By Aditya Kalra and Munsif Vengattil
NEW DELHI (Reuters) -China's Xiaomi has told the Indian government that its heavy scrutiny of Chinese companies has made smartphone component suppliers wary about setting up operations in India, according to a letter and a source with direct knowledge of the matter.
Xiaomi, which has the biggest share in India's smartphone market at 18%, also asked that New Delhi consider offering manufacturing incentives and lowering import tariffs for certain smartphone components, according to the Feb. 6 letter.
The Chinese company assembles smartphones in India with mostly local components and the rest imported from China and elsewhere. The letter is Xiaomi's response to a query from India's information technology ministry asking how New Delhi can further develop the country's component manufacturing sector.
India ramped up scrutiny of Chinese businesses after a 2020 border clash between the two countries killed at least 20 Indian soldiers and four from China. That scrutiny has disrupted the investment plans of big Chinese companies and drawn repeated protests from Beijing.
While Chinese companies operating in India are reticent to speak publicly about the scrutiny, Xiaomi's letter shows that they continue to struggle in India, especially in the smartphone sector where many critical components come from Chinese suppliers.
In the letter, Xiaomi India President Muralikrishnan B. said India needed to work on "confidence building" measures to encourage component suppliers to set up operations locally.
"There are apprehensions among component suppliers regarding establishing operations in India, stemming from the challenges faced by companies in India, particularly from Chinese origin," Muralikrishnan said, without naming any companies.
The letter said the concerns included those related to compliance and visa issues but did not elaborate. It said "the government should address these concerns and work to instil confidence among foreign component suppliers, encouraging them to set up manufacturing facilities in India."
Xiaomi and India's IT ministry did not respond to queries for further information and comment.
China's foreign ministry said in a statement to Reuters that it was aware of news reports about Xiaomi's concerns and hoped "India will earnestly fulfil its commitment to open cooperation and provide a fair, just, transparent and non-discriminatory business environment."
"This is also in line with India's own interests," the statement said.
Indian authorities last year accused Chinese smartphone company Vivo Communication Technology of breaching some visa rules and alleged it siphoned $13 billion in funds from India.
India has also frozen more than $600 million in Xiaomi assets for alleged illegal remittances to foreign entities, accusing the company of passing them off as royalty payments.
Both Chinese companies deny any wrongdoing.
India has since 2020 also banned more than 300 Chinese apps, including ByteDance's TikTok, and halted planned projects such as those planned by Chinese automakers BYD and Great Wall Motor.
The source said many executives at Chinese electronics companies struggle to get visas to enter India, and the companies continue to face slow clearances for investments due to heavy scrutiny by New Delhi.
New Delhi on Jan. 31 moved to reduce import taxes on battery covers and phone camera lenses.
Xiaomi also asked for tariff reductions on sub-components used in batteries, USB cables and phone covers, according to the letter.
Reducing the import tariffs could "increase India's manufacturing competitiveness ... in terms of costs", Xiaomi said in the letter, but it added that getting component manufacturers to set up shop in India would require bigger incentives.
In January, India's top industrial policy bureaucrat Rajesh Kumar Singh signalled that India could ease its heightened scrutiny of Chinese investments if the two countries' border remains peaceful.
(Reporting by Aditya Kalra and Munsif Vengattil; Additional reproting by Breand Goh in Shanghai; Editing by Tom Hogue and Edwina Gibbs)