After largely ignoring the country for many years, why is Apple currently bullish on India? What does it have up its sleeve?
Apple and India have had for the longest time a singularly peculiar relationship.
The company’s founder Steve Jobs had a famous connection with the country, taking a trip to the Himalayas in search of spirituality, even though he did publicly state that after visiting India he realised that “maybe Thomas Edison did a lot more to improve the world than Karl Marx and Neem Kairolie Baba [a Hindu guru]”.
Apple the company, though, hasn’t always loved India back: Jobs shut the company’s only India office, a software development and support centre in Bangalore, in 2006, just two months after it opened with much fanfare; reports at the time suggested that the mercurial CEO found the quality of the company’s Indian operations lacking.
The iPhone-and-Macintosh-maker has also never taken the Indian market very seriously, with current CEO Tim Cook saying in 2012 that “he loves India but the multi-layer retail distribution structure present in the country” (brought on by the Indian government’s strict regulation surrounding FDI in single-brand retail) meant that in the intermediate-term there are larger opportunities outside India.
Apple <3 India
The last few months, however, have seen the pendulum swing the other way. Apple can’t get enough of India now. Last month, the Economic Times reported that the company had filed an application with the Department of Industrial Policy and Promotion to finally open its much-vaunted and inimitable range of Apple retail stores in India.
A week later, during a conference call with analysts, Cook sang paeans to the potential of the Indian market and noted that Apple had redoubled efforts to crack the Indian market. In the most recent quarter, revenue in India surged 38%, surpassing the 11% growth seen in a majority of developing markets. Forbes compared Cook’s overtures and the company’s recent advertising campaigns to that of a groom trying to woo a bashful Indian bride.
And last week, news broke that Apple had signed a number of MoUs with the Telangana government for the opening of a new Rs. 150-crore software development centre in Hyderabad; a centre that will employ over 4,500 people.
A largely hopeless cause
Apple has had good cause to ignore the Indian market for so long: the company’s method of making money runs diametrically opposite to the nature of the Indian smartphone market and the average income level of the Indian consumer.
The company’s product proposition is bafflingly simple: ‘We offer you arguably the best smartphone in the market and you will pay as much as we ask you to’. Arrogant as it may seem, this business model works.
As tech analyst Horace Dediu put it, “Apple’s lack of market monopoly coupled with a near monopoly in profits can only be explained by disproportionate value creation.” What has aided this unprecedented increase in value creation is that the prices of Apple smartphones have been historically masked in Europe and United States by carrier subsidies.
None of this works in India though. IDC figures from the end of 2015 show that while a little less than 20% of all smartphones sold in China were priced less than $100, in India close to 50% of all smartphones shipped during the same period were in the sub-$100 price segment. Indian consumers simply can’t shell out that much money and Apple’s market share in the country reflects that.
The chart above shows the market share for different smartphone companies in India in 2015 and the one below for 2013.
Take a look at the pie charts above. There are a few minor shifts – the fortunes of companies such as Nokia, Sony and Karbonn have shifted in favour of Intex, Lava and Lenovo. But the broad structural characteristics of the Indian market remain the same. Samsung and Micromax remain the leaders; new competitors such as Intex, Lenovo and a host of Chinese companies fight over low margins and churn out phones that are of high-quality but come with a relatively cheap price tag.
While there are new (some would say innovative, others would say empty attempts at raising hype) forms of retail channels such as online flash sales, the crucial criterion that drives sales – price – hasn’t changed.
To its credit, Apple has managed to nearly double its market share in the country over the past two years. In the process, however, it has had to really reach into the bottom of the barrel with EMI schemes, buyback programmes and partnering with bigger retail partners. The company has slashed prices on older phones with the hope of boosting market-share. These attempts, however, have had a quick and adverse effect on its high-margins strategy.
Age-old pundit advice would demand of course that Apple produce a cheaper iPhone, one specifically meant for developing countries, but that would only drag the company down to the level of its perennially profitless Android brethren.
Apple’s next phase
What gives then? Why is Apple so bullish on India? The simplest explanation is that with China’s smartphone market slowly heading for saturation, Apple has no choice but to look at India, regardless of whether the company has a fool-proof plan to crack the market while retaining its appetite for high profits.
A more nuanced perspective is that Apple is banking on a number of factors. Whether this will amount to anything if Indian income levels don’t tick up, and they start spending more on their smartphone purchases, remains to be seen.
1) The Apple Store: The pièce de résistance of Apple’s retail strategy; a corporate retail outlet that has the highest sales per square foot of any commercial real estate space. More importantly, the Apple Store is the first step in establishing Apple as a luxury brand. If you’re shelling out over Rs. 60,000 on a smartphone, you need to be able to buy into the experience; to flaunt your purchase and more importantly to do it in style.
As tech analyst Om Malik puts it, the Apple Store is “the gateway drug to the Apple experience”. India has no Apple Stores: sales are done through through a whole range of stores from the common, where iPhones are placed next to Samsung phones like a vegetable cart vendor, to Apple’s “authorised resellers” which are better but still a pale imitation of the real Apple Store.
Does Apple believe that opening Apple Stores in India, as it plans on doing, will raise sales? A few commentators and analysts believe so. If this is to be accepted, however, one has to buy into two main assumptions.
The first goes something like this: Apple isn’t considered a luxury product right now but with the Apple Store coming to India, it will be. This is a difficult premise to swallow: India’s elite flaunt their iPhones, journalists are given iPads as Diwali gifts, and India’s youth stick Apple stickers on their normal PCs. iPhones are more of a Veblen good in India than the US; Apple is the very definition of luxury in India.
The second assumption, which makes more sense, is as follows: Apple products are luxury items, but the process of purchasing an Apple product in India is anything but luxurious. Apple’s authorised resellers in India don’t do a very good job of letting consumers hold, touch and ultimately fall in love with an iPhone or iPad. If one is to accept that there is a certain magic present in the Apple Store, it’s safe to say that there’s no magic currently in the stores that sell Apple’s products in India.
While the primary premise here is still weak – that the opening of Apple Stores will result in more footfalls and sales than the current stores selling Apple products – it’s a plausible outcome.
2) The Refurbished iPhone Plan: Come September, India and other developing countries will be flooded with refurbished versions of the relatively latest iPhone. Last year, the company introduced an ‘iPhone upgrade scheme’ in the US that puts its customers on a slightly more expensive permanent rolling contract in exchange for a new phone every year. As part of this deal, consumers are required to hand in their one-year old iPhones to Apple every year.
What this means is that Apple is explicitly entering the second-hand market for iPhones: the company plans on taking these old iPhones, putting them through a strict examination of quality testing, give them a new serial and IMEI number and package it along with a one year warranty. These phones can then be sold in developing countries for anywhere between $260-$350 (the current going price in Western markets for a year-old iPhone).
As it happens, Apple has currently applied for permission from the government to import and sell these type of phones in India. In order for it to receive permission it has to prove to the environment ministry’s Technical Review Committee that it isn’t trying to move e-waste from the US to India.
If this does come through -what could happen is that when the iPhone 7 comes out later this year, a one-year old, refurbished iPhone 6S could be sold for approximately Rs. 25,000 in India. It would normally take the company three years to be able to drop prices to that extent; the iPhone 5S is currently sold online in India for Rs. 25,000. If the refurbishing plan goes through, the company could shorten this time period to one year.
The question then becomes: Will Indians be willing to buy refurbished phones? What is worse: Buying a brand-new, albeit two-year old model? Or a year-old model that has been used by another person for one year? Or will Indians simply reject both options?
How will Apple market and advertise these phones? It’s difficult to imagine how one would put a positive spin on a used iPhone, but if anyone is capable of doing it, it’s Apple.
Ultimately, both these factors that Apple may be banking on to improve its market share here in India aren’t product or technological innovations. They are clever ways of pumping up sales numbers. That doesn’t mean that Apple should rush to offer more discounts or bring out cheaper iPhones; that’s a rush to the bottom that every player should avoid.
It’s a waiting game: the Indian consumer and market isn’t a shy animal that needs to be carefully coaxed into eating food out of a person’s hands. The average Indian consumer simply needs to have more discretionary income to spend, like the average Chinese consumer, and until that happens Apple may need to look elsewhere for growth.
Featured image credit: Aasif Iqbal J/Flickr, CC BY 2.0.
Edited: This piece has been corrected for a factual inaccuracy (Telangana government and not government of Andhra Pradesh)