Finnish-ed? Or, will Nokia reconnect afresh?

It was a shortlived blip on India’s manufacturing radar as Nokia’s Chennai operations in exurban Sriperumbudur went dormant earlier this month.

 Cheers have turned into tears in less than a decade for more than 8,000 people, mostly youngsters of Tamil Nadu, who were in recent years hired by the world’s second largest mobile phone maker Nokia Corporation. The suspension, largely attributed to unknown reasons, has in effect been interpreted as a closure. Started with capacity of 5 lakh mobile sets per day in 2006, Nokia has been crippled by multiple operational snafus and ended up with zero units in 2014.

A far cry from 2014, when seeing India's market potential and industry-friendly policies, the Finnish paper-to-mobiles giant ignored manufacturing megastar China and opted to set up its manufacturing plant in Chennai, even as many other states vied to win over the blue chip project.

Eventually, Tamil Nadu, which won the race to shower incentives on the project and showcased it as the jewel in its manufacturing crown, is silent on the issue after Nokia suspended production.

It is understood that Nokia announced suspension of operations at its Sriperumbudur mobile handset plant from November 1 after Microsoft terminated an agreement to buy mobiles from the unit. However, company sources said that production stoppage was necessitated by a tax dispute with the Tamil Nadu government.

On the other hand, industrial experts and various political parties in the state say that the company, which had benefited from government sops while setting up its manufacturing unit, should have consulted the central and state governments before suspending operations.

The problem started in March 2014, when the Tamil Nadu government served a Rs 2,400-crore (Rs 24 billion) notice on Nokia, saying the firm had sold products from the Chennai plant in the domestic market instead of shipping them overseas.

‘We indeed export’

The company came out officially on the issue, saying, "Nokia considers the claim to be completely without merit and counter to domestic tax laws. In India, exports are by law exempt from tax, and Nokia has proved consistently that devices produced in Chennai are exported abroad. Indeed, the company has been regularly assessed and audited by the tax authorities since 2006 without incident, and has also won numerous export awards from governmental organisations.”

The company also claimed that "it is absurd that the Tamil Nadu tax authority is now claiming that devices made in Chennai were not exported and were instead sold domestically in India. We contend that this allegation has no basis in reality, whatsoever; it could easily be rebuffed by a check of documentation provided to various governmental departments, including customs.” Nokia will defend itself vigorously in this matter, the company added.

The second tax issue is of a more serious nature. The Income Tax Department has demanded Rs 15,258 crore in unpaid taxes, interest and penalties.

In addition, the charges also relate to Nokia's import of software from its head office in Finland. Nokia India showed the payments made for the software as 'purchase deals', not 'royalty payments'. Thus, the payment was made without keeping back any withholding tax.

Nokia had approached the Delhi High Court on the tax matter and got partial relief in the case. Apart from lifting the freeze on assets, the court said that Nokia India and its parent would be jointly liable to pay tax as determined and payable under Indian rules, interest and penalty.

The court asked Nokia to deposit a minimum of Rs 2,250 crore in an escrow account. According to the Nokia India Employees Union, there are about 1,000 employees still at the Chennai production unit. After the Nokia-Microsoft deal, a VRS scheme was offered to employees, and 5,700 of them quit the company opting for "golden handshakes" in phases.

Nokia had started its facility in Tamil Nadu’s industrial corridor Sriperumbudur, the Special Economic Zone (SEZ) near Chennai, in 2006 and exported mobile sets and other related accessories to overseas markets including the Australia, Middle East and Africa, and New Zealand.  

Nokia’s operations here peaked in 2010 when it produced around 5 lakh mobile phones a day, the highest output among all Nokia plants across the world.

It was one of the largest foreign exchange earners for the country in the technology sector, exporting phones worth more than $2 billion a year. Nokia India's turnover was about Rs 1.50 lakh crore between 2006-12.

The Nokia's production success in 2010 led to various political parties wanting to gain ground around it they saw the employees as potential vote banks. All along, Nokia’s internal angst germinated in a myriad labour issues and operational constraints was slowly bubbling to the surface. The first tremors emerged in 2011, when Nokia suspended over 30 employees and transferred a few to other locations. More than 3,000 permanent workers went on strike demanding that Nokia roll back its decision to suspend the employees.

In 2013, I-T officials raided Nokia’s factory and demanded more than Rs 2,000 crore in tax on royalty payments. In December the same year, the Delhi High Court froze Nokia India’s assets, blocking its transfer to Microsoft. But Nokia insisted that it would keep the Chennai plant out of the Microsoft deal.

But events overtook the deal after Microsoft took over the Nokia business. In October this year, Nokia said that it would shut down its Sriperumbudur plant from November 1 as Microsoft had terminated the mobile purchase agreement. Meaning, no business, and time to hang up.

"...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...,” Nokia added.

No debates, and goodbye

Nokia India Thozhilalargal Sangam (Nokia India Employees Union), honorary president and MLA A Soundararajan said, "It is matter of serious concern. The organisation did not even bother to give a proper statement regarding the future of its current employees.” Stating that the issue has already been taken up with the state Labour Department, Soundararajan said the union is also exploring legal options.

"The state government does not seems to be worried about this issue. It is unclear why it is keeping silent and not coming to the rescue of workers of the company,” Soundararajan said.

According to the Union, the factory employed about more than 8,000 people, of which more than 60 per cent were women. About 10,000 people were indirectly employed in the Sriperumbudur region.

"I worked for two years without any problem. They paid me well. However, closure of the company will surely affect my family", a woman worker said.

Nokia sources said they are assessing alternatives to reduce impact on existing employees and would share further information once details are known.

"We are concerned about jobs at stake at the Chennai factory," Nokia Chairman and interim CEO Risto Siilasmaa had said in Delhi after meeting former Commerce Minister Anand Sharma and tax authorities. "We are not planning to cut jobs at the Chennai factory, the question is whether we are allowed to transfer the factory to Microsoft," Siilasmaa said. "If we are not allowed to transfer, we will have a factory, but no business. And, if we don't have a business, we can't manufacture anything in the factory. And that would be detrimental to our employees, we care for them." 

The opposition DMK, which was instrumental in getting Nokia to Tamil Nadu said that the present AIADMK government should hold talks with the management to ensure workers do not lose their jobs. The government has a duty to safeguard employee interest, it added.

Nokia sources further said that if the tax dispute continues in India it has no other option but to shift the business to Vietnam. "Our tax issue with the government and its delay will impact how other multinational companies, especially those involved in production, look at the Indian market for electronics manufacturing," a senior official from Nokia said. The future seems to be hanging in the balance for existing Nokia employees here as both company and government play a game of shadows. Nokia’s “missed” call will have a chance of reconnection only when either party decides to come forward to chalk out a solution to the issue.