During Indian Prime Minister Narendra Modi’s meeting with American business leaders during his recent visit to the U.S., Apple Inc. (NASDAQ:AAPL) CEO Tim Cook is reported to have spoken with him about AAPL’s first assembled-in-India iPhone — the iPhone SE. Apple started assembling the iPhone SE in Bangalore in May through its partner, the Taiwanese contract manufacturer Wistron Corporation.
Over time, this is expected to be scaled up to full manufacturing. (iPhone SE was launched globally in April last year and at a starting price of $399 was positioned as Apple’s cheapest iPhone.) While at present the Cupertino, Calif.-based technology firm sells its iPhones in India through multiple channels like franchisee-run exclusive brand stores, multi-branded stores and online, it is now waiting for approval from the Modi government to set up its own company-owned stores in the country.
Apple is also in talks with the government on various issues like duty waivers on imports of components and permission to bring refurbished iPhones to India. In the company’s earnings call in May, Cook noted that Apple was “underpenetrated” in India and was “putting a lot of energy” here.
He said: “We are very optimistic about our future in this remarkable country with its very large, young and tech-savvy population, fast growing economy and improving 4G network infrastructure.”
It’s not hard to understand why India is important for Apple. Last April while announcing its quarterly results, Apple reported, for the first time ever, that sales of iPhones had dropped. The company sold 16% fewer iPhones in January to March 2016 than it had during the same period in 2015. This year, for the first three months of 2017, iPhone sales remained flat. The company sold 50.76 million iPhones, 1% less compared to the same period last year. The drop in China, Apple’s second largest market which accounts for 25% of its profits, was steep: 20%, according to industry estimates.
Ravi Bapna, professor of business analytics and business information at the Carlson School of Management, University of Minnesota, notes: “Assembling iPhones in India is a strategic diversification move by Apple to simultaneously hedge against its manufacturing reliance on China and more easily — with potentially lower costs from ‘make in India’ benefits — tap into the growing upper middle class market in India.”
India is the world’s second largest mobile phone market after China, the third largest smartphone market after China and the U.S. and, most importantly, the fastest growing smartphone market globally among the big markets. According to technology market research firm Counterpoint Research, smartphone shipments in India grew 18% annually in calendar 2016 compared to the global smartphone market which grew at 3%.
In the first quarter of 2017, while globally smartphones grew by 10% year-on-year, in India the growth was 15% reaching 29 million units.
“The rollout of 3G/4G mobile broadband networks and digitalization of almost every use-case has been spurring the demand for 3G/4G capable smartphones in India. Smartphone penetration here, which is among the lowest in the world, is on the verge of a massive growth as more and more people adopt smartphones to connect to the internet for rich multimedia communication, content and commerce,” says Neil Shah, research director, devices & ecosystems at Counterpoint Research. The government’s sharp push towards digital payments is also giving it a huge boost.
Anshul Gupta, research director at research and advisory firm Gartner, points out that with slowdown in sales in major markets, India represents the largest opportunity for handset makers. According to Gartner’s data, smartphones (which currently account for around 50%) are expected to account for 62% of all mobile phones sales in India in 2018. “And, while at present the average selling price of smartphones in India is around $100, two or three years down the line, the pyramid at the top will be big,” he adds.
“Apple is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.”–Neil Shah
Benefits of Local Manufacturing
Apple needs to quickly strengthen its India story to make the most of this opportunity. According to Counterpoint’s data, for the January to March quarter this year, the premium smartphone segment in India — phones priced at more than Rs.30,000 ($465) — grew at 35% year-on-year. Apple garnered a 43% market share in this category; up 10% from the same period last year. In the overall smartphone market it has only a 2.6% share (up 0.1% from last year). In terms of India’s smartphone revenue share, Apple is in fifth position with 8.6%. In the first quarter of 2016, it had 10.1% share and ranked second.
Counterpoint’s Shah sees Apple’s new assembling activities in India as a measure towards “building its foundation” in the country. “Apple,” he says, “is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.” According to industry estimates, local assembling and manufacturing can give savings of around 12%.
Pointing out that at present India is one of the costliest markets in which to buy a new iPhone and that less than 3% of the total smartphones sold here are in the $600 and above range where most of Apple’s models are positioned, Shah says: “India has never been a priority market for Apple until now when it is seeing that in the next two to three years, the Indian smartphone user base will swell to almost half a billion users and many of them will be buying their second or third smartphone.”
Market intelligence firm International Data Corporation (IDC) estimates that by the end of this year, India will have the second-largest smartphone installed base (smartphones in use) with 334 million smartphones. “This huge smartphone base coupled with the fact that India continues to be largest feature phone market in the world provides tremendous opportunity for phone makers to woo users who are looking to replace their smartphones as well as those migrating from feature phones to smartphones,” says Navkendar Singh, senior research manager at IDC India.
Singh considers Apple’s move to assemble its phones in India as “critical” in terms of the cost savings it will give the company. “This can be used to bring down prices as well as for expanding distribution, channel margins, retail marketing spends and to ensure placement in smaller towns and cities, where the consumer is highly aspirational and strives for a premium brand like Apple.”
Singh also points out that with around 40 local and foreign brands including Samsung, Oppo, Vivo, Xiaomi, Gionee, Micromax, Intex and Lava already assembling and manufacturing in India, the country is fast emerging as the new manufacturing hub for mobile phones and components.
He cites “relatively lower labor costs, government push and incentives for local manufacturing coupled with high differential duties on import” as some key reasons for this. “Approximately 65% of phones sold in India are assembled in India. And in the next few years, vendors are expected to start exporting devices to South East Asia and African countries from their India manufacturing operations,” he adds.