China and India need each

other. Just look at technology

Hong Kong/San Francisco (CNN Business)China and India are locked in a
tense diplomatic and military standoff after a deadly border skirmish earlier
this week. The economic stakes are high too, given the huge trading
relationship and particularly close ties in technology.
India imports more goods from China than any other country. And over the
past decade, India and China have enabled each other's rise as emerging
technology powerhouses. Chinese tech giants have invested billions of dollars
into India's biggest startups, while its smartphone makers dominate the
country's market and Indians have flocked to apps like TikTok.
Now, the dispute threatens those ties. Growing anti-China sentiment in India
has already led to calls for a boycott of Chinese products and services, while
new rules on foreign investment could constrain China's ability to cash in
on India's internet boom.

Deep ties
China has created a significant place for itself in India's technology sector over
the last five years, according to a report published by Indian foreign
policy think tank Gateway House. Unable to convince India to sign on to its
global infrastructure project known as the Belt and Road Initiative, China
entered India's tech scene by flooding the market with cheap smartphones
from brands such as Xiaomi and Oppo and plowing money into Indian
startups.
Chinese smartphone maker Xiaomi was the top selling brand in India in 2019, according to IDC.

close dia log

Gateway House estimates that Chinese investors have poured some $4 billion
into Indian tech startups since 2015.
Alibaba (BABA), for example, has invested in Indian e-commerce company
Snapdeal, digital wallet Paytm and food delivery platform
Zomato. Tencent (TCEHY), meanwhile, has backed Indian messaging
company Hike and ride hailing app Ola. Gateway House found that more than
half of India's 30 unicorns — private firms worth more than $1 billion -— have
Chinese investors.
And Huawei is still in the running to help build 5G networks in India's fast-
growing internet economy, despite a US-led campaign against the Chinese
company.
"China was hoping to be the dominant player in this internet market," said
Amit Bhandari, fellow at Gateway House and co-author of the report.
India is also key to China's goal of becoming a dominant force in global tech,
according to Sukanti Ghosh, South Asia head for the Washington-based think
tank Albright Stonebridge Group.
"I don't believe anyone has been a loser in this relationship, both countries
have gained substantially," Ghosh said, adding that it "ties in with the Chinese
strategy of Asian dominance and its increasing competition with the United
States."
But earlier this year, India signaled it was taking steps to curb China's growing
influence. In April, the government announced that foreign direct investments
(FDI) from countries that share a land border with India would be subject to
more scrutiny.
Analysts say the new rules are vague. For example, investments in social
media platforms that would raise questions about data storage and privacy will
likely receive more scrutiny, Bhandari said. The government says the rules
are intended to fend off opportunistic acquisitions and takeovers of Indian
companies grappling with the fallout from the Covid-19 pandemic.
They also appear to be aimed squarely at China.
Pakistan, India's arch rival, is not going to invest in India in any meaningful
way, according to Bhandari, and the rest of the countries that share a border
with India are small and not known for making large investments.
"It was directed at China, but not in a direct way," he said.
Bhandari said tightening FDI rules was a message to Chinese firms that they
can still export software and hardware to India, but they won't be able to
dominate Indian's internet ecosystem.
Basically, "China will not have a free run in this market," he said.
The government policy was initially met with skepticism by some in India's
tech sector. Then a cross-border skirmish between Chinese and Indian forces
broke out in May, resulting in minor injuries to troops.
The incident — at a remote, mountainous crossing close to Tibet — was the
latest in a long line of border flare-ups, and it fueled a fresh round of anti-
China sentiment in India. Tensions ramped up considerably on Tuesday,
when at least 20 Indian soldiers were killed during a clash with Chinese
troops, according to the Indian army.

Redirecting China's influence

China is bristling at the negative attention.
State-run tabloid The Global Times said in an article published earlier this
month that India's move to tighten FDI rules "shows the Indian government
has been hijacked by domestic anti-China sentiment."
The tabloid also criticized a recent app downloaded by millions of people in
India called "Remove China Apps" that promised to help users scrub Chinese
software from their smartphones. Google (GOOGL) yanked it from its app
store earlier this month for violating terms.
"If India allows narrow-minded nationalism to spread to the field of science
and technology, it will definitely hurt its own interests in turn," the Global
Times wrote.

Chinese companies are seeking to establish a long-term presence in India,

and their investments in Indian companies give them an enduring stake in the
market, according to a Brookings India report published in March.
"I don't think there's a widespread understanding of how difficult it would be to
completely reduce India's reliance on China," said Ananth Krishnan, former
Brookings India fellow and author of the report.
India relies on China for everything "from heavy machinery and all kinds of
telecom and power equipment, to active pharmaceutical ingredients," said
Krishnan, who is now a reporter with The Hindu newspaper. In his Brookings
report, Krishnan estimated that the total current and planned investment from
China into India is at least $26 billion.
Trade between the two countries reached more than $87 billion in the 2018-
2019 fiscal year, according to India's Department of Commerce. China was
India's second largest trading partner that year, just behind the United States.
But the relationship is one-sided. China exports far more to India than the
other way round.
"These are structural dependencies on China which boycott campaigns aren't
really going to address," he said.
Krishnan said the recent tightening of FDI rules weren't aimed at stopping
Chinese investment into India, but rather about "redirecting Chinese
investment to areas where it will be of greater use to India — into actual
[manufacturing] facilities and generating jobs."

Cutting off China could mean job losses for

Indians
Chinese smartphone makers have already built factories and created jobs in
India.
India's emergence as the biggest overseas market for Chinese mobile phone
companies is one of the most significant developments in China's relations
with India over the past five years.
Last year, four of the top five best-selling smartphone makers in India were
Chinese: Xiaomi, Vivo, Oppo and Realme, according to market research firm
IDC. South Korea's Samsung, the only non-Chinese brand, was the No. 2
seller.
The India sales of those top Chinese smartphone brands totaled more than
$16 billion in 2019, according to IDC.
And all of them have manufacturing facilities in India. Doing so allowed the
Chinese firms to both embrace Prime Minister Narendra Modi's "Make in
India" program and avoid stiff import tariffs. Xiaomi manufactures 95% of the
phones it sells in India locally.
"So if you're talking about cutting down the sales or shipment for these guys, it
also impacts the factories that they have in India," which will "absolutely"
affect Indian jobs, said Kiranjeet Kaur, an analyst with IDC.
She added that campaigns urging Indians to boycott Chinese goods have
happened before, during previous border skirmishes. But they never put a
dent in sales of Chinese smartphones in India.
So even though many Indians are vowing to cut off Chinese hardware and
software, "I really don't think it's going to change their buying decisions at all,"
Kaur said.
"They're so dependent on these Chinese phone ecosystems, there's hardly
any other choices."