a basic exemption limit, say 10% of profits/capital may be provided where the company distributing dividend up to 10% is not liable to dividend distribution tax.
  • Ease of doing business: While there have been improvements, much more needs to be done to bring India’s rank within the top-50 in the World Bank Doing Business rankings.
  • Corporate Tax: Currently, India’s tax rate for companies compares unfavourably to that of most other emerging economies, so that funds are tempted to avoid the country. The corporate tax rate should be brought down to 18% (all inclusive) to bring it in sync with world standards.
  • Public procurement norms: With the government being the largest buyer in the economy, the procurement process should be made more efficient, time-bound and predictable. Similarly, there is a need to move away from the policy of awarding contracts based on the lowest bidder as this often discriminates against vendors with sophisticated equipment. Industry also needs a level-playing field with foreign firms in terms of payment and proven track record norms.
  • Start-up: The Budget should provide enabling policies which would help creation of 1 million start-ups in the next five years. These should be permitted to comply with regulations through self-declaration for all interface with the state for the first five years. The definition of a start-up can be any firm less than five-years old with no further qualification.
  • Infrastructure: Above all, a thrust to manufacturing would remain incomplete unless the government speeds up, on a war footing, the pace of infrastructure development by augmenting investment, both public and private, in roads, new ports, improving logistics and connectivity.

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