The Melancholic Saga of Xiaomi in India

Yet, beyond the glimmering numbers lies Xiaomi's tumultuous decade-long expedition in the Indian market. Despite the hurdles, Xiaomi has weathered the storm, and the historical undulations invoke poignant reminiscences.

Embarking from India

India was Xiaomi's first destination on its internationalization journey in 2014.

As the world's third-largest smartphone market with a population of 1.428 billion and 600 million smartphone users, India provided ample room for Xiaomi's imagination. With India's economic development and increasing consumer purchasing power, the demand for smartphones was shifting from low-end to mid-to-high-end, offering Xiaomi significant opportunities.

In 2016, Xiaomi's revenue grew by 700%, exceeding $1 billion in total revenue and setting a record as the fastest company to achieve this milestone in India. In June 2017, Xiaomi opened its first store in India, and by the end of the year, it equaled Samsung with a 23.5% market share, becoming one of the largest smartphone brands in the Indian market.

Initially, Xiaomi rapidly tapped into the Indian online sales channel through partnerships with local e-commerce platforms such as Amazon, Flipkart, and Snapdeal. Simultaneously, the company actively expanded its offline channels by collaborating with local retailers to establish offline stores in major cities. Xiaomi also partnered with large retailers like Sangeeta, Poorvika, Croma, and Sangeetha Digital, entering their stores. Starting in 2015, Xiaomi established seven factories in India, closely aligning with the Indian government's "Made in India" policy, providing 20,000 job opportunities locally. As of July 2023, Xiaomi had 18,000 offline stores in India and planned to double its sales force to 12,000 people by 2024.

With a multi-channel sales approach and effective social media marketing, Xiaomi turned its losses into profits within three years of entering India, becoming the top-selling smartphone brand with a market share of 23.5% by March 2017. Xiaomi also introduced smart TVs in India, poised to become the leading brand, and claimed the top positions in wearable and mobile power bank segments with over 40% and 35% market shares, respectively.

In 2023, Xiaomi's shipment volume in India exceeded 25.1 million units, showing a year-on-year growth of 17%. Concurrently, Xiaomi expanded its presence in India by entering at least three new domains: financial technology, advertising, and gaming. This diversification included the launch of payment service MiPay, lending platform MiCredit, and the game Survival Game. As a result, Xiaomi emerged as one of the largest diversified technology companies in India.

Facing Adversity in India

The love-hate relationship with India is palpable – the market is vast, but the business landscape is undeniably challenging.

In January 2021, Xiaomi faced patent infringement accusations from the local non-profit organization, Software Freedom Law Centre, demanding compensation of INR 1 billion (approximately CNY 150 million). Subsequently, in January 2022, the Indian government pursued Xiaomi for INR 65.3 billion (about CNY 5.6 billion) in back taxes.

On June 9, 2023, India's enforcement agency issued formal notices to Xiaomi Technology India Private Limited, Xiaomi India branch, select executives, and three banks—Citigroup, HSBC, and Deutsche Bank—accusing them of "illegally transferring funds to foreign entities" in potential violation of the country's Foreign Exchange Management Act (FEMA). Based on these allegations, Indian authorities froze assets amounting to INR 555.1 billion (approximately CNY 48.2 billion), equivalent to 57% of Xiaomi's global profits for 2022 and six times its total operating profits in India over nine years.

In response, Xiaomi asserted that all its operations strictly adhere to local laws and regulations, emphasizing that royalties paid by Xiaomi India are legitimate business transactions for authorized technologies and intellectual property used in Indian products.

Public records and media reports indicate that these charges stem from a "illegal remittance" dispute dating back to May 2022, with Indian authorities accusing Xiaomi and its Indian subsidiary of making illegal overseas remittances under the guise of "royalty payments" since 2015, in violation of India's 1999 FEMA regulations.

Xiaomi India provided an explanation, stating that more than 80% of the expenses considered "illegally remitted to foreign entities" were payments to Qualcomm for licensing fees. However, Indian authorities deemed Xiaomi's payment of patent licensing fees as importing software without paying software import duties, labeling it as "tax evasion" and necessitating back taxes and fines.

Such narratives of tax and regulatory challenges are not unique to Chinese enterprises expanding abroad. India, often dubbed the "graveyard for foreign companies," consistently targets international giants with allegations of tax evasion, fraudulent accounting, and violations of foreign exchange management laws, adversely impacting their business environment creditworthiness. Additionally, Indian government policies mandating foreign companies to introduce Indian equity partners imply a relinquishment of some management and control rights in the local market, further complicating the landscape for foreign enterprises.

Sacrifices of “Made in India”

Xiaomi, in its earlier days, proactively addressed the Indian government's "Made in India" initiative by escalating investments in localization. During an interview in India, Lei Jun, the founder of Xiaomi, articulated the company's strategic vision, stating, "Over the next five years, Xiaomi is poised to inject USD 1 billion into a hundred Indian startups. Our focus is on establishing an application ecosystem centered around our smartphone brand, intending to extend Xiaomi's prosperous business model from China into the Indian market."

sourced from The Hindu official website article, captured by Haider Ali Khan

However, the tightening regulatory environment has left Xiaomi and numerous Chinese companies "disappointed."

Since 2020, India has initiated a 400 billion INR worth Electronic Manufacturing Incentive (EMI) scheme. In the smartphone sector, Indian companies like Micromax and Lava, as well as global giants like Samsung, Apple, Foxconn, and Wistron, made it to the incentive list. However, domestic Chinese smartphone brands like Xiaomi, OPPO, and vivo were notably absent. By 2022, Xiaomi's market share had declined from 25% in 2021 to 20%, indicating a significant drop.

This development is not surprising, given that China and its enterprises have been considered the most formidable "foes" in the context of "Make in India." The economic barriers against "Chinese manufacturing" and "Chinese investments" were anticipated. According to statistics from the Chinese Ministry of Commerce, from 2014 to 2023, India initiated 127 anti-dumping cases, 8 countervailing duty cases, and 145 safeguard measures involving China, covering industries such as machinery, chemicals, non-ferrous metals, steel, textiles, and more. India has become the second-largest initiator of trade remedy investigations against China, following only the United States, and the top complainant in anti-dumping cases against China. An investor who was previously stationed in India mentioned in a media interview that targeting Chinese companies was one of the primary goals within the Indian government, even a key performance indicator (KPI).

In reality, India's foreign trade policy has oscillated between conservatism and openness over the years. In the early 1990s, India initiated economic liberalization, significantly lowering tariffs to attract foreign investment. However, after the Asian financial crisis at the end of the last century, India reinstated higher trade barriers. Around 2000, with several major global economies experiencing rapid growth, India once again opened up to the world.

However, when Prime Minister Modi took office in 2014, the emphasis returned to protectionism with the "Made in India" slogan. Despite the vision to attract foreign investment, develop labor-intensive manufacturing, and increase the manufacturing sector's contribution to GDP, World Bank data reveals that the manufacturing sector's share of GDP in India has hovered around 13% to 17% over the past decade, falling far short of the targeted 25%.

In a review of the Invest India website, EqualOcean found that Indian authorities project the country to have 850 million smartphone users, constituting approximately 55% of the total population, by 2026. Moreover, India plans to produce smartphones valued at USD 126 billion by 2025-2026, leveraging local supply and production chains.

Indeed, the rise of the Indian mobile phone industry signifies a notable achievement in the localization of the country's industrial landscape, transforming from reliance on imports to supporting exports. However, for Chinese smartphone brands like Xiaomi, which established factories in India, absorbed labor, and contributed technology, they have become typical sacrifices after achieving this localization goal. When their utility is depleted, they transform into obsolete "tools."

Speculations on Xiaomi's Future in India

On January 31, 2023, Manu Kumar Jain, the Global Vice President of Xiaomi India, who played a crucial role in propelling Xiaomi to the top position in the Indian smartphone market, announced his resignation on social media. Notably, several other key executives, including Sunil Baby, the Director of Offline Sales, Raghu Reddy, the Chief Business Officer, and Sumit Sunal, the Marketing General Manager, also resigned in succession.

Xiaomi India Global Vice President Manu Kumar Jain announced his resignation on social media, image captured from Twitter

Xiaomi India Global Vice President Manu Kumar Jain, image sourced from public records

Delving into the reasons, the media has placed the spotlight on Xiaomi's rapid decline in market share in the Indian smartphone market and a series of disputes with Indian authorities. A court document disclosed by Reuters reveals that Manu Kumar Jain, along with Chief Financial Officer Samir Rao and their families, faced "physical violence and coercion threats" during questioning by Indian law enforcement agencies.

The recent overhaul of Xiaomi's management team in India has introduced new uncertainties to the company's development in the region.

In July 2023, employees disclosed that the workforce at Xiaomi India has reduced from around 1400 to approximately 1000, representing an inevitable measure taken by Xiaomi as it gradually recognizes formidable challenges in the Indian market. While the company maintains its commitment to the seven factories established in India, the future trajectory of Indian policies – such as the government's directive for foreign companies to introduce Indian equity partners – may gradually transform "Xiaomi in India" into "Indian Xiaomi."

Looking ahead, Xiaomi might not engage in the Indian market as aggressively as before, opting for a more measured approach and turning towards other international markets for stable growth, especially in the era of uncertainties. Maintaining a positive dialogue with Indian authorities and recognizing their dependence on Chinese companies in the supply chain could serve as a pressure relief valve, instilling confidence in Xiaomi to navigate through challenges.

For Xiaomi, the real contemplation should extend beyond immediate growth concerns in India and focus on harmonious coexistence with local Indian enterprises in this evolving business environment..

Conclusion

A journey through memories stirs a deep sense of emotion.

In 2015, Lei Jun set foot in India, immersing himself in local traditions. During the Xiaomi Mi 4 launch, he confidently echoed the words "are you ok?" This phrase resonated, becoming a beacon of pride for Chinese netizens, a dazzling moment in the global ascent of Chinese businesses.

In 2017, Lei Jun returned to India, honored by an audience with Prime Minister Modi. They shared visions of success for the "Internet+" model, a moment of unity in shaping the future. However, recent years witnessed Lei Jun's withdrawal from further investments in India, dispelling optimistic notions of "increased investments" as mere rumors.

Xiaomi, once brimming with hope for its Indian ventures, now stands as a poignant chapter in history. This challenging odyssey reflects not just the brand's struggle but also a profound reflection point in the dynamic relationship between China and India.

As Xiaomi and India move forward, their shared future will unfold through negotiations and challenges, a testament to the enduring resilience of their journey.