India to Western Tech Firms:
To Sell It Here, Build It Here
By Amol Sharma, Wall Street Journal,
New Delhi, January 8, 2013
India has proposed sweeping curbs on the import of technology products ranging from laptops to computer-network equipment. The WSJ's Amol Sharma talks about what this means for foreign technology companies.
NEW DELHI—India has proposed sweeping curbs on the import of technology products ranging from laptops to Wi-Fi devices to computer-network equipment.
The proposed regulations, which were reviewed by The Wall Street Journal, would create an expansive "Buy India" mandate requiring a large percentage of the high-tech goods sold in the country to be manufactured locally.
If implemented, the rules could wreak havoc on the business plans of a wide range of U.S. and other foreign firms, including hardware-makers Cisco Systems Inc. CSCO and Dell DELL services companies such as International Business Machines IBM and telecom-gear suppliers such as Nokia Siemens Networks B.V. and Telefon AB L.M. Ericsson
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Shoppers look at mobile phones at a wholesale store in Zirakpur, India.
To comply with the rules, foreign companies would have to set up factories in India quickly—possibly as soon as April—or significantly expand their existing manufacturing capacity in a country where the infrastructure is poor and building plants can take years because of red tape and other hassles.
Or they could face the loss of current business—collectively the industries affected generate billions of dollars in sales here annually—and the chance to tap into what is expected to be a booming technology market in years to come. Spending in India's technology and electronics market is expected to reach about $400 billion by 2020, up from $45 billion in 2009.
Reuters
Proposed regulations would require most high-tech goods sold in India to be made there. A Dell factory in India.
The rules are in draft form, and their sweep may reflect some brinkmanship on the part of the Indian government, which wants foreign firms to increase manufacturing in India. The government could still choose to delay or scale back its plan.
Still, U.S. lobbyists and industry are strenuously opposing the proposals, which have quickly become the most serious point of tension in commercial relations between the two countries. The proposals also aren't the U.S. government's only concern. It is also trying to head off Indian anti-tax-avoidance rules that would expose foreign investors to huge potential liability if they take effect in April as planned.
"India is the largest free-market democracy in the world. To mandate local manufacturing is antithetical to the very concept of a free marketplace," said Ron Somers, president of the U.S.-India Business Council, a lobby group for U.S. firms in India.
Representatives in India for Cisco, IBM, Nokia-Siemens and Ericsson declined to comment. A Dell spokeswoman in India didn't respond to a request for comment.
Indian officials say the regulations are needed to slow electronics imports, which are becoming a key driver of the nation's widening trade gap and are on track to reach $300 billion by 2020. By that point they would far surpass oil imports, long the largest contributor to the nation's current-account deficit. The government has also framed the rules as security measures to keep India safe from foreign cyberattacks. "Some countries have the means, opportunity and motive to use their telecom companies for malicious purposes," the government's policy proposal says.
India also wants to boost manufacturing amid gross-domestic-product growth of 5.3%, which is sluggish by its standards. The majority of India's population still works in agriculture, but services are the biggest contributor to the economy. Manufacturing makes up just 16% of GDP despite government efforts to increase it.
An initial Indian government proposal would have applied the "Buy India" mandate only to government agencies. (Some U.S. federal agencies are required by law to give preference to American-made goods as long as it's in the public interest and the cost is reasonable.) But the latest proposals include technology purchases by private firms, including government licensees and "managed services providers" like IBM that provide and manage technology for businesses.
Foreign companies see that as a major escalation. In a Nov. 23 letter to telecom ministry officials, the Association of Unified Telecom Service Providers of India, whose members include international and Indian telecom companies, said the proposed rules affecting private procurement are "an unprecedented interference and significant disruption in the global telecommunications marketplace, while raising significant questions about India's commitment to the rules-based trading system established under the World Trade Organization."
The list of products covered has also expanded significantly. It started out as a curb on imports of wireless telecom equipment made by Chinese companies. But proposals in recent weeks cover tablets, laptops, printers, set-top boxes, Wi-Fi devices, telephone handsets and a host of technologies that make up the guts of businesses' networks, including switches and routers.
A specified share of each product's market—anywhere from 30% to 100% of sales—would have to go to India-based manufacturers, and the share would generally rise over time.
Many foreign companies say they aren't opposed to building plants in India but want the government to provide tax holidays and investments in roads and energy. Some Western technology companies, including Nokia-Siemens and Ericsson, already do some manufacturing in India and would have a head-start. Many others, including Cisco and IBM, don't have any plants.
The USIBC's Mr. Somers says states that have offered appealing incentives—Gujarat, in western India, for instance—have drawn U.S. manufacturing investment. Ford, for example, is building its largest auto plant outside the U.S. there, and Abbot Laboratories is also building a plant.
In addition to the plant requirement, high-tech companies would have to source a large percentage of such parts as semiconductors locally to meet requirements that "value" is being added in India. India has virtually no homegrown semiconductor market, making that very difficult, experts say. The policy would also penalize companies for paying royalties on foreign products rather than developing and patenting intellectual property in India.
"You cannot force manufacturing to happen in India when there's no support system for manufacturing," says Akshay Grover, an India telecom analyst at consulting firm Ernst & Young.
Venu Reddy, India research director at IDC, says the market for high-end switches that power computer networks illustrates the coming challenge for India if it implements the proposed rules.
The country relies on a handful of foreign companies like Cisco to provide the vast majority of the switches now. "How many of them have a manufacturing facility in India?" he asks. The answer: "Zero."
Write to Amol Sharma at amol.sharma@wsj.com
A version of this article appeared January 8, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: India to Western Tech Firms: To Sell It Here, Build It Here.