Foxconn Investments in India Show New Regional Dynamic
By Dezan Shira & Associates
Editor: Melissa Cyrill
In its second coming, Foxconn, the world’s largest contract electronics manufacturing company, re-entered India over the summer with a series of wide-ranging investments, tapping into a spate of government incentives.
While its investments across manufacturing, solar energy production and e-commerce platform Snapdeal may have surprised many, they have been fortuitous in their timing. The biggest among these, a US $5 billion memorandum of understanding (MoU) signed with the Maharashtra state government, came right on the heels of the Make in India campaign.
Still, observers should remain cautious. According to the 2014 Economic Freedom of the States of India report, published by the Friedrich Naumann Institute and Cato Institute, only a fraction of MoU’s or Industrial Entrepreneurs Memoranda (IEMs) materialize; the highest rate of conversion is only 19 percent in Haryana state, while being a mere eight percent for Maharashtra state. On the other hand, after facing criticism over labor practices at Chinese factories, a shift to India changes the Foxconn conversation from controversy to curiosity.
Whether Foxconn’s investments materialize will be closely watched by others looking to diversify or scale up their Asia operations. Foxconn’s proposed India investment will serve as a bellwether for both Make in India and manufacturing in Asia.
Foxconn’s India Putsch
The Taiwanese electronics giant discreetly began assembling smartphones for Xiaomi Inc. from a leased facility in Andhra Pradesh state in June. Yet, what took industry observers aback was the US $5 billion MoU reached with Maharashtra in August. The MoU outlined a five year investment in a new electronics production unit as well as a research and design (R&D) center that would create 50,000 new jobs.
Also in August, Foxconn invested US $200 million for a 4.27 percent stake in Snapdeal, India’s second largest e-commerce firm. India will be the world’s second fastest growing smartphone market by 2017, while its expanding internet coverage and huge youth demographic have made the country’s e-commerce industry an ideal destination for investment. The Indian market’s demand for electronics and appliances informed another investment – Foxconn has agreed to invest at least US $65 million into Greendust, a refurbished goods retailer.
Foxconn has also sought to capitalize on India’s growing solar industry; it invested US $20 billion on various solar projects in partnership with Japan’s SoftBank Corp and Bharti Enterprises. Currently, Foxconn is in talks with the Adani Group and SoftBank to invest in a US $3 billion project to manufacture solar cells and panels in India. A new deal with the Adani Group, which maintains close ties to Prime Minister Narenda Modi’s government, could eventually lead to a more significant Foxconn presence in India – the Adani Group has interests in commodities, logistics, agri-business and energy.
Why India and Why Now?
Foxconn chose Maharashtra due to its financial center Mumbai, availability of talent, burgeoning start-up community and capacity for software-hardware integration, according to Foxconn founder and Chairman Terry Gou. To take advantage of these features, Foxconn plans to partner with local companies to create the supply chain for products manufactured in the Maharashtra unit. Fostering these kinds of business-to-business relationships is one of the primary goals of the federal government’s drive to attract foreign investment.
In fact, the investment pledges amount to a defacto endorsement of Modi’s efforts to promote India as the next hub of innovation and manufacturing and, for its part, the Taiwanese company has taken advantage of the ‘Make in India’, ‘Digital India’, ‘Skill India’, and ‘Green India’ campaigns. However, foreign direct investment specialists note that these types of investments are part of a larger regional trend. China – ‘the world’s factory’– has been losing its cost advantage and competitiveness in comparison to countries in South Asia and Southeast Asia.
Dezan Shira & Associates founder and Chairman Chris Devonshire-Ellis noted this trend early in 2013, asserting that Apple’s China-centric business model will need to adapt. At that time, he wrote “Quite when that hedge appears is probably just a matter of time; however, it may not be long before a ‘made in India’ mark appears on an iPad”. Following the recent Foxconn investments, that time appears to be now. Dezan Shira & Associates North America Director Richard Cant has supported an ever increasing number of US-based companies actively looking at alternative locations to China. India is high on the list, according to Cant.
In China, foreign investment incentives are dwindling, regulatory compliance is becoming stricter, wages are rising and the workforce is ageing. India, on the other hand, offers a strategic opportunity for companies seeking to lower operating costs, diversify their labor force or supply chains, and access India’s huge market. India has a massive unified market, youthful population, large labor force, comparatively lower labor costs and increasing government support for industry. India has become a key alternative for businesses heavily invested in China to geographically de-risk.
Given the size and diversity of Foxconn’s strategic investments, it would not be a surprise if some of the agreements do not materialize. However, Foxconn has clearly done its market research. Its investments are directed squarely on some of the fastest moving industries in the country, and avail of a wide spread of incentive schemes unveiled by the government over the past year. Foreign companies interested in investing in India should take note.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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