Chinese Checkers

The Moves

October 2021:

1. Indian Government reportedly sends notices to Chinese smartphone brands Vivo, Oppo, Xiaomi and OnePlus, asking the companies to share details on the components used in their smartphones. The purpose of this investigation purportedly was to determine if these products are safe to use for Indian consumers. 2. India reportedly puts pressure on brands Oppo and Vivo to stop relying on Chinese partners and instead use local firms for product distribution.

December 2021: Investigation by the Income Tax Department, Customs Department and the Enforcement Directorate (ED) against Chinese smartphone manufacturers Xiaomi, OPPO and Vivo over tax evasion and money laundering charges. These charges are currently on-going.

July 2022:

Oppo is accused by Indian regulators of tax evasion. India’s Directorate of Revenue Intelligence, a financial enforcement agency, alleges that Oppo, which along with Vivo has evaded taxes worth Rs 43.9bn. The DRI also alleges that Oppo paid lower customs duties through mis-declaring imported items and failing to include royalty and license fees in their value.

August 2022:

Indian government reportedly considers restricting Chinese smartphone manufacturers from selling phones under Rs 12,000. The approximate contribution of this price segment is 33% or 50 million devices presently.

The (indirect) message to the Chinese brands as per me:

1. Thanks for Making In India, but we would like you to make high-end devices and export. That is a business opportunity which should offset you vacating the entry level segment.

2. We have security concerns with you hence have to push back.

3. We need to protect our local companies be it Indian brands or distributors. We tried through the PLI, but it does not seem to have worked for Indian Brands who just have less than 1% share.

4. We will keep a close watch on your activities.

5. We have concerns on your burning capital to gain market share and showing year on year (YoY) losses in India and would like to investigate what is going on.

So what could happen to the Chinese brands:

1. If you are thinking they will exit the market, well that is not going to happen. They have invested a lot of time and money in establishing themselves in India, the second largest market, and cannot and will not give up easily. On the flip side, even the government would not like that to happen due to lack of alternatives and the time required by the non-Chinese brands to scale up.

2. They will remain under constant scrutiny keeping them on their toes. In a highly competitive field this could impact their aggression on pricing/expenses as they may want to cut down on their losses/show profits. This would, to some extent take away the premise on which these brands were built in India – a low price to specification ratio and high marketing spends.

3. Itel, Tecno, Infinix may struggle as they are predominantly playing in the sub Rs 12k price segment.

4. Chinese brands/distributors may start identifying partners with good investment capabilities to act as front while they manage the business from the back. Alternatively, they may promote their present second layer of Indian distributors (under the Chinese distributors) to join hands to form a consortium sorts which then become the first choice as replacement distributors for these Chinese brands. This should be a win-win considering the consortium already distributing the Chinese brand understand the Chinese distributors’ style of working and can easily replicate it. The Chinese brands also make the extra buck from the reduced layer.

5. The older Indian brands may see a ray of hope in the sub Rs 12k price segment. However, they shouldn’t get too excited as Jio is targeting this segment. Jio can surely come up with a winning combo of 5G devices at aggressive prices bundled with their 5G plan taking a major chunk of this opportunity. In fact there was some news on Jio launching a 5G device between Rs. 9-12k when they start their 5G services.

Indian brands will also have major challenges in managing their supply chain initially till such time they are able to build volumes. As of now, while the Government may want to give them preferential treatment, the component and semi-conductor suppliers may still not give them the priority they need to scale-up thereby stalling their growth.

6. After Jio, the second gainer would be Nokia followed by the older Indian brands.

7. How does one execute the Rs. 12k conditionality is a question mark. All one has to do is to price it a tad bit higher than the minimum price fixed to bypass the rule if applied. Alternatively, offer a post buy cashback to make the price go below Rs. 12k. I am sure there would be many more which can come to mind.

8. If one takes the 4 top Chinese brands today the customer would be happy to buy a Rs. 14k product from them against a Rs. 12k product by an old Indian brand. There is premium attached to Xiaomi/Vivo/Oppo/Realme vis a vis the MILK (Micromax, Intex, Lava, Karbon) brands and the customer is willing to pay it. It would not be that easy for the Government to execute the two reported plans of replacement of Chinese distributors with Indian distributors and the no entry of Chinese brands in the sub Rs. 12k price segment for various reasons in the short term. One has to have a backup of a strong supply chain of alternative brands to fill the gaps immediately. This is not visible today.

For all you know, in the end, it could just be a push back strategy through indirect messaging to keep the Chinese uncertain and to give confidence to the Indian brands.