Mr. Apple goes to India

The more sobering view is that right now India contributes barely 1% of Apple’s total revenues. And even though its growth in the country in the past two years is very real, it can also be attributed to temporary factors. For instance, the consumers’ post-Covid spending spree. It is a fact that Covid left the wealthy Indians’ purchasing power pretty much untouched (if not improved) while causing a lot more damage in the rest of India. So 2022 unleashed a wave of “revenge shopping” in the premium segment while the lower segments stagnated. This is consistent with the numbers. The premium segment in the smartphone market (phones above 30,000 rupees, or 330 Euro) grew by 30% while the ones below shrunk by 15%.

This was fueled by a second temporary factor, namely, the availability of cheap consumer credit. The past years in India have been a veritable bonanza of consumer credit offerings, with traditional banks and NBFCs fighting new fintech challengers in the lending space. And this additional lending obviously targeted the best (richest) consumers.

But Indian consumer markets, while large, are not very deep, a fact that implies a growth ceiling that could make itself present soon. Also, post-Covid purchasing habits might revert to previous ones while inflation is already slowing down the lending business. So can we really project the same growth trend for premium phones going forward?

In this light, Apple’s investment in India as a move to chase market growth does not sound fully right.

A quick look at the below graph hints at a bigger competitive problem that does require Apple’s focus in India. Despite all the growth, the company’s market share in the premium segment has remained substantially unchanged in the past three years. This would mean that Apple’s growth has been driven mostly by overall segment growth and not by any significant improvement in its competitiveness in relation to the other brands. Furthermore, we can observe that the competitors under the “Others” category have grown its collective market share (from 11% to 21%), indicating non-top-3 brands gaining ground and thus increased competition in the segment moving forward.

Apple’s market share has always been defined by its ability to convince consumers to pay their sky-high prices. This is particularly constraining in India, where a 22% import tax (typical for products manufactured outside India) and an 18% GST tax (value added tax) are largely responsible for the final sale price of an iPhone to be substantially higher than in other parts of the world. For instance, a latest generation iPhone costs about 60% more than in the U.S ($1600 to $999). Moreover, Apple has always been very reluctant to offer discounts, to keep their premium image intact. So price becomes a serious problem for Apple if it is to face increased competition and the ambition to develop India’s market beyond current levels.

A related second problem is customers’ satisfaction with post-sales service. Recent surveys point at a real pain point for Apple consumers in finding fast and affordable service from the company. Unless addressed, this could erode the image of quality that critically supports the willingness to pay high prices.

Taken together, all these competitive factors suggest the need for Apple India to reinforce its country strategy, regardless of whether the market keeps growing at the same pace or not. And Apple’s recent moves in India are consistent with that.

Apple seems to have understood that the Indian premium electronics markets, while attractive, are tough to crack for any brand, especially foreign ones. And their strategy is all about reducing the price barrier without sacrificing the brand’s image.

For example, Apple seems to be prioritizing large online retailers like Amazon and Flipkart. These e-commerce giants routinely offer deep discounts on iPhones (often through the disguise of financing plans), which allows Apple to claim that the company itself does not lower prices while at the same time having the consumer face a more affordable price. Moreover, online retailers’ inventory levels are easier to service and their retail strategies (Diwali sale!) ensure predictable and high product turnover. Consequently, smaller brick-and-mortar merchants seem to have been sidelined in the strategy.

At the same time, Apple is moving iPhone assembly to India. This will allow the company to largely avoid the import tax (remember 22%!) and thus gain a lot of breathing room in its cost structure, even if not all that gain is passed onto the consumers. Of course, this supply chain relocation has bigger reasons, like building a global manufacturing alternative to the company’s dependence on China, but nonetheless it fits nicely with the goal to sell more in India.

And what role do the newly opened Apple stores (and future new ones) play? Largely as showrooms, as it is hard to conceive any Indian consumer, rich or poor, paying a higher price in the store instead of just "touching" the product there in order to run to the lower price online. But the buzz created with each store opening and the positioning of the stores as visit-worthy “brand temples” are meant to drive interest while the other channels and financing options close the deal. Moreover, the physical stores can also serve as hubs for a better post-sales service strategy. With this in mind, it would probably make sense to open a few additional stores in the coming years to cover more Tier-I cities.

All in all, it seems a sensible strategy for the company in India, from both supply and demand perspectives. And from a broader country perspective, Apple’s performance in India in the coming years might become a big datapoint for testing the common narrative about premium segments. If, as that narrative goes, those segments are limited in size, Apple and its competitors should hit their natural growth ceiling soon enough and revert to a zero-sum game. If instead they break through and continue double-digit growth in the rest of the decade, well, we will be in a whole new ballgame, not only for smartphones but for the entire country.