China’s Strategic Response To India’s Regulatory Measures On Chinese Companies – Analysis

By He Jun

India, with its large population, is an appealing market for many foreign companies. From a global perspective, India possesses several advantages. Firstly, its population of 1.4 billion provides a considerable demographic dividend, offering a substantial labor force and a potential consumer market. In recent years, numerous foreign investments and companies, including those from China, have intended to harness its vast market potential.

However, for many of them, India can also be a challenging environment, as foreign businesses often encounter allegations such as tax evasion and illegal fund transfers when conducting business in the country. Chinese companies, in particular, have been singled out and scrutinized by relevant government departments in India.

The Indian government has imposed restrictions on foreign companies, under the pretext of tax issues. Chinese companies like VIVO, OPPO, Xiaomi, and South Korea’s Samsung have all grappled with difficulties related to these issues in India. Xiaomi, in particular, has confronted such hurdles. In 2021, there were requests for access to data and details of Xiaomi smartphones and components. In 2022, import taxes totaling INR 6.53 billion were imposed on the phonemaker. On June 11 of this year, the agency responsible for investigating financial crimes in India accused Xiaomi’s Indian subsidiary of violating the Foreign Exchange Management Act (FEMA), leading to the freezing of INR 55.51, a move tantamount to the seizure of Xiaomi’s assets.

According to an article in the Economic Times on June 13, informed sources stated that Indian government departments recently summoned Chinese companies such as Xiaomi, Oppo, Realme, and Vivo to attend a meeting, requesting these Chinese smartphone manufacturers to induct Indian equity partners in their Indian operations. The report further mentioned that these companies were also required to appoint Indian executives to key positions, such as CEO, COO, CFO, and CTO. Additionally, Indian authorities instructed the Chinese companies to designate Indian manufacturing partners to enhance local manufacturing capabilities up to the component level through joint ventures with Indian enterprises, expand exports from India, and employ local distributors. Previously, Indian media reported that Chinese companies seeking to establish component factories in India would require Indian capital to hold a 51% stake in the joint venture. An Indian official stated that is for the Indian partners to have control over the management and board of directors.

These cases highlight the common challenges that Chinese companies encounter in India. According to ANBOUND researchers, many Chinese companies investing in India find the investment environment in the country to be arduous, with nationalism, protectionist policies, and an unwelcoming business environment contributing to significant uncertainty in business operations, resulting in increased costs and risks for companies. As a result, some well-established Chinese manufacturing companies are contemplating the possibility of withdrawing their investments from India.

From a macro perspective, there are various aspects of India that Chinese companies may not fully comprehend or grasp. Firstly, India harbors ambitions of becoming a major global power, but often these aspirations exceed its capabilities. Historical factors and geopolitical tensions have resulted in a lack of political and civil trust between China and India. Secondly, India’s overall situation is characterized by bureaucracy, corruption, inadequate governance, a demanding business climate, and a strong sense of nationalism. These factors collectively contribute to the complexity of conducting business in India. Thirdly, from a geopolitical standpoint, India is a target of Western influence and has adopted an overall strategy of aligning itself with the United States in an effort to counter China’s influence. India’s significant role in U.S.-led multilateral frameworks such as the Indo-Pacific Strategy, Indo-Pacific Economic Framework, and Quadrilateral Security Dialogue further exacerbates geopolitical tensions between India and China.

For China, it is crucial to adopt a long-term perspective with the objective of safeguarding the interests of Chinese companies. The responsibility lies with the Indian government to ensure the return of assets that rightfully belong to Chinese companies and to provide suitable compensation. In terms of response strategies, the Chinese government might carefully evaluate all available options, including legal, diplomatic, and international organization actions, as well as geopolitical considerations.

While Chinese companies operating in India may have their own share of deficiencies, it remains important for India to address these issues with fairness and impartiality and to adopt a balanced approach to them, ensuring that they are treated in a manner consistent with principles of transparency and objectivity.

He Jun is a researcher at ANBOUND