Time To Review FDI Rules

Prime minister Narendra Modi and Republican presidential candidate Donald Trump have little in common but they do seem to share one goal — forcing Apple to create jobs in their own countries. Trump warned, “We’re gonna get Apple to start building their damn computers and things in this country, instead of in other countries.” Similarly, Apple CEO Tim Cook’s attempt to get permission to open Apple stores in India was rebuffed by the Modi government as the company refused to source 30 per cent of its manufacturing materials from local vendors.

While Trump’s demands would be costly for Apple, India’s investment requirements are simply unrealistic. The kind of offset arrangement that foreign manufacturers might agree to — like building parts of an aircraft in exchange for orders of a sizable number of those aircraft — cannot be easily applied to a high-tech product like the iPhone. If anything, the FDI conditionality demonstrates the yawning gap that is emerging between archaic government regulations and a fast-changing economic landscape.

To be fair, at least a section of the government does understand the absurdity of the condition and recommended waiver of the local sourcing requirement. But the Ministry of Finance, the final arbiter, insisted that Apple had to agree to create jobs in India in order to access the country’s vast market. “Otherwise,” Finance Minister Arun Jaitly said, “we will become a nation of traders only.” The fact, though, remains that not one Indian company features among the global suppliers that drive Apple’s supply chain, which comprises 198 global companies and 759 subsidiaries.

Over 44 per cent of these subsidiaries are located in China, where all the smartphones and computers are assembled. Availability of skilled labour, quality energy and transport infrastructure and proximity to the assembly plant encourages foreign suppliers to set up subsidiaries in China. The bill for materials to manufacture the iPhone 6 — the display screen, chips, battery, sensors, camera and multitude of components — amounts to $200. Since most of the suppliers located in China are foreign owned, only a fraction of the amount spent on sourcing components delivers immediate benefit to China. The jobs provided to 1.5 million workers (even at $2 an hour rate) was significant but its importance is decreasing as increasingly robots take over assembly job. Apple’s main assembling partner Foxconn recently replaced 60,000 workers with robots.

In the unlikely event that Apple accepted India’s local sourcing requirement for raw materials and components, the company would have to find Indian suppliers to provide Apple $60 worth of components for each assembled iPhone — at the moment there are none. In order to attract existing global suppliers to set up subsidiaries in India to meet this need, the country would need to ramp up its skills and improve the investment climate and infrastructure. Whether India remains a “nation of traders,” as the finance minister put it, or develops into a bustling industrial hub will be determined by India’s policy and practices.

Apple’s failed bid to open stores in India, though, presents an occasion to review existing FDI policies and consider the Chinese experience in opening the door to foreign technology investors. In terms of financial rewards, Apple offered very little other than cheap wages to Chinese labour. But the manufacturing of hundreds of components and the experience of large-scale assembling of high-technology products offered China the opportunity to learn and upgrade skills and advance its own innovation. In an age when industrial robots are on the rise, foreign investors should be pressed to upgrade skills rather than offer short-lived jobs on the factory floor.