The Xiaomi-Foxconn tie-up for assembling smartphones in India is being taken as a shot-in-the-arm for the Make-in-India initiative. It might still be early days for such euphoria.

There is no doubt over the fact that smartphone manufacturers look at India as an important location. This is primarily for two reasons. The first is the large consumption of smartphones in India, expected to increase over time given the large population yet to adopt internet and smartphone usage. Not only does this make the country a lucrative market for smartphone producers, it also encourages them to set up bases in India. On efficiency grounds, particularly transportation costs, it makes more sense to serve the growing Indian market by producing locally, rather than serving the market by importing phones, as the Xiaomi has been doing till now.

The second important reason for looking closely at India is the difficulties being experienced by smartphone assemblers in China. The latter is no more as efficient a location for assembling electronic products as it used to be.

With wage costs increasing at a fast clip in China for keeping pace with the rising standard of living in many areas, particularly coastal provinces that are assembling hubs, smartphone producers are looking to relocate. India is a good alternative in this respect.

The Xiaomi-Foxconn combination would be working in a manner where Foxconn will play the role of the key assembler. As it does for Apple and Samsung also elsewhere in Asia, Foxconn would be gathering parts and components necessary for fitting into smartphones designed by Xiaomi. The latter would be labelled Made-in-India, like the Redmi 2 Prime launched recently, and made at the Foxconn facilities in Andhra Pradesh. The partnership would be similar to the one Xiaomi and Foxconn have in Brazil. Like Brazil, India is also a market that appeals to the two, both from the consumer- and producer-end perspectives. Over time, as scaling up happens, the India facilities might become hubs for exporting smartphones, particularly to the neighbourhood (South Asian countries).

But how much of the Made-in-India Xiaomi smartphones will actually be made in India? The smartphone manufacturing value-chain is interesting and reflects the fragmentation that hi-tech production has undergone over time. Smartphone designers (such as Xiaomi), wherever they are located, outsource the entire production to contract manufacturers (such as Foxconn). The latter handle a range of responsibilities that include sourcing the various components required for the phones and their final assembling.

Each component sourced for the phones adds its individual value to the overall value-chain. On most occasions, the values of these individual components—measured in terms of their sourcing prices—are far more significant than the costs of assembling. The Apple iPhone is a relevant example. The Made-in-China iPhones, assembled by Foxconn at its factories in the mainland, have the largest value contributed by components imported from Japan (34%).

Imported intermediates from Germany and South Korea account for another 30% of the total value of iPhones. The value addition by China is only 4%!

China has been a key location in the global smartphone value-chain due to its low labour costs and the ease of gathering adequate workers at short notices for responding to large demands. Nonetheless, the fact that its value addition is only 4% in a hugely popular smartphone that comes with a Made-in-China tag implies that labels on smartphones do not necessarily mean that they are ‘made’ in the country from where they are declared.

The Indian smartphone story, to be played out by Xiaomi and Foxconn, is going to be similar. Like the Redmi 2 Prime, which has been assembled in India using imported components, other Xiaomi phones would follow a similar pattern. While these would all be ‘Made-in-India’, the value-addition in India is going to be limited. This is going to be so till parts and components available in India become as good as the standards dictated by the Xiaomi designs.

That is going to take some time. Till then, the assembling will have to rely heavily on sourcing from abroad.

The success of the assembling will also depend on the duties that India imposes on imported parts and components.

While cheap labour might work to India’s advantage, such advantage might be neutralised if Indian tariffs on imported electronic components are high. High import duties will mean high import costs and would be reflected in the final pricing of the phones. Given Xiaomi is looking principally at production of budget smartphones in India, high tariffs might spoil the show.

From a manufacturing perspective, the smartphone story will mean for India, what it meant for China: a step towards getting recognised as the smartphone factory of the world. But today’s factories hardly produce from scratch. On the contrary, they gather and put together. The smartphone story has busted the myth of China being in control of all segments of its value-chain, except the downstream assembling. For the time being, India must also reconcile to a similar fate.

The author is senior research fellow, Institute of South Asian Studies, National University of Singapore.
E-mail: isasap@nus.edu.sg.
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