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Apple CEO Tim Cook is visiting China. It is the second time this year that Cook visits the Asian giant.
Apple operates at the limits of technology to create electronic products so well-crafted and ambitious that die-hard fans turn the sidewalks near Apple stores into campsites before new products arrive. They have catapulted it into the most valuable company in the world with a market capitalization of $3.5 trillion, the same as India’s GDP in 2023.
Cook’s visit is intriguing and important because Apple is of American origin. And the rivalry between the US and China, especially in advanced science and technology, is irrevocably shaping the 21st century. Bloomberg reported Chinese Minister of Industry and Information Technology Jin Zhuanglong, who asked Cook to invest in innovation, a sensitive topic in Washington, which wants to slow Beijing’s technological advance. The competition between the superpowers is so fierce that analysts sometimes speculate that it could lead to war. Still, the Apple executive vowed that he would “continue to increase investment in China and help high-quality supply chain development.”
Apple’s overtures show how China, unlike India, remains an irreversible economy for global companies. That’s why it’s Apple that’s courting China, not the other way around. How the latter has developed into a global manufacturing center is well documented and India is trying to emulate this in its own way. However, the country’s ability to leverage access to market and production capacity to learn and grow with the world’s best is severely limited.
For example, Cook considered China so important, both as a production center and as a market, that the company signed an agreement secret agreement in 2016 to invest $275 billion locally, including billion-dollar infusions into Chinese startups like Didi. The Chinese government made few concessions as Apple fended off a regulatory attack on the olive branch of investment. The pact was an unqualified success. Apple raked in the cash while riding on the country’s economic boom and the prosperity of its citizens. It became the phone manufacturer’s largest market outside the US. bring in Between 2016 and 2022, it generated revenues of $378 billion while helping Chinese companies improve their technological capabilities.
By comparison, India went to great lengths to get iPhone and iPad makers to set up shop here. It lowered import duties on parts, while keeping out finished products with high tariffs. This has now led to a situation where an iPhone made in India is cheaper in Dubai than in Delhi. An iPhone 16 with 128GB memory costs around Rs 78,000 at a Dubai Mall, while it costs Rs 89,000 at the shiny Apple store in Delhi where Cook personally flew and stopped last year. It took no time for arbitration to become a smuggling racket.
India’s tortuous duty structures
iPhone smuggling may not cause much damage to the public purse, but distorted tax structures and perverse incentives distort the market so much that larger national goals and development agenda are crumbling. Protectionist tariffs have hampered growth and innovation in the solar energy sector. Like this three-part series shows that India’s renewable energy program is weighing heavily on the finances of electricity distribution companies, ordinary consumers and ultimately taxpayers. State-owned public distribution companies have incurred losses of Rs 6.77 lakh crore.
Indian solar companies find it more profitable to import photovoltaic cells from China and assemble modules to ship to other markets and sell to local users. High import duties on modules but low levies on cells ensure wide margins for module manufacturers and high costs for power distributors and end users.
Reliance on fair arbitration
Such policies also have broader, unintended consequences. For example, small manufacturers (read assemblers) use imported Chinese components in white-labeled goods and private brands to sell in regional markets. One such entrepreneur from Maharashtra, with a turnover of around Rs 75 crore, says his products have good margins and give bigger companies value for money. He keeps costs low by managing sales, operations, purchasing and logistics all by himself. Tariffs are fickle and an upward revision will put pressure on margins. He does not want to risk increasing costs by hiring specialists. This means that the basis of its success is neither technological innovation nor organizational efficiency, but arbitrage. It also means that the task structure intended to encourage local production and job creation only promotes product assembly while generating few jobs.
Earlier this month, the Tata Group factory in Tamil Nadu made back panels for older models of the iPhone caught fire. The unit is the sole producer of the crucial part, forcing iPhone maker Foxconn and the Tata Group (which assembles older models at another unit) to source the parts from China to meet global demand during the peak season. Bloomberg reports that business was a key factor even in achieving a breakthrough in India-China border talks.
Why China is leading the way
When Cook signed the secret deal in 2016, Apple pledged to localize component sourcing and make deals with Chinese software companies, collaborate on technology with Chinese universities and invest directly in Chinese technology companies through 2022. The company also promised to build research and development centers and sustainable energy projects, The information reported in 2021.
To be fair, Apple wasn’t the only American company to sign such an agreement. Microsoft and Cisco signed similar agreements that benefited local R&D and innovation. The ecosystem they helped build has undoubtedly helped strengthen the technological prowess of Chinese manufacturing. But in the meantime, homegrown companies were also developing their own expertise and breakthroughs.
Chinese scientists have already done that 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 nuclear battery the size of a coin that could power a mobile phone for 50 years. According to the report on the work of the government, presented at the 14th National People’s Congress, the number of small and medium enterprises producing new and unique products using special and advanced technologies exceeded 70,000 in 2023. In comparison, the number of technology SMEs in India is just over 10,000, according to Nasscom. Most of them are in software and work for larger companies. This is not to say that there are no Indian companies doing cutting-edge research and innovation. But they are few and far between, and they often lack capital. Tata Sons, at 207, is the only Indian company on the 2024 Patent 300 list, an annual global ranking of innovators.
Indian companies must value innovation
China offers liberal tax breaks to manufacturing companies and small and medium-sized enterprises if they invest in research and development. India also offers tax breaks of up to 150%, but this is mainly used by Global Capacity Centers (GCC) of foreign companies, because even large Indian companies rarely foster a culture of innovation. The R&D tax incentive, apart from the availability of high-quality, cheap talent, is one of the reasons for the explosive growth in the number of GCCs (now over 1,600) in India. However, the knowledge and patents created do not belong here.
Indian planning is often focused on the short term. The government must holistically rethink its incentive structures to make the local industry truly independent and competitive in the long term.
(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