India makes a mess of Apple proposal as the decision to allow retail stores remains in limbo

The confusion about whether to grant a waiver to Apple regarding the local outsourcing requirement that accompanies any investment over 51 percent in a retail enterprise could not have come at a worse time for a country that desperately needs investments.
Written by Rajiv Rao, Contributing Writer

Apple CEO Tim Cook with Indian Prime Minister Narendra Modi

It is a tangled tale of Dr Stangelove-like proportions, perhaps worthy of putting a smile on even Kafka's face were he alive.

For all the non-stop chatter about attracting top-notch global companies to Indian shores, the Indian government yet again proved itself to be supremely idiotic thanks the muddle-headed manner in which it handled the issue of Apple's application to open retail stores in the country. More worrisome is its inability, in this period of desperately-desired growth and employment, to come out with a coherent policy in the technology sector.

It all started late last year when the government eased its rule on foreign investment in "single-brand retail". The rule normally has the rider that if you are a foreign entity and want to invest beyond 51 percent in retail stores, up to 30 percent of your finished product needs to be made from goods sourced from micro, small and medium enterprises, village and cottage industries, artisans, and craftsmen. Since electronics cannot be fashioned from bamboo and indigo dye, the government in a constructive impulse decided that this rule could be relaxed for companies that brought in "state-of-the-art" or "cutting-edge technology".

The next most logical thing to do was for the government to specifically decide what this "cutting-edge technology" could look like and what kinds of companies could qualify. Would semi-conductor fabs make the cut? What about phone makers? Apparently none of this was done.

Somehow, the news making the rounds was that everything was hunky dory for Apple's expansion in India and that the local sourcing requirement was going to easily be waived. Even the press was rife with reports from officials in the government that this approval was pretty much in the bag.

Still, Apple supremo Tim Cook left no stone unturned in his recent visit, as he rushed about ingratiating himself with Bollywood stars and Prime Minister Narendra Modi amongst others. He even went to Mumbai's Siddhivinayak Temple with Apple India CEO Sanjay Kaul and offered up prayers to Lord Ganesha, the presiding deity there, whom Hindus revere as a "remover of obstacles". After all, Apple's request to sell refurbished phones in the country was rejected around the time of his trip so Cook was taking no more chances.

"Cutting edge, really?"

By then, a special panel comprising officials from the Departments of Industrial Policy and Promotion (DIPP), Electronics and IT, and NITI Aayog recommended to the finance ministry that India should indeed go ahead and waive the 30 percent content requirement rule on the basis that Apple's products "represented" cutting-edge technology. So far, so good.

The proposal was then kicked over to the final cog in the approval wheel, namely the Foreign Investment Promotion Board (FIPB) under the finance ministry, and that's where things began to unravel. The finance ministry was having none of it, allowing Apple's application but rejecting the waiver of the 30 percent sourcing rule .

It said -- quite correctly -- that Apple was neither bringing any cutting-edge technology with it on ground, nor were there any clear guidelines framed by the special panel of what "cutting edge" meant. It also presciently saw a hornet's nest in the making if it allowed a large element of discretion in the approval process. After all, both Xiaomi and LeCo have applied for the same waiver and if Apple gets it and they don't you can be sure that all hell will break loose.


Lenovo will soon be manufacturing as much as 50 percent of the phones it sells in India within the country

Now, of course, Cook has egg on his face and the Indian government is in complete disarray over the decision, with different ministries at loggerheads with each other. Commerce and Industry Minister Nirmala Sitharaman, who was hoping to push the proposal through, is now desperately trying to cajole the finance ministry to relent and allow Apple's proposal through. "Now the finance ministry has already taken a different position, we will certainly talk to them ... I want more clarity on that ... We will talk and make sure that sooner we will come out with some decision," commented Sitharaman a few days ago in a statement that, in typical poilitico-speak, essentially said zilch.

There is a rational debate surrounding the 30 percent norm. On one side are industry stalwarts who lament that at the current rate of consumption of electronics (everything from smartphones to stereos), India will still need to import $300 billion of it in 2020, roughly equivalent to the country's oil import bill.

What India needs desperately is jobs. Therefore, the only way to marry huge local consumption with massive unemployment is to ensure some green shoots of local manufacturing through a policy that mandates tech outfits to source some part of their product process -- assembly, wiring and casing, if not actual manufacturing -- locally. After all, these companies are here to exploit the next greatest El Dorado in smartphone consumption, so why not ask them to help build an ecosystem of manufacturing while at it?

On the other side are staunch capitalists who say that any attempt by the state to foster an environment that ultimately needs to be competitive and innovative is an exercise in futility. Ecosystems such as this need to grow organically, they say.

Critics of India point out that the country is far removed from a China, with shoddy infrastructure and a byzantine bureaucracy that makes doing business there not very easy. And yet, a slew of smartphone makers have already decamped for Indian shores, and have quickly ramped up manufacturing. Take, for example, the Chinese company Lenovo, which has had spectacular success with its phones in India, and in a short period of time has seized the third spot in the country's smartphone rankings behind Samsung and Micromax, and is going to make a preponderance of their phones from there.

"Outside China, India is the only country where we are manufacturing both Moto and Lenovo phones. We intend to enhance our manufacturing capabilities in India and in 2016, more than half of the smartphones we sell here would be Made in India," said Sudhin Mathur, Lenovo India's director of smartphones in February this year.

Therefore, in conclusion, the only logical question to ask is, if Lenovo can, why not Apple? After all, Apple's contract manufacturer Foxconn has already started making phones and televisions in India for companies such as Sony, Xiaomi, Gionee, and Microsoft and plans on making India its hub for Africa and West Asia.

Either way, there's no escaping the fact that a poorly-conceived policy by a government which apparently works in silos has caused an imbroglio that may haunt it for some time to come. Reject Apple and you risk tarnishing your image as a country that is an attractive destination for investment, something India desperately needs. Allow it as a special exemption and you open a Pandora's box of problems, with every phone maker in town baying for the government's blood.

For its part, Apple may decide that the country -- which at $1 billion in India revenue contributes a minuscule 1 percent of $235 billion of its global revenues -- is not worth all the trouble right now. But this much is clear: The yuan continues to appreciate and companies continue to relocate to India to serve the domestic market, making supply chains much easier. Manufacturing in India may not be such a ridiculous proposition any more.

Maybe Apple should take a page out of the book of one of the great capitalist manufacturing icons of the modern world, Henry Ford, whose philosophy was that the consumers of his cars ultimately would be the very workers on his production line.

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