Apple chief Tim Cook is visiting China. This is the second time that Cook has visited the Asian giant this year.
Apple operates at the frontiers of technology to create electronic products that are so well-crafted and aspirational that die-hard fans turn sidewalks near Apple stores into campsites ahead of new product arrivals. They have catapulted it to become the world’s most valuable company with a market capitalisation of $3.5 trillion, the same as India’s GDP in 2023.
Cook’s visit is intriguing and important because Apple is an American native. And the US-China rivalry, especially in cutting-edge science and technology, is irrevocably shaping the 21st century. Bloomberg reported China’s Minister of Industry and Information Technology Jin Zhuanglong asking Cook to invest in innovation, a sensitive subject in Washington, which wants to slow Beijing’s tech march. The superpower competition is so intense that analysts sometimes speculate that it could spiral into war. Yet, the Apple chief vowed to “continue to grow its investments in China and help the high-quality development of the supply chain”.
China Remains Un-Bypassable
Apple’s overtures show how China, unlike India, remains an un-bypassable economy for global corporations. Which is why it is Apple that is wooing China, not the other way round. How the latter built itself up into a global manufacturing hub is well-documented and India is trying to emulate it in its own way. However, its ability to leverage market and production capacity access to learn and grow with the best in the world is severely limited.
For instance, Cook considered China so important, both as a manufacturing hub and market, that the company signed a secret deal in 2016 to invest $275 billion locally, including billion-dollar infusions in Chinese startups such as Didi. The Chinese government barely gave any concessions as Apple was fighting off a regulatory onslaught with the olive branch of investment. The pact was an unqualified success. Apple raked in the moolah as it rode the country’s economic boom and citizens’ prosperity. It became the phonemaker’s largest market outside the US, bringing in $378 billion in revenues between 2016 and 2022 even as it helped Chinese companies upgrade their technological capabilities.
In comparison, India bent over backwards to woo iPhone and iPad makers to set up shop here. It slashed import duties on components while keeping out finished products with high levies. This has now led to a situation where an iPhone made in India is cheaper in Dubai compared to Delhi. An iPhone 16 with a memory of 128GB costs about Rs 78,000 in a Dubai Mal, while it costs Rs 89,000 at the shiny Apple retail store in Delhi that Cook personally flew down to last year and flagged off. It took no time for the arbitrage to spawn a smuggling racket.
India’s Tortuous Duty Structures
iPhone smuggling may not cause much damage to the exchequer, but warped duty structures and perverse incentives distort the market so much that larger national objectives and development agenda are crumbling. Protectionist tariffs have stunted the growth and innovation in the solar industry. As this three-part series shows, India’s renewable energy programme is weighing heavily on the finances of electricity distribution companies, ordinary consumers, and, ultimately, taxpayers. State-owned public distribution companies have accumulated losses of Rs 6.77 lakh crore.
Indian solar energy firms find it more profitable to import photovoltaic cells from China and assemble modules to ship to other markets as well as sell to local users. High import duties on modules but low levies on cells ensure wide margins for module makers and high costs for power distributors and end consumers.
Relying On Just Arbitrage
Such policies also have wider, unintended consequences. For instance, small manufacturers (read assemblers) use imported Chinese components in white-labelled goods and own brands to sell in regional markets. One such Maharashtra-based entrepreneur with a topline of about Rs 75 crore says that his products enjoy good margins and give bigger companies a run for their money. He keeps costs low by managing sales, operations, procurement and logistics, all by himself. Levies are fickle and an upward revision will squeeze margins and he does not want to risk raising costs by hiring specialists. That means the basis of his success is neither technological innovation nor organisational efficiency but arbitrage. It also means the duty structure intended to boost local manufacturing and job creation is merely promoting product assembly while generating few jobs.
Earlier this month, the Tata Group-owned plant in Tamil Nadu that makes back panels for older models of the iPhone caught fire. The unit is the only producer of the critical component, forcing iPhone maker Foxconn as well as the Tata Group (it assembles older models at another unit) to source the parts from China to meet global demand in peak festival season. Bloomberg reports that business was a key factor even in achieving a breakthrough in India-China border talks.
Why China Is Pacing Ahead
When Cook signed the secret deal in 2016, Apple vowed to localise component sourcing and stitch up deals with Chinese software firms, collaborate on technology with Chinese universities and directly invest in Chinese tech companies until 2022. It also committed to building research and development centres and renewable energy projects, The Information reported in 2021.
To be sure, Apple was not the only US company to sign such a deal. Microsoft and Cisco signed similar deals that helped local R&D and innovation. The ecosystem they helped build no doubt contributed to bolstering the technological prowess of Chinese manufacturing. But, meanwhile, homegrown companies also developed their own expertise and breakthroughs.
Chinese scientists have already built an electrolyzer that can directly split seawater to produce hydrogen. A Beijing-based energy startup Betavolt claimed in January this year that it had built a commercially viable coin-sized nuclear battery that can power a mobile phone for 50 years. In 2023, the number of SMEs producing new and unique products using special and sophisticated technologies exceeded 70,000, according to the Report on the Work of the Government presented at the 14th National People’s Congress. To compare, the number of technology SMEs in India is just over 10,000, as per Nasscom. Most of them are in software and do work for larger firms. This is not to say that there are no Indian companies doing advanced research and innovation. But they are few and far between, and are often starved of capital. Tata Sons at 207 is the only Indian company in the 2024 Patent 300 list, an annual global ranking of innovators.
Indian Firms Need To Value Innovation
China offers liberal tax incentives to manufacturing companies and SMEs if they invest in R&D. India, too, offers tax breaks up to 150%, but it’s mainly used by Global Capacity Centres (GCC) of foreign companies because even large Indian firms rarely foster a culture of innovation. The R&D tax break is one of the reasons, apart from the availability of cheap, high-quality talent, for the mushrooming of GCCs (over 1,600 now) in India. The knowledge and patents created, however, do not belong here.
Indian planning often tends to be short-termist. The government needs to holistically reassess its incentive structures to make the local industry truly independent and competitive in the long run.
(Dinesh Narayanan is a Delhi-based journalist and author of ‘The RSS And The Making Of The Deep Nation’.)
Disclaimer: These are the personal opinions of the author
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