The myth of Modi’s Make in India campaign

by @Amannama March 8, 2015 7:00AM ET

PM Narendra Modi wants to boost manufacturing in his country, but it’s cheaper and easier to import than make in India

Jobs & Unemployment
R. Kalpana, 24, lost her job at the Nokia plan in Chennai when it was shut down in Nov. 2014.
Kuni Takahashi for Al Jazeera America

SRIPERUMBUDUR, India — Six seconds a phone, the supervisor told her, 10 phones a minute, 600 an hour, eight hours a day.

In 2009, 19-year-old R. Kalpana landed what seemed like the easiest job of her life on the assembly line of the world’s largest cellphone factory. The plant was operated by Finnish telecom giant Nokia Oyj in this industrial township an hour’s drive from the Tamil Nadu state capital of Chennai. Before being hired there, she carried head-loads of sand at construction sites, gravel along half-built highways and sticky red clay to the brick kilns that dot the rice fields along the coast in Tamil Nadu.

In her new position, Kalpana was handed a static-free uniform and set to work snapping brightly colored plastic covers onto inexpensive mobile phones for Asia, Latin America and the Middle East. Nokia was then the global leader in cellphone sales, and the Sriperumbudur plant — which began production in the summer of 2006 — was a vital cog in its international operations, churning out millions of cellphones each month.

Every day, almost 30,000 workers, mostly women, were bused from the villages surrounding Sriperumbudur to the 210-acre campus of the Nokia Telecom Special Economic Zone, which was, for a time, the hub of electronics manufacturing in India.

“Initially, the other girls struggled to keep pace with the line,” Kalpana says. “But I was hardened by a lifetime of manual labor. I could do anything.”

In its first five years, the factory churned out 500 million phones. Three years later, production ground to a halt, victim of a 2.25 billion rupee ($365 million) tax dispute with Indian authorities and slowing demand for Nokia’s outdated cellphones. In 2014, thousands of jobs vanished as a world-class manufacturing ecosystem and well-drilled workforce turned into an expensive and obsolete liability.

One of seven cellphone models introduced at a 2007 Nokia launch event.
Gurinder Osan / AP

Automation, improved logistics and sluggish global growth have transformed manufacturing by giving multinational companies ever-greater flexibility to pick and choose what they produce where. Technology has shrunk the number of manufacturing jobs overall, pushing emerging markets like India, Thailand, Indonesia and Vietnam into intense competition for shrinking employment, while offering companies the freedom to shift production from one country to another in a matter of months.

Low international trade tariffs and an unwieldy domestic tax regime have made it cheaper and easier to import finished goods rather than make them in India. The Nokia phones on display in the mobile stores of Sriperumbudur are now assembled at a Microsoft-owned facility in Vietnam, rather than in the silent factory next door, at no extra cost to the consumer.

Indians are expected to buy 300 million cellphones in 2015 from more than 100 different phone makers offering everything from low-cost devices retailing for as little as $20 to Apple’s expensive iPhone 6. Last year, the country’s mobile companies launched three new phones a day. Yet, according to the trade body the Indian Cellular Association, 85 percent of the handsets — even from ostensibly “Indian” brands like Micromax, Lava and Xolo — will be imported from factories in Southeast Asia.

“Nokia had a problem with the government so it moved to Vietnam. But I don’t have such an option. We must live here” Kalpana says. “The company offered me a voluntary retirement scheme — I’m 24 years old.”

Salesmen explain mobile models to customers at a mobile phone shop in Chennai, India, on Feb. 10, 2015.
Kuni Takahashi for Al Jazeera America

Prime Minister Narendra Modi, who took office in the summer of 2014, has staked his reputation on his ambitious Make in India program to revitalize the economy. His government has rewritten labor laws, diluted environmental standards and pushed for a new law to make it easier for industry to override the claims of farmers when acquiring their lands for industry. These measures, the government hopes, will make it easier to build and operate factories to provide meaningful employment for the 10 million young Indians who will come of working age each year for the next 15 years.

“Come make in India … Sell anywhere, [but] make in India,” Modi declared in his Independence Day address last August, inviting Indian and foreign companies to make a range of products from “electrical to electronics … paper to plastics … satellites to submarines.” Two months later, the Nokia plant shut down.

In February, Nokia’s glass-fronted factory looked like a carefully preserved monument to the information-technology revolution. The shop floors were empty of workers, the assembly lines erased. A solitary janitor in blue overalls mopped the floor below a large poster advertising the company’s Lumia range of smartphones. It was hard to believe that, till recently, the cavernous industrial sheds produced as many as 18 million phones a month.

Outside a mobile phone shop in Chennai.
Kuni Takahashi for Al Jazeera America

“The size of our domestic market represents a huge opportunity for domestic and international companies to manufacture in India,” says Sandeep Ladda, the lead technology analyst at the India office of the financial services firm PricewaterhouseCoopers. Manufacturers are unlikely to be moved by the size of the market alone, Ladda adds. “If India is to attract large investments, it is also vital to provide stability and certainty in the areas of tax, regulations and policy.”

Last week, Modi said his government would try its best to revive the facility, adding that plant shut down due to the policies of the previous government. “If we have to create jobs, we will have to promote the idea of Make in India,” he said, in a speech at the Rajya Sabha, the upper house of parliament.

Yet the world has changed since 2006, when the first handset rolled off the assembly line: Nokia no longer makes cellphones, demand for low-end feature phones has shrunk, and a mix of India’s trade agreements, government incentives and domestic taxes have created an “inverted-duty structure,” in which components are taxed at a higher rate than the finished product, making it cheaper to import a finished phone rather than manufacturing or assembling it in India.

For example, a company exporting cellphones from India finds it easier to import the accompanying charger, rather than buying it locally, explains Sasikumar Gendham, managing director of the charger-manufacturing company Salcomp India. This is because buying locally attracts sales tax, while importing a component, even for subsequent export, doesn’t. (The sales tax is eventually refunded, but the process is time consuming and locks up cash that could be used for operations.) This year, cellphone exports are expected to drop to zero, according to the Indian Cellular Association, while electronics imports are up 20 percent.

Salcomp, headquartered in Finland, is the last Nokia supplier still manufacturing in Sriperumbudur. Gendham is not authorized to disclose the names of his new clients, but did answer one question: Could a charger made by Salcomp in Sriperumbudur be exported to Vietnam, put into a box with a phone assembled abroad and shipped back to the cellphone shop down the road?

“The India version of our chargers is exported to clients abroad,” he says. “So the answer is yes.”

Commuters pass beneath a billboard advertising a Micromax phone in Tamil.
Kuni Takahashi for Al Jazeera America

The Indian government’s policy of attracting international companies through a combination of investment subsidies, easy land acquisition and tax breaks is not without its critics.

In public, the bureaucracy, political classes and industrial chambers are united in support of foreign investment and industrialization, yet in private, many in the government voice fears that companies enticed at great cost may up and leave the moment the incentives lapse.

One morning in January 2013, a team of income-tax officers entered the Nokia plant on the suspicion that the Indian subsidiary had evaded millions of dollars in income tax and diverted the proceeds to its parent company in Finland. Computers were confiscated and files seized and by the end of the year, the company was presented with an interim bill of $365 million, which could rise to 10 times that sum after accounting for penalties.

“We found emails and memos in which company employees were discussing how to avoid income tax,” said an officer involved in the raid who was not authorized to speak on the record as the matter is currently under review. “The idea was to transfer a major portion of their profits by categorizing them as a software costs billed to the Finnish parent.”

Earnings on patents, royalty and intellectual property make up a significant portion of the tech world’s annual profits, and the abstract nature of such transactions allows companies to minimize tax liabilities by choosing where to pay their taxes. Tax departments around the world have responded by tightening regulations in a manner that has met with some criticism. Royalty payments, according to a report from PricewaterhouseCoopers, are among the most litigated issues in India.

A guard in front of the shuttered Nokia plant in Chennai, Feb. 2015.
Kuni Takahashi for Al Jazeera America

In Nokia’s case, the IT official says and court submissions allege, the Indian subsidiary transferred millions of dollars in the form of software costs paid to the Finnish parent. These software payments were categorized as “raw material” expenses and accordingly deducted from profits shown by the Indian subsidiary. Reducing profits in this manner, the officer says, allowed Nokia to minimize its tax bill in India.

The raid came at a difficult time for the company. It had failed to predict the smartphone revolution and was still manufacturing standard keypad-navigated phones. As losses mounted, the board made a decision to sell the handset-and-devices division to Microsoft for $7.2 billion. Yet the protracted tax dispute with the Indian authorities meant the plant at Sriperumbudur was left out of the acquisition. Microsoft shifted all production to Vietnam, and the Sriperumbudur plant closed last November.

Nokia declined to comment on the tax department’s allegations. “Unfortunately, it’s difficult for us to answer these questions as they relate to legal proceedings that are still ongoing,” a Nokia spokesperson wrote in response to an emailed questionnaire. “We can say that we will continue to defend ourselves vigorously in those cases.”

The income-tax department, meanwhile, has struck a defensive note. “It is not fair to blame us for the loss of jobs,” says the tax officer. “Nokia exploited India. We gave them so many incentives, but when they were asked to pay tax, they ditched our country.”

R. Kalpana sorts laundry while her younger sisters, Kani, 19, left, and Kanchana, 20, sit in the room at their apartment in Sadhurangapettai village, 32 miles east of Chennai.
Kuni Takahashi for Al Jazeera America

One night, months after she left Nokia, Kalpana dreamed she was back in the large, four-room house she used to share with six other women who worked with her at the factory. Slender, with large eyes and steady hands, Kalpana seems to have absorbed the rhythms of the assembly line. She speaks in rapid bursts interspersed with moments of complete stillness.

“We joined Nokia together. We met at a girls hostel and decided to move in together,” Kalpana recalls of her housemates as she sips coffee in the one-bedroom home she now shares with her two sisters. “We were scattered across three shifts at the plant, so we divided our home life the same way.”

The women would cook before they left for a shift at the plant so that those on their way back would have something to eat. On holidays, they would all head into the city together. They went to the theater, they wandered around the markets of Chennai, they experimented with alcohol, sipping nervously from a bottle of cheap red wine that Kalpana had brought back from a trip to the nearby town of Puducherry.

“In our village, people were always watching us, commenting on what we did, what we wore, who we spoke to,” Kalpana says. “But in the city there was freedom. We were working, we sent money home to our parents, we felt powerful.”

It was a hard slog, Kalpana says. The hours were long and spent standing up, hunched over buglike electronic components; the pace was punishing and relentless.

A security guard stands at the entrance of a factory operated by Foxconn at Sriperumbudur, on the outskirts of Chennai, on July 27, 2010.
AFP / Getty Images

“You take your place on the line and the robot starts feeding you parts, and you work and you work till you become part of the robot,” said K. Bhuvaneswari, originally from the neighboring town of Kanchipuram, who joined Foxconn, Nokia’s biggest supplier, in 2007 after tiring of her low-paying job as a nurse in a private hospital. “In the beginning it was hard, but when I got used to it, I was surprised by how fast my body moved.”

The pay was low and the supervisors unforgiving, she says, but gradually the workers on the line formed a union. They staged sit-ins and strikes for better wages and working conditions; they won promotions and awards for meeting targets. By 2014, most were earning 15,000 to 18,000 rupees a month, far more than their peers in the textile and automotive industries.

“The large number of women in the factories gave us a sense of security. And even with the men, it was different,” Bhuvaneswari says. “In the city, men leer at us and pass comments, but in the factory, they didn’t just see us as objects; they were forced to acknowledge us as co-workers, as people.”

Bhuvaneswari’s salary allowed her siblings to chase their own dreams: One sister took an education loan to study engineering, while another moved to the eastern port city of Kolkata to train as a professional soccer coach.

Now these monthly expenses have become hard to sustain. “There are no more electronics jobs in Sriperumbudur,” Bhuvaneswari says. “The few companies that are hiring only want to recruit fresh graduates for 4,000 rupees a month. At 27, employers tell me I am too old for a regular job.”

M. Murali at his apartment in Sriperumbudur, Feb. 11, 2015.
Kuni Takahashi for Al Jazeera America

“Life does not provide warranties and guarantees. It only provides possibilities and opportunities. Don’t miss them, make BEST of it,” reads the WhatsApp status on M. Murali’s Nokia 603. But the texts on the popular messaging service have, of late, been less than encouraging.

“My friends and I have a group from our Nokia days on which we exchange news about possible jobs,” says Murali, a studious 27-year-old who joined Nokia straight after finishing high school in 2008. “But the employers refuse to hire anyone above the age of 21.”

A recent message on Murali’s phone advertises trainee positions at a tire company for male candidates ages 18 to 21 with a diploma in engineering who are at least 165 centimeters tall and weigh at least 53 kilograms. The position, the message warns, is only open to those who obtained their degree after 2012.

Tamil Nadu has more than 42,000 factories, which employ over 2.23 million workers, the most of any Indian state, according to government figures. The state’s many technical-training institutes churn out 1 million qualified graduates each year, far in excess of what the economy can absorb.

Employers increasingly prefer young graduates who can be paid lower wages and trained on the job, rather than more experienced workers like Murali who expect higher pay. Murali hopes that continuing his education will making him more marketable; in addition to his undergraduate degree in mathematics, he has invested part of his severance package in weekly coaching classes in the hope of eventually getting a clerical job at a government office.

M. Murali reads a textbook at his apartment.
Kuni Takahashi for Al Jazeera America

Murali’s experience is borne out by a preliminary survey by M. Vijayabaskar, an assistant professor at the Madras Institute of Development Studies. Of the 72 former Nokia workers surveyed by Vijayabaskar, only five have found a new job in the manufacturing sector. The rest are either unemployed or have moved back into the informal economy — some are driving auto rickshaws, for example, while others have set up small roadside eateries, mobile repair shops or provisions stores.

Nokia and Foxconn workers face a particularly hard time finding new jobs because employers are worried by the history of unionization at both plants.

According to a former line manager with a Nokia supplier who spoke on condition of anonymity, the human-resources departments of the plants “set up informal nonpoaching agreements to prevent workers from driving up wages by moving from one supplier to another.”

After a series of rejections, Kalpana took to hiding her prior experience with Nokia. She now has a temporary job fitting buttons onto the front panel of car audio systems for a Hyundai supplier. The work — greasing up to 100 panels an hour — is hard and pays less than a quarter of what her Nokia job did. Once panels are assembled, a supervisor tests them for tactile feedback. “You are in trouble if the buttons make a sound when pressed,” Kalpana says. “It’s called failing the ‘feelings test.’ ”

Workers exit a metro station near Tidel Park, one of the largest IT parks in Chennai.
Kuni Takahashi for Al Jazeera America

Historical precedent suggests that few countries, apart from the petro-economies, have become wealthy without creating manufacturing jobs. However, new research indicates that mass industrialization, as seen most recently in China, is becoming harder and harder to achieve.

“The numbers of manufacturing jobs that India can secure are likely to be much smaller than the hype suggests,” says Aashish Mehta, associate professor at the Global & International Studies Program at the University of California, Santa Barbara, as developing countries are losing the ability to retain jobs due to mechanization and greater competition from other developing economies. “If costs at home rise, or costs elsewhere fall, production processes can be more easily relocated. Investors seem to get this short-termism.”

The objective of the Make in India campaign is reasonable, Mehta explains, but he is troubled that the sweeping changes in labor laws, land rules, environment regulations and education policy unleashed by the government come with significant social costs and ultimately may not result in enough good jobs. “Manufacturing is important,” he says. “It is just too important and costly to get wrong.”

Gendham, the managing director of Salcomp, the Nokia supplier, agrees. While Salcomp assembles its chargers in India due to lower labor costs, the company still imports most of its high-value components. One way to keep jobs in India, he says, is to attract investment that brings manufacturing and design jobs, over simple assembly tasks, which can be more easily relocated.

Kalpana, meanwhile, is already saving up for a future outside the factory. “I’m getting married,” she says, flashing a quick smile. “And I’m going to become a farmer and work on my own land.”

Even though she has spent her entire life trying to get away from her village, she is amenable to going back after the wedding. “We never had any land,” she explains. “My fiancé’s family has a small patch of land not far from here.” The plot is small, but the couple plans to dig ponds there and set up an inland fishery under a government self-employment program. She’s done the research and is willing to sink some of her severance pay from Nokia into the business.

She is working eight-hour shifts for now, sometimes seven days a week for the overtime pay. But after the marriage she’ll devote herself to her fishery. She has collected a cupboard of unread books, and the day is not far, she hopes, when she’ll finally have the time to read them all. She’ll sell the fish in the market, keep some for her family, read, cook and finish a distance-learning degree in psychology.

Why psychology?

“Because I want people around me to be happy. Always happy.”