Apple poised for big India push, but which phones will it flog?

The iPhone 6, which is the reason for Apple's last phenomenal earnings result in both the US and China, is simply too expensive for Indians
Written by Rajiv Rao, Contributing Writer

Apple's CEO tweets his thanks to Indian customers

There's good reason Apple sees India as its next potential El Dorado. After all, the country has recently outstripped the US as the second-largest market for smartphones in the world at 220 million unique users and is also the fastest growing.

Almost overnight, India has become more pivotal than ever to Apple's future, primarily because of the jitters that China's uncertain growth has posed, not just to Apple but pretty much every other company on the planet. Of course, judging by Apple's last blockbuster quarter in China where it posted a massive 99 percent fourth quarter revenue surge (YoY), any talk of a Chinese slump appears ludicrous.

And yet, Apple's shares got pummelled in December and January when China admitted that its economy would grow below 7 percent for the first time in 25 years. Apple is not being paranoid for no reason. At least 20 percent of its revenues come from China -- 25 percent if you include Hong Kong and other appendages -- and it provides the company with its second-fattest profit margins. Therefore, despite all this good cheer, the bells of good fortune that toll consistently for Apple are suddenly inflected with a dissonant strain. CEO Tim Cook has mentioned "extreme conditions" as the spectre of a so-far unquantified tsunami of Chinese domestic debt, observers say, is poised to hammer the global economy further.

The China foil?

Therefore, India as a logical counterweight to Apple's China overexposure, is theoretically a very necessary idea. However, it is proving to be a distant realisation both in terms of India's middle class as well as Apple's ground realities. For one thing, the middle class is nowhere near as big as it was once trumpeted to be. Then, there's the thorny riddle of what phone Apple is going to harness to achieve the same success it achieved in China. The problem is, the Indian market cannot be different enough from China's. The most popular phones in India today are in the sub-$100 segment, but the popular iPhone 6 and 6S, which have been the engine of Apple's fairy tale boom both in the US and in China, cost around $900, which ironically is a little more than the per capita income of Indians.

In other words, only a tiny sliver of Indians today are able to afford these phones -- which is why Apple's previous strategy in India was to flog its older generation phones such as the 4S and 5C, which much of the world had stopped using but cost the Indian around $230. Indeed, it is a testimony to Apple's incredible brand value in the country that many phone buyers, especially youth, would prefer buying an inferior legacy iPhone to a superior and cheaper Android one. This has actually allowed Apple to increase its market share from a negligible amount a few years ago to 2 percent today, shipping 1.7 million iPhones to the country in the last fiscal year. To Apple's credit, the 2 percent market share is misleading -- it actually holds the number three position in terms of sales revenue precisely because of its high prices, and hit $1 billion in revenue last year for the first time, a 40 percent increase over the previous year.

The big question is, can Apple make enough money in India to begin compensating for a future decline in growth in China? Some say that because it focuses on premium phones, and therefore premium pricing, it can grab 50 percent of the 35 million premium phones projected to be sold in India in 2018, which would amount to a tenfold increase from 2015. This is a wildly fanciful estimate perhaps considering where it is today and where India and Indians will most probably be then from an economic and income point of view. Others think it will do well to double its share by 2018, which seems the more attainable goal.

Even if you decide to split the difference between the two estimates, it would represent a trickle considering the 75 million phones the company sold in just the last quarter alone.

The Frugal Indian

In other words, to attain China-like figures in India, Apple has to figure out how to sell phones to a frugally-conscious population where the middle class isn't anywhere as well off as the Chinese and won't be for a while. One way to do that, many of us thought, was by introducing a low-cost phone. Tim Cook has nipped that idea in the bud several times, recently categorically stating again that Apple would not do. (It just doesn't make sense for a premium brand like Apple to erode its brand cache as well as its profit margins in order to chase the volumes that India offers. For now, at least.)

To complicate matters in India, Apple has now pulled its previous generation 4S and 5C handsets that were ensconced in one of the fastest-growing, sub-$250 category of phones -- ostensibly because they couldn't keep pace with their similarly priced but superior-spec'd Android brethren -- leaving only the 5S as an affordable Apple alternative. So where will Apple look to, in order to find its India moment?

One gambit may involve also flogging the prospective 4-inch iPhone 5SE rumoured to make its entrance in the next few months as a smaller alternative to the 6 series. However, even here the 5SE's price may well be out of range for the middle class Indian who prizes a modest sticker tab along with a large screen.

Another involves bringing in refurbished phones from China to sell to Indians, but an almost identical earlier proposal concerning iPads was rejected by the government on the ludicrous grounds that it would add to e-waste in the country.

The Great Push

At any rate, despite the haze surrounding how Apple intends to engineer a surge in India sales, it is putting the pieces together for a concerted campaign. The company has announced a plan to open 500 retail stores, no doubt bolstered by the Indian government dropping its "Make in India" requirement that previously necessitated that 30 percent of a company's products be sourced locally. (It was deep-sixed because there simply weren't any outfits that could currently do the job for companies such as Apple.) Then, there's the other bit of news recently where Apple announced a $25 million technology development site spanning 250,000 square feet in Hyderabad.

Moreover, Foxconn, the Taiwanese contract manufacturer that makes phones for Apple, has announced a $5 billion plant in the Indian state of Maharashtra. In other words, Apple is seemingly putting into place all of the pieces of a vertically-integrated strategy in India that would allow it to control the evolution of its product from birth to post-sales customer service.

This is all fine and dandy but until Apple puts phones into the hands of Indians, no one is going to buy the story of an India Apple boom. And yet Apple's recent success in India, no matter how meagre it may seem in contrast to its China experience, has been because of certain experiments that the company has undertaken in the country. For instance, it has partnered with banks to offer financing, launched buyback plans, and tied up with carriers to offer zero-down payment plans to make its phones more affordable. Whatever strides Apple has made in the Indian market to date has largely been because of these efforts.

Apple will hope that in a market where telecom carriers don't subsidise phones, these and similar efforts will be enough to propel a boom for its products.

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