Vivo Staff Arrests in India Highlight Challenges for Chinese Smartphone Makers in a Tough Market

Following the previous arrest of several Vivo executives, two more senior employees of Chinese smartphone manufacturer Vivo have recently been arrested by the Indian law enforcement authorities for alleged money laundering. The identities of these arrested Vivo employees have not been disclosed, but they are scheduled to formally appear in court for trial today.

Two months ago, the Indian law enforcement authorities had arrested four executives of Vivo India, including the CEO and CFO, one of whom is a Chinese national. It was one of the first arrests of senior Chinese executives in India. In July, Indian authorities raided dozens of Vivo’s offices in India and seized over 100 bank accounts related to Vivo India, containing more than 50 million US dollars. Vivo has stated that it would legally contest these arrests in court.

Another Chinese smartphone maker, OPPO, reportedly prohibited Chinese executives to travel to and work in India, fearing visa issues and concerns about detention by the Indian government. Xiaomi Inc faced similar fate in India. In April 2022, Indian government seized about US$725 million from Xiaomi, with the Indian financial enforcement agency claiming that Xiaomi’s actions violated Section 4 of the Foreign Exchange Management Act.

This section imposes restrictions on the purchase, possession, ownership, or transfer of foreign exchange, foreign securities, or immovable property located outside India. Xiaomi stated that the transfer of funds was for the payment of patent licensing fees to the American company Qualcomm. To date, Xiaomi’s funds are still frozen.

The wider geopolitical context of these tensions between Chinese companies operatingi n India and the Indian government encompasses a lethal border skirmish between India and China, as well as India’s "Make in India" initiative, which aims to incentivize companies to produce goods within the country. Moreover, corporations such as Apple are shifting their supply chains away from China amid U.S.-China decoupling. Apple has established manufacturing facilities in India and started producing its iPhone 15 there since last year.

The latest arrests are part of a broader, multi-year regulatory crackdown on Chinese companies in India. In 2020 as border tensions flared up, the Indian government banned 118 Chinese mobile applications, including popular apps like TikTok, WeChat, and UC Browser, citing threats to the sovereignty and integrity of India. This list was later expanded to bring the total number of banned Chinese apps to over 200 by the end of 2020.

The Indian government also changed its Foreign Direct Investment (FDI) policy in 2020 to impose restrictions on investments from countries sharing a land border with India, which includes China. This change requires Chinese investors to seek government approval before investing in Indian companies, a move aimed at curbing opportunistic takeovers and acquisitions of Indian companies by Chinese investors during the COVID-19 pandemic.

Chinese goods faced increased scrutiny and delays at Indian ports reportedly due to more stringent customs checks, and Chinese companies were banned to bid for government contracts in India and restricted to participate in the power and education sectors. In 2021, India’s Department of Telecommunications excluded Chinese companies like Huawei and ZTE from participating in trials for 5G networks.

But for Chinese phone makers, the stakes in India are high. Chinese smartphone brands occupy nearly 60% of the smartphone market share in India, with Xiaomi, Vivo, Realme, and OPPO alone accounting for four of the top five spots in market share. In the second quarter of 2023 alone, these four companies shipped over 19.8 million smartphones in India.

Xiaomi, Vivo, and OPPO all have established factories in India. Xiaomi now owns seven factories in India, and almost all the smartphones it sells in India are manufactured by local contract manufacturers.

Chinese smartphone makers’ revenues in India have been negatively impacted by the regulatory crackdown. For example, several built-in applications on Xiaomi smartphones, including "Mi Community," "Mi Browser Pro," and "Mi Video," were banned as part of the Chinese app ban initiative. These apps were one of the sources of income for Chinese phone makers, considering their large user base in India.

Smartphone makers also get paid for third-party pre-installed apps. As these apps were banned, it meant the loss of another potential revenue.

For Chinese smartphone makers, India presents a complex yet crucial market. Its vast size makes it irreplaceable, and pulling out would mean losing a significant market share they’ve painstakingly built over the years.

Despite facing numerous challenges, these companies continue to operate and invest in India backed by a determination not to abandon a market that’s key to their global presence.

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