During the flagging-off event of Suzuki’s e-VITARA at Suzuki Motor Gujarat’s manufacturing facility in Hansalpur, Gujarat, Prime Minister Narendra Modi introduced a new definition for swadeshi (indigenous). “My definition of swadeshi is very simple. I am not concerned about whose money is being invested. I don’t care whether it is dollars or pounds or what the colour of the money is. However, the sweat must be of my countrymen,” he said.

The Prime Minister’s words are telling, especially in the context of how there is a thaw in the relationship between India and China, as evidenced by the Prime Minister attending the Shanghai Cooperation Organisation summit in Tianjin, where he was spotted with Chinese Premier Xi Jinping. 

Concurrently, Piyush Goyal, the Union Minister of Commerce and Industry, recently hinted that India might revisit and mull changing Press Note 3, a key element of India’s Foreign Direct Investment (FDI). It was introduced in April 2020, right at the cusp of Covid-19 engulfing the world, to curb investment from opportunistic takeovers from foreign companies. 

It mandated that any investment from countries sharing a land border with India—or where the beneficial owner of the investment is based in such countries—could only come through once it was vetted and approved by the government. The move was widely seen as aimed at preventing opportunistic takeovers of Indian companies by Chinese investors when valuations were depressed. This purported clampdown on Chinese investments was also brought close on the heels of clashes between troops along the Line of Actual Control (LAC) in the Galwan valley in Ladakh.

It is interesting to note that policymakers are now mulling removing these restrictions, arguing that while the policy has succeeded in preventing hostile acquisitions, it has also slowed the influx of Chinese capital into key sectors such as technology, manufacturing, and startups.

Carmakers in jeopardy amid faltering ties

In the automotive sector, the two casualties of India’s chokehold on Chinese investments were Great Wall Motor and BYD. Investments worth $2 billion (₹16,000 crore) from two Chinese auto majors, Great Wall Motors and BYD, have been rejected by India. While the former could never take off in India—shelving plans in 2022 as it could not secure clearances, and handing pink slips to its 11 Indian employees on July 1, 2022—the latter has made inroads in the world’s third-largest automobile market, selling 450 vehicles in August, as per data released by FADA.

MG Motor India, which the Chinese state-owned SAIC Motor previously owned, had to sell a 35% stake in a joint venture with Sajjan Jindal’s JSW Group, after a $650 million influx of capital from China was rejected by India’s interventionist policies, to ‘Indianise’ the company. 

Furthermore, Indian institutional investors—including InfoEdge India—acquired an 8% stake, and MG Motor dealers and employees cumulatively acquired another 8% stake, leaving SAIC with a minority, 49% stake. The JSW Group plans to increase its stake in the joint venture, with SAIC having no plans to invest further in India. The carmaker had a 1.77% market share in August, selling 5,717 vehicles.

Opportunity worth grabbing with both hands?

The question that now remains is whether Chinese automakers, which are making their mark on the world, will reevaluate India as a key market to enter. Queries sent to BYD and Great Wall Motor did not elicit a response.

“Fundamentally and logically, there shouldn’t be a reason why it (Chinese investment in the Indian automotive sector) shouldn’t be allowed. We will have to wait and watch,” Hemal N Thakkar, Senior Practice Leader & Director, Crisil Intelligence, tells Fortune India.

Puneet Gupta, director, S&P Global, India and ASEAN, echoes Thakkar’s sentiment. “Chinese investment in India will ultimately be a win-win for the consumer, and for the country,” he says, citing the example of BYD in India. Despite having no manufacturing facilities in India and paying an exorbitant duty of 150%, BYD has managed to carve out a niche for itself in the market. “If it were not for the duty, we would have all been driving BYD cars,” quips Gupta.

Gupta asserts that the Indian automobile market is too large for the Chinese to overlook. “In the past also, whenever diplomatic tensions flared, the Chinese took a back foot. But whenever tensions ease, they come back stronger, because they are a typical business community. They are not leaving even the smallest markets. The stature of the Indian market is big, from a consumption perspective, and even from a competitor perspective,” he avers.

The entry of Chinese carmakers in India will set new benchmarks for the industry to follow, according to Gupta. “It will make the other OEMs go for it, which has not been able to happen…In the short term, it may be difficult for the domestic OEMs to catch up with the Chinese, but even their stature is too big today. They will innovate and evolve.”

China will also gain access to cheaper technology, which will enable the suppliers to expand their volumes and take a larger share of the export market, according to Gupta. “The Chinese are good because they will force you to innovate and adapt to new technologies, and follow the benchmarks set by them.”

According to Vinnie Mehta, director-general, Automotive Components Manufacturers Association (ACMA), China is the single largest source of imports for the auto components industry. “We welcome the thaw in the relations between India and China. A lot of auto component manufacturers are tying up with China. Indian businessmen are astute; they will not simply relinquish their stake. But we have to play it a little smartly so that we don’t fall prey to whatever concerns are out there. Frankly, it’s a global world, and we have to leverage a country that’s 25 years ahead of us,” he says.

Brajesh Chibber, partner, McKinsey, avers that collaboration is the way to go. “This has been one industry where collaboration is the mantra. We look at it from the standpoint of access to technology—the Indian standpoint—but we also need to invert the prism and see how the Chinese are looking at it. For them, this is a big market, like China, but ten years behind them,” he says. The U.S. is the biggest market for them, but it has become a no-go area for them, according to Chibber. “(India) is an opportunity area for them (the Chinese). This is a win-win. I think with the thaw in the relationship, the sky is the limit.”

The contrarian view

Not everyone is upbeat about the Chinese getting free access to the Indian market, though. According to Ravindra Patki, managing partner at Vector Consulting Group, it will be detrimental to the interests of Indian automakers.

“If you depend on an external source for technology, that comes from a place where you believe that you don’t have the knowledge or technical know-how. That is not the case. The knowledge exists. Therefore, if China were to set up in India, it would be detrimental, especially for the auto component industry, which is a flagbearer for Aatmanirbhar Bharat. If we truly have to be self-reliant, then it has to happen from within,” he posits.