Apple Inc. Eyes India As iPhone's Next Big Market, But China-Style Success Won't Be Easy

Apple is now allowed to open its own retail stores in India -- an untapped smartphone market ripe for the picking for a company looking to find the next big growth engine as domestic sales threaten to slow and China's economy cools. But the subcontinent holds its own challenges for Apple -- a premium brand that will need to find a way to compete in a market where consumers have far less cash than in its traditional strongholds.

India will very soon be the world’s second biggest smartphone market in terms of ownership. With a population of 1.2 billion and smartphone penetration under 20 percent, it holds big potential for companies that are increasingly seeing their markets saturated elsewhere in the world -- even in China.

Apple now derives over 60 percent of its revenue from overseas sales. China alone accounts for 20 percent of Apple’s total revenue and provides the second largest margins for the company compared with other regions. Almost all of that revenue is coming from Apple’s newest (and biggest) iPhones, with Tim Cook saying sales in the most recent quarter were up 120 percent over the same period last year. But even China’s smartphone market is now slowing down with a 4 percent decline year-on-year in the second quarter of 2015, meaning Apple will need to look elsewhere if it wants to maintain iPhone growth.

Enter India. The Indian government this week relaxed its Made in India rules -- restrictions that required 30 percent of products to be sourced locally for companies looking to set up shop in the country.

Many see it as paving the way for Apple -- among other Western companies -- to open its own retail stores, though Apple has made no comment on its plans to expand its retail footprint into the subcontinent. “The change in law could remove the biggest barrier for Apple, that is to touch the customers directly. Having full control of the customer presales, during sales and post-sales experience is what Apple aims for and this is welcome news, aligning well with Apple’s vertical integration strategy,” Neil Shah of CounterPoint Research told International Business Times.

However, this is not the whole story. Apple cannot count on a repeat of the success it has experienced in China over the last two years due to economic, cultural and patriotic reasons.

Conspicuous Consumption

The Indian and Chinese markets do share some features: both are huge with growing economies and an increasing middle class, with smartphone sales in China expected to reach 707 million units in 2017 (up from 458 million in 2015), while India is expected to see sales rise from 118 million to 174 million according to Strategy Analytics -- but there are fundamental differences according to Jackdaw Research analyst Jan Dawson. "In China, there is a big conspicuous consumption aspect to the culture where the people want to have the expensive stuff and show it off. In India, that exists in some segments but there is more of a frugality mentality so people want to be seen to have made a smart purchase rather than an expensive purchase," Dawson said.

The frugality is intrinsically linked to the fact that Indians on average are simply not as wealthy as the Chinese. India's middle class is growing, but the scale of it compared to China is still much smaller, while the country's GDP per capita is roughly a quarter of what it is in the People's Republic of China. As Viranch Damani, a contributor to the Techpinions blog, put it, "the buying capacity of Indians is still very limited."

Apple currently has a 2 percent smartphone market share in India, shipping 1.7 million iPhones to the country in the last fiscal year, up from 1.1 million the previous year, according to CounterPoint Research. Although this may seem insignificant considering Apple sold 48 million iPhones globally in the last quarter alone, it is important to remember that just two-and-a-half years ago iPhones were only selling in the thousands in India.

Then Apple switched gears, contracting with multiple, national-level distributors, partnering with banks to back financing, offering deep discounts on older models and providing buyback plans. Apple has seen Indians take to the iPhone in droves. With the launch of the iPhone 6, the company also tied up with Vodafone to offer zero-down payment plans to make the phones more affordable.

According to Damani, most of the iPhones sold in India are from the company's legacy lineup, as it still sells an 8GB iPhone 4S for around $220 to $230, a phone which hasn't been on sale in the U.S. for over a year. "To be honest, these lower-end iPhones are the ones that end up selling the most in India, since this is what Indians can afford," Damani said, adding that these entry level models provide "an underwhelming user experience when compared to their Android counterparts. Apple needs to fix this if it is to grow in India."

National Pride

Another issue facing Apple is one of national pride, according to Dawson, with local manufacturer Micromax currently the top vendor in a market where up to 70 percent of smartphones sold cost under $250. Of the foreign builders, South Korea's Samsung is the biggest but most of its smartphone sales in India come in at under $250. As former Apple CEO John Sculley said recently, at that price “they are not making any money on those phones."

While Apple's share of the market is tiny in terms of units sold, in terms of sales revenue it is the number three manufacturer because of its high prices. Shah said that the company's domination of the premium end of the market will rapidly increase. The analyst predicts the premium ($400 and above) market in India will grow to 35 million units per year by 2018 -- up from 2015's shipments of under 15 million -- and said Apple will grab up to 50 percent of that, which would represent a tenfold increase in shipments compared to the last 12 months.

That bullish position is not held by everyone, however. "I think 5 percent would be a great goal for the next couple of years, that would be more than doubling their current share there. I suspect it is going to be slow growth there, I don't think we are going to see the same kind of explosive growth that you have seen in China in the last couple of years," Dawson said.

The reason for that explosive growth in China was due to Apple clearing two major hurdles. It didn't have a deal with the country's (and the world's) biggest mobile carrier -- China Mobile -- and it also lacked a large-screen smartphone. Addressing those in the past two years has fueled Apple's dramatic rise in China. The company has already cleared these hurdles in India, selling its 5.5-inch iPhone in partnership with the major networks in the country.

Too Expensive

The reason Apple is not selling more phones on the subcontinent is simple -- they are too expensive. India's GDP per capita is roughly a quarter of what it is in China. In addition, just 26 percent of the country is online, according to Internet Live Stats, and there are many challenges facing Apple if it wants to grow market share.

With a population closing in on 1.3 billion, Apple may be tempted to introduce a completely new device at a lower price point, just to capture some of this market, which represents 17 percent of the world's population. But Dawson says he's skeptical about such stories and believes instead Apple will look to focus on incremental increases by offering cheaper, lower-storage models than in other countries and keeping older models on sale for longer.

Another key to Apple's success in China is because iPhones are seen as a status symbols. While Apple products are still viewed as aspirational devices in India, there is another factor that has much more influence on consumers' decision to buy -- and that is the size of the smartphone's screen. "Indians have a great desire for phablets," Damani says. The reason? "For a lot of Indians a smartphone is a primary computing platform because many haven't really used PCs."

While the iPhone 6S Plus does meet the demand for a bigger screen, it is also prohibitively expensive at over $1,000 for the cheapest model, which equates to one third of the average annual salary in India.

But with the government's relaxation of its Made in India laws, this should help Apple grow its market share. Apple has been not been allowed to open its own retail stores in India because foreign companies were not allowed to open brand stores unless 30 percent of the materials were sourced in India. That rule has been relaxed to allow companies that can show their products are so state of the art they could not source the materials in India -- something Apple is very likely to be able to do.

There are already semi-official stores in India -- Apple Shops operate as stores-within-stores to circumvent the rules, staffed by employees partially trained by Apple and offering an experience comparable to a typical Apple Store. Genuine Apple Stores may be next for India, which Apple can ill-afford to take for granted.