Text/Letter Lee
Edit/Midnight
On the eve of May Day, Xiaomi received two bad news in succession.
On April 29, market research institute IDC released data showing that in the first quarter of 2022, China's smartphone market shipped about 74.2 million units, down 14.1% year-on-year. Among them, Xiaomi shipped 11 million units in the Chinese smartphone market in the first quarter of 2022, down 18.4% year-on-year, and its market share was 14.9%, ranking fifth.
Along with the decline in domestic market share, there is also the news that Xiaomi India-related assets have been seized.
Law enforcement agencies under India's Ministry of Finance announced on April 30 that they would seize Rs 5551 million (about 4.79 billion yuan) of assets in the bank accounts of Xiaomi India.
Announcement on the seizure of Xiaomi-related assets issued by the Enforcement Bureau under the Ministry of Finance of India, the source of the Image source is the Law Enforcement Bureau under the Ministry of Finance of India
"Xiaomi Technologies India Pte Ltd (hereinafter referred to as Xiaomi India) is a company incorporated in India under the laws of India and shall comply with the laws of India and be regulated by the Indian tax authorities. If the Indian tax authorities investigate and punish the company in accordance with the law, the procedure for investigation and punishment is legal, factual and legal basis, and the company must pay taxes. Xia Jinyan, a lawyer at Zhejiang Zeding Law Firm, told Connect Insight.
However, Xiaomi quickly resolved the matter. According to the latest reuters report, an Indian court has suspended the decision of federal law enforcement agencies to freeze the assets of Rs 555.1 crore in China's Xiaomi bank accounts.
However, it is worth noting that within half a year, the Indian government has strictly investigated the tax problem of millet three times in succession. At the beginning of this year, India's Ministry of Finance recovered 653 million rupees (about 570 million yuan) of tax from Xiaomi, and the Indian government also investigated Xiaomi's related income tax at the end of last year.
In 2020, India's Ministry of National Telecommunications and Information Technology also released a reward program for the production of electronics manufacturing, which was shortlisted by companies such as Samsung and Apple, but there was no Chinese mobile phone company.
After Xiaomi entered the Indian market in 2014, it surpassed Samsung at the end of 2017 to become the mobile phone brand with the largest shipment in the Indian market, and Xiaomi has maintained this record for a long time since then. Lei Jun also said that India is extremely important to Xiaomi.
But now, the indian government's various actions show that Xiaomi's development in India will not be as smooth as in the past, but will encounter various obstacles.
Although Xiaomi has temporarily resolved the recent crisis, there is no guarantee that the Indian government will not seize its related assets again.
"Xiaomi India's assets are located in India, and the Indian tax authorities can be recovered." Lawyer Xia Jinyan mentioned.
Xiaomi's India crisis is probably not over.
1. In the past six months, India has strictly investigated xiaomi taxation
Xiaomi is constantly in trouble in the Proud Indian Market.
The Enforcement Agency, a ministry of finance, issued an announcement on April 30 that it had seized 555.1 billion rupees (about 4.79 billion yuan, $725 million) of assets in the bank accounts of Xiaomi India Company under the provisions of India's Foreign Exchange Management Act of 1999.
From the announcement, the Indian Law Enforcement Agency launched an investigation into Xiaomi's illegal remittances in February this year, and mentioned that Xiaomi began to operate in India in 2014 and began to send remittances in 2015. The company has remitted the equivalent of Rs 5,551,270 crore to three foreign entities, including a Xiaomi Group entity disguised as royalties.
The Indian Enforcement Agency mentioned that Xiaomi India is an Indian mobile phone trader and distributor under the brand MI (i.e. Xiaomi). Xiaomi India procures fully manufactured phones and other products from Indian manufacturers, and Xiaomi India does not receive any services from three foreign entities, which have been transferred to these entities. Under the cover of camouflage of creating various unrelated documents between group entities, the company remitted this amount abroad in the name of royalties, in violation of Article 4 of the FEMA Foreign Exchange Control Act.
Announcement issued by the Indian Enforcement Agency, image sourced from the Ministry of Finance of India's Ministry of Finance Under the Enforcement Agency
That is to say, the Indian Enforcement Agency does not recognize patent royalties and royalties, believing that Xiaomi India has not received services from them, so Xiaomi India's remittance to foreign companies is illegal remittances.
In response to this matter, Xiaomi India issued a statement saying that all the company's operational activities strictly comply with local laws and regulations. The royalties and bills paid by Xiaomi India to banks are legal and genuine. These royalties paid by Xiaomi India are used for licensed technology and intellectual property used in the Indian version of the product. For Xiaomi India, paying such royalties is a legitimate business practice.
Xiaomi said it would work closely with the government to clarify any misunderstandings.
In fact, this is not the first time that the Indian government has conducted a tax investigation into Xiaomi.
On January 5 this year, India's Ministry of Finance said in a statement that it had issued three notification of causes to Xiaomi Technology India Pvt. to recover Rs 653 crore (about 570 million yuan) in taxes to the company.
The same reason for the tax recovery is that Xiaomi India remitted royalties and licensing fees to Qualcomm and Xiaomi Mobile Software, which are not included in the transaction value of its imports.
At this time, Xiaomi has said that "the root cause of this tax problem is that there are differences between the parties on the price determination of imported goods." On this issue, Xiaomi will also continue to communicate with the relevant departments in India. ”
Judging from the progress, Xiaomi did not effectively communicate with the Indian government, which also led to India's seizure of Xiaomi India's related assets for the second time for the same reason.
In December 2021, the Indian income tax authority also launched an investigation into the compliance of mobile phone manufacturing companies, including Xiaomi India, with relevant income tax regulations.
From the end of last year to May this year, Xiaomi India has been investigated by the relevant indian tax authorities three times.
In addition to taxation, in June last year, India's Ministry of Electronics and Information Technology began banning Chinese mobile apps on the grounds that "sovereignty and national security are threatened", and Xiaomi Browser was banned. As the number one brand in the Indian market, Xiaomi mobile phones are basically pre-installed with Xiaomi browsers, and the impact of this ban on them can be described as huge.
Judging from the various actions of the Indian government, xiaomi's control in the Indian market in the future may become more and more stringent, but despite this, xiaomi is unlikely to give up the Indian market, after all, this is one of the most successful markets for xiaomi to develop overseas.
2. How important is India to Xiaomi?
"Over the past two years, we have implemented the 'India First Priority' strategy at our headquarters. In terms of research and development and design, we have considered the needs of many Indian consumers. In November 2017, Lei Jun mentioned in an interview with Indian business media Livemint.
At that time, IDC announced the market share of Indian smartphones in the third quarter of 2017, and in this quarter, Xiaomi won 23.5% of the market share in India with its best-selling models such as Redmi Note 4 and Redmi 4, successfully equaling Samsung and ranking first.
Market share of smartphones in India in the third quarter of 2017, image source IDC
Since then, Xiaomi has long occupied the number one position in the Indian smartphone market.
According to the historical data released by the comprehensive market research institutes IDC, Counterpoint and Canalys, from 2018 to 2021, Xiaomi's smartphone market share in India was 28.9%, 28.6%, 26% and 24% respectively, basically consolidating the position of India's largest mobile phone brand.
The importance of the Indian smartphone market to Xiaomi can be seen.
After Xiaomi entered the Indian smartphone market, it also attached great importance to local production investment. According to public information, after Xiaomi announced its entry into the Indian market in 2014, the production line established by Xiaomi and Foxconn in cooperation with Foxconn was completed and put into operation the following year. In August 2015, Xiaomi released the Enhanced Version of the Redmi Mobile Phone 2 in India, which was manufactured by Foxconn's Indian factory.
According to public information, as of early 2021, Xiaomi has partnered with Foxconn and Flex in India to establish three manufacturing plants in Tamil Nadu and Andhra Pradesh.
Due to the disruption of the supply chain due to the global epidemic in 2021, Xiaomi immediately found three new partners - BYD, DBG and Radiant, to jointly build factories and produce Xiaomi equipment in India, once again pushing Xiaomi's "Made in India" strategy to a new height.
At the beginning of 2021, Manu Kumar Jahn, xiaomi's global vice president, said in an interview with foreign media BusinessInsider, "With the DBG plant put into operation, we expect to increase production capacity by about 20% this quarter. The plant went into production two months ago. BYD's plant will be operational in the first half of this year, and we expect to further increase production capacity. Among Xiaomi and its partner companies, the number of people working exclusively for Xiaomi products has increased from 50,000 last year to 60,000 now. ”
After years of layout, about 75% of the parts of Xiaomi mobile phones can be manufactured locally in India, and 100% of TV sets can be manufactured in India. This further solidifies Xiaomi's supply chain in India.
In addition to the upstream and downstream layout of the mobile phone industry chain, Xiaomi has also invested in many Indian companies with Shunwei Capital, such as the online microfinance platform KrazyBee, online music and video provider Hunger Digital Media Entertainment, and the second-hand mobile phone recycling and maintenance company Cashify.
These Indian local enterprises have strengthened Xiaomi's localization progress and business cooperation in India, such as Hungama is content that can be directly connected to Xiaomi Music; Krazybee can provide installment sales services for Xiaomi mobile phones; cashify can recycle and repair Xiaomi mobile phones.
In an interview with Indian business media Livemint in 2017, Lei Jun said that Xiaomi will invest $1 billion in 100 startups in India in the next five years, hoping to create an app ecosystem around the Xiaomi brand.
From mobile phone production, supply to sales, and then to mobile phone application services, mobile phone back-end maintenance and other industrial chains. Millet can be said to have laid deep roots in India, which is equivalent to re-incubation of a "millet".
India's importance to Xiaomi is self-evident, and Xiaomi is bound to think of ways to keep the Indian market.
3. How does Xiaomi survive the difficulties?
"Although India has been cracking down on Chinese mobile phone companies such as Xiaomi, it will not let them out completely, after all, the Indian people still need cost-effective products." Sun Yanbiao, president of the First Mobile Phone Research Institute, told Connect Insight.
The facts are exactly as expected. After Indian law enforcement agencies froze Xiaomi India's related assets, Xiaomi India later challenged the decision of The Indian Financial Crimes Fighting Agency in a high court in the southern Indian state of Karnataka.
According to the latest reuters report, two sources said that after listening to Xiaomi's lawyers, the judge suspended the decision of the enforcement bureau. One of the sources said that the condition for the lifting was that Xiaomi would inform the Indian authorities of the transfer of funds, such as royalty payments.
But everything has not yet been finalized, and the court's written order has not yet been made public. According to the Indian court's website, the case will be heard for the next time on May 12.
The difference between the Indian government and Xiaomi is mainly in the royalties including patent royalties, the Indian government believes that the domestic entities (i.e. Xiaomi India) have not enjoyed the use of the patent rights proposed by Xiaomi, and the royalties are the costs of the enterprise, if the fee is too high, the profits of the enterprise will be reduced, and the corresponding corporate income tax paid locally may be reduced accordingly.
Xiaomi has previously said in its response that whether royalties, including patent royalties, should be included in the price of imported goods is a complex technical problem in various countries.
"Modern businesses will avoid taxes in a variety of ways under the premise of legality. The key to this matter is whether the royalties, licensing fees, etc. paid by Xiaomi India to foreign companies are based on real and necessary transactions between Xiaomi India and the relevant foreign companies, and if the transaction is false, it will inevitably violate the laws of India. Xia Said to Connect Insight.
Judging from the latest developments, Xiaomi seems to be safe, temporarily lifting the Indian government's decision to seize related assets. But a source reported by Reuters said the premise of reaching a lift of the seized assets was that Xiaomi would inform indian authorities of the transfer of funds, such as royalty payments.
This means that the Indian government can at any time not recognize Xiaomi India's payment of royalties to foreign companies, thereby preventing Xiaomi India from paying relevant funds to foreign companies.
"Due to geopolitics and India's support for local manufacturing, India may still limit the development of Chinese companies in the local area." Sun Yanbiao said.
In April 2020, the Production Linkage Incentive Scheme (PLI Scheme) for India's Large Electronics Manufacturing Industry, drafted by the Ministry of National Telecommunications and Information Technology of India, was officially released. The plan shows that India will spend more than Rs 40,000 crore over the next 5 years to incentivize the development of the electronics manufacturing industry, including smartphones.
Since then, 22 companies such as Lava, Dixon, micromax and other Indian companies; foreign mobile phone manufacturers such as Samsung and Apple; and 22 companies such as Foxconn and Pegatron mobile phone foundries have appeared in the incentive list. The domestic mobile phone manufacturers that occupy most of India's mobile phone share and have built factories in India, such as Xiaomi, OPPO, vivo, etc., do not appear in the list.
This move is obviously the Indian government's crackdown on Chinese mobile phone manufacturers. "Now India's local mobile phone brands are not strong, so India uses Apple and Samsung to attack Xiaomi OV, so as to give local mobile phone brands some space." Sun Yanbiao said.
The Indian government's initiatives have had some effect. Sun Yanbiao said that recently India's local mobile phone brands are slowly rising, and some newly established brands have emerged. In the field of smart wear, India's local brands are developing faster.
India's top 5 smartwatch brands account for market share, image source Counterpoint Research official WeChat public account
According to the latest research by Counterpoint's IoT Service, shipments in the Indian smartwatch market increased by more than 274% year-on-year in 2021, a record high. Indian local brandOise leads the entire market in 2021 with a 27% share, and Indian domestic brands account for 75% of the total market shipments.
Judging from the actions of the Indian government in recent years, Xiaomi's life in India may not be too good in the future. But Xiaomi can't give up the hard-won Indian market, so it can only adapt to changes and seek living space.