Nokia’s Largest Plant to Shut Down in India

BANGALORE, India — One of the world’s biggest cellular phone manufacturing plants, located in the southern India city of Chennai, will stop production of mobile phones and down shutters after Nov. 1. Microsoft, its lone customer, has terminated a subcontract agreement.

“Microsoft has informed Nokia that it will be terminating the manufacturing services defined in the agreement with effect from November 1, 2014,” Nokia announced Tuesday. “In absence of further orders from Microsoft, Nokia will suspend handset production at the Sriperumbudur facility from November 1.”

Nearly 5,200 workers left the Finnish phone maker in a massive voluntary retirement scheme after the factory’s future was clouded by the Indian tax department’s asset freeze move. But roughly 1,000 workers who had stayed at the factory had hoped things would improve with the new national government coming into power. Now their future seems bleak.

Established in 2006 on a 200-acre site, the Nokia facility in Sriperumbudur slowly ramped up production to before the largest single location for mobile handsets globally. The factory once employed 8,000 workers directly and rolled out 450,000 units a day. After Microsoft purchased Nokia’s global handsets and services business in April for $7.2 billion, the factory cut down production drastically and was producing a mere 40,000 handsets a day when the shutdown was announced.

Microsoft was forced to leave the Indian factory out of the Nokia deal because of an asset freeze order on the plant resulting from a $383 million tax dispute with Indian authorities. The factory continued to operate as a contract manufacturing unit for Microsoft for its popular Asha series handsets. However, Microsoft recently decided to phase out this model.

“Nokia will continue to do the best it can to minimise the impact on its employees,” the company said. “Unfortunately, the continuing asset freeze imposed by the tax department prevents Nokia from exploring potential opportunities for the transfer of the factory to a successor to support the long-term viability of the established, fully functional electronics manufacturing ecosystem.”

M. Rajesh, joint general secretary of the Nokia Employees Union,told the Economic Times that the suspension of operations was a hard blow. The 28-year-old worked as a machine operator in one of Nokia production lines. He said the employees left behind at Nokia have been there for a minimum of five years, so jumping ship would be difficult for them. “We just feel stranded.” Union representatives met the assistant commissioner of labor in their district but could not come to any solution, he said, because the government can only advise in such matters.

Big blow to Make in India
The news is certainly a setback to the image of India as a global manufacturing hub, coming close on the heels of Prime Minister Narendra Modi’s much-discussed Make in India campaign.

The campaign is part of an effort to attract foreign firms to bring in investment and set up more manufacturing facilities in Asia’s third-largest economy. But many foreign firms remain wary about doing business in India because of its reputation for red tape, bureaucracy, and retrospective amendments to tax laws governing the indirect transfer of shares.

For example, Vodafone has been locked in a long-running legal battle with Indian authorities over allegations that it owes nearly $2.2 billion of taxes in a takeover deal. Though the nation’s Supreme Court ruled in favor of Vodafone in 2012, the laws were changed that same year, allowing the country to impose taxes retroactively. Vodafone said it would use international arbitration to resolve the dispute.

Shell India Markets Pvt. Ltd. (the local unit of Royal Dutch Shell Plc), LG Electronics Inc., the Singapore property group Ascendas Pte. Ltd., the French IT services firm Cap Gemini SA, and the chocolate maker Cadbury are among the global companies involved in transfer pricing disputes in India, Reuters reported in March when Nokia’s case came up.

Transfer pricing is the value at which companies trade products, services, or assets between units in different countries, sometimes to avoid taxes. Tax authorities have said Nokia’s Indian subsidiary had been downloading software from its parent firm used in the manufacture of mobile handsets at its Sriperumbudur factory in Tamil Nadu. The subsidiary paid a royalty on the software,

“The tax collection targets are much beyond what the Revenue Department is being able to collect. This obviously means that they will increase their scrutiny on transactions,” B.M. Singh, a former chairman of the Central Board of Direct Taxes, told LiveMint last year. “The tax department has gone overboard with respect to certain transfer pricing transactions… With these kind of instances, foreign investors will do a rethink while investing in India. We need a more certain tax regime since tax is an important criteria for determining the business environment.”