Xiaomi's $4.8 billion frozen: why is it so hard for brands to go overseas to India?

On June 13, # millet responded to the confiscation of 4.8 billion yuan by India # words on the hot search list of major platforms, triggering a wide range of netizens.

Not long ago, India's Enforcement Directorate (ED) issued a document stating that it had formally issued a notice to Xiaomi India, the company's relevant executives, as well as HSBC, Deutsche Bank, and Citibank, alleging that Xiaomi had violated the Foreign Exchange Management Act (FEMA) by "illegally transferring funds to foreign entities."

In this regard, the agency had already frozen Rs 55.51 billion (roughly Rs 4.834 billion) of Xiaomi's funds last year, and this notice means that the funds could be forfeited altogether. Xiaomi, for its part, has denied any wrongdoing and reiterated that its operations in India follow all local laws and regulations.

Xiaomi India's previous response

Xiaomi and India, one is a headline brand in China's tech scene, the other is a country where Chinese internet discussions are extremely hot.

As the first batch of Chinese cell phone manufacturers to enter the Indian market since 2014, Xiaomi quickly gained a foothold in the Indian cell phone market by virtue of its unique business strategy and the extreme cost-effectiveness pursued by the products themselves, among other things.

Xiaomi's products are loved by the local people, and it only took three years for Xiaomi to gain the title of "No. 1 in India's cell phone market share".

Up to now, Xiaomi has not only set up seven production lines in India, but also employed 20,000 Indian employees, realizing the localized operation in India.

It can be said that Xiaomi not only brings good products to India, but also provides a lot of local jobs. Such an enterprise deserves the attention and support of the government.

Why in the end, let millet was issued "4.8 billion yuan (RMB)", the Indian authorities so far the largest amount of seizure?

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Frozen 4.8 billion yuan: Xiaomi's disagreement with India

On May 1, 2022, the Indian Enforcement Directorate (IED) said that it had found that Xiaomi Group had illegally remitted money to foreign entities under the guise of payment of royalties, and that under the relevant provisions of the Foreign Exchange Management Act, 1999, the Indian authorities had imposed a seizure of INR55.51 billion on Xiaomi Group's local bank account in India.

The Indian authorities argued that Xiaomi India's remittance of documents related to patent license fees and royalties to Qualcomm and China's Beijing-based Xiaomi Mobile Software, which were not factored into the transaction value of its imports, constituted an act of tax evasion and therefore required it to be re-taxed.

Screenshot of the Enforcement Directorate (ED) document from India

Xiaomi India said that more than 84% of this fee was part of the royalties paid to the US-based Qualcomm Group for the use of the relevant Standard Essential Patents (SEPs), as well as intellectual property rights in the Indian version of Xiaomi's smartphones, among other things. "Without these technologies, our smartphones would not work in India."

Xiaomi India also said that Qualcomm, for its part, can confirm that the fees relate only to phones sold in India and not to other countries and regions; that the payment was made through approved and authorized banks and is a legitimate business practice; and furthermore, that Xiaomi India does not own or hold any assets outside of India.

Although millet has always said that they are engaged in legitimate business practices, but the Indian side does not seem to pay attention to, the two sides of the word, has not been able to reach a settlement. However, experts say that Xiaomi India also has the right to continue to appeal.

Picture / photographic network

It is worth noting that in recent years, the scale of Xiaomi's overseas business is still gradually expanding.In 2022, Xiaomi Group's foreign revenue accounted for 49.2% of the total revenue, which mainly came from India and Europe.

In May this year, Xiaomi India also announced that it would expand its manufacturing scale in India and cover products beyond smartphones and smart TVs by partnering with Indian electronics manufacturer Optiemus to produce wireless audio products in the country. Xiaomi India also emphasized that it aims to increase the sourcing of locally manufactured components by 50 percent by 2025.

According to Xiaomi's 2022 annual report, Xiaomi's adjusted net profit in 2022 was $8.518 billion. That makes $4.8 billion about more than half of Xiaomi's annual net profit.In the first quarter of 2023, Xiaomi reported revenue of 59.5 billion yuan and a net profit of 3.2 billion yuan, with $4.8 billion far exceeding its net profit for the quarter.

Although Xiaomi India's business is still in normal operation, but this is not a small amount of freezing, is tantamount to Xiaomi India's "aorta" on a knife.

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India why is called "foreign enterprises graveyard"?

In fact, this is not the first time millet company by the Indian government "target".

Reports show that since the end of 2021, the Indian government departments have been raiding Xiaomi India on the grounds of tax evasion, false accounting and violation of foreign exchange management laws, and seizing huge assets of the company.

Xiaomi India has also exposed that Indian law enforcement agencies used extreme threats while questioning the company's executives and family members to coerce them into making the required confessions.

Not only Xiaomi, other Chinese-funded cell phone companies in India have also received more or less "special care" from the Indian authorities.

In July 2022, OPPO was accused of evading customs duties of 43.9 billion Indian rupees, or about 3.8 billion yuan.

In the same month, Vivo's 119 India-related bank accounts were blocked by the Indian Enforcement Directorate (IED), totaling 4.65 billion rupees, or about 400 million yuan. In a related statement, the Indian Enforcement Directorate alleged that Vivo India remitted Rs. 624.76 billion (roughly Rs. 45.5 billion) to China and elsewhere to avoid paying taxes.

Interestingly, in the strict regulation of foreign companies, India can be said to be truly "equal".

In 2008, the Indian tax department to Microsoft issued a 7 billion rupees (about 85.45 million U.S. dollars) fine. 2013, Indian regulators believe that IBM misrepresented the revenue of the 2009 fiscal year, requiring it to pay 53.57 billion rupees of tax arrears, equivalent to 866 million U.S. dollars.

In 2014, Samsung was fined $200 million in taxes in India.2023 In January, the Indian Revenue Intelligence Service accused Samsung of misclassifying remote radio heads in an attempt to avoid Rs 17.28 billion in import duties, or about $212 million.

The frequent crackdowns on foreign companies in India are a major reason why India is known as the "graveyard of foreign companies".

Legend has it that a joke has been circulating in foreign trade circles: "If you come across an Indian and a snake in the dangerous tropical jungle, which one do you kill first?" The answer is the Indian, because they are "unpredictable".

In the World Bank's "Doing Business 2020" report, India is considered one of the "world's most difficult countries to do business in", and the reason behind this is mainly related to the "uncertainty" of local laws

In this incident millet is accused of violating the Indian "Foreign Exchange Management Act as an example, the law was enacted in 1999, when India has just passed the largest economic crisis since the founding of the country, the opening of the Indian market soon on the whole to foreign capital to enter the attitude of welcome. But at the same time, India and foreign capital to enter whether it will again destroy the country's foreign exchange reserves, triggering a new economic crisis fear.

Therefore, India in the Foreign Exchange Management Act, section 4 of the foreign exchange regulations on the extremely strict management measures, but in the actual implementation of the Foreign Exchange Management Act, but also allows as the implementation of the Act, the Reserve Bank of India (RBI) through the issuance of a "chartered bank" qualification and other ways to flexibly grasp the scale of supervision, to facilitate the establishment of foreign capital in India, the enterprise The large amount of foreign exchange transfers that are inevitable in the day-to-day operations of foreign companies in India.

In practice, the law sets a very high compliance threshold for companies operating in India. At the same time, the lack of clear and explicit interpretation of the article, in the practical application of the ambiguous standards, operability is very strong.

On June 13, Indian media also reported that the Indian government required smartphone makers such as Xiaomi, OPPO and Vivo to appoint Indian nationals to key positions such as chief executive officer, chief operating officer, chief financial officer and chief technology officer.

The government has also directed them to delegate contract manufacturing to Indian companies, develop manufacturing processes involving local firms and export through local distributors.

With these conditions, the Indian government is asking Chinese companies in India to accelerate their "Indianization" and eventually become Indian-owned. At the same time, India also hopes that Chinese-funded enterprises to help India enhance its position in the global industrial chain and supply chain.

In 2014, Indian Prime Minister Modi put forward the "Make in India" initiative, hoping to increase the proportion of manufacturing in India's GDP from 15% to 25%. It was also in this year that Chinese smartphone makers, including Xiaomi, began to enter the Indian market.

Xiaomi, Vivo, OPPO these Chinese cell phone brands once occupied more than 75% of the market share in India. But the development so far, the Indian market, many uncertainties also make many foreign companies, including them, deeply worried.

Is the Indian market attractive? Of course it is. The United Nations has predicted that by the middle of this year, India will surpass our country to become the world's most populous country.

Where there are people, there is consumption, and for cell phone brands, India's large population provides considerable demand as growth in China and the world's developed markets peaks.

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Chinese brands have a long way to go overseas

For Xiaomi, nearly a decade of layout in India has seen both challenges and achievements. It is unfortunate that it has suffered from a freeze in funding, and there is still much to learn and learn from its brand's journey overseas.

Why can millet go overseas successfully? The first is its forward-looking strategic vision. In the Indian market has not been a lot of brands competing ten years ago, their own brand has a clear positioning of millet, concerned about the development potential of India. India at that time, although the level of development is relatively backward, but its increasingly perfect infrastructure and labor advantages can not be ignored.

In addition, customized localized functions and services for India is also a key part of Xiaomi's success. Such as MIUI India version of the integration of many local content providers, to ensure that the content is rich and at the same time reflects the differentiation and personalization.

Details, MIUI also launched the Indian style system theme, support for the Indian traditional calendar display and other functions, many details of the experience and improvement, undoubtedly got the Indian users good feeling, but also see the heart of millet.

The good times do not last long, with the tension between China and India in 2020, India's domestic anti-China sentiments are high, Chinese enterprises in India business environment has deteriorated sharply.

Photo/Xiaomi

Currently, Xiaomi remains a key smartphone vendor in the Indian market, capturing 21% of the market share in 2022, ahead of Samsung's 18.1% and Vivo's 15.9%. However, at the same time, due to the deterioration of the macro-economy and the prolongation of the replacement cycle, the global cell phone market performance is sluggish, and Xiaomi's share has fallen 25% year-on-year.

India's strategy to develop local manufacturing is indisputable, but its "first introduced after the 'robbery'" approach is not smart. In the short term, the "millet incident" will not change the general direction of major enterprises to enter India. But this is also undoubtedly a wake-up call for them: to do business in India, whether they are fully prepared?

With a heavy industrial base, rich labor resources, a huge potential market in India seems to be a piece of fat meat, but perhaps, when you look at its profits at the same time, it also stared at your "capital".

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