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Apple still needs a foothold in the world's second-largest smartphone market

Daniel Howley
Technology Editor

Apple needs India to continue to grow, but success will be tough

Apple’s iPhone is by far its most important product. In Q1 2017, the handset generated $54 billion of the company’s $78 billion in revenue, sending shares soaring.

But if Apple (AAPL) is going to keep investors happy, iPhone sales need to continue growing. And with smartphone sales slowing in more mature markets like the US, Europe and China, the iPhone maker needs to redouble its efforts to gain a foothold in the world’s second-largest smartphone market by users: India.

The fastest growing smartphone market in the world, India offers a wealth of opportunity for Apple with millions of potential consumers available to the company. But the tech giant has to overcome some rather large hurdles to make a dent in the country’s overall smartphone landscape.

What’s more, India presents unique challenges that Apple might not necessarily want, or be prepared, to deal with — including still-maturing wireless infrastructure and steep competition from Chinese competitors. Still, the cash might be too good to pass up.

Opportunities abound

With a population estimated at about 1.4 billion people, India is the world’s second most populous country behind China. And according to a 2016 study by economists Neeraj Hatekar and Sandhya Krishnan of Mumbai University, about half of the country’s population is considered middle class with that number expected to continue to grow.

Apple’s needs to get its iPhone into the hands of more Indians to continue the company’s growth. image: Getty

What’s more, as Citi Research analyst Jim Suva points out in a recent note, smartphones make up just 30% to 35% of India’s overall mobile market. That makes for an enormously untapped market for smartphone manufacturers. On top of that, 4G infrastructure is still rolling out across the country, meaning more people will soon have access to high-speed internet connections adding to the pool of potential smartphone consumers.

Apple, meanwhile, is already experiencing moderate success in India. According to CEO Tim Cook, the company set new revenue records in the country in Q1 2017, and intends to further grow its presence there.

What’s more, when it comes to the premium smartphone market, Apple is king in India. But according to IDC Research’s Kiranjeet Kaur, the number of consumers purchasing those high-end handsets is exceedingly small. The premium segment made up just 2% of the 110 million smartphones sold in 2016.

The roadblocks ahead

Unfortunately, some significant roadblocks stand in Apple’s way. For one thing, Apple doesn’t have traditional retail stores in India. That’s an enormous weakness, as it limits how the company can move its products and cuts off its ability to provide the customer service experience Apple prides itself on.

That doesn’t mean there aren’t any retailers selling Apple products in India, though. The country has Apple Premium Resellers and Apple Shops, which are essentially kiosks inside other retail stores. But they are a far cry from Apple’s own brick-and-mortar operations.

Apple’s iPhone SE is one of the mid-range devices available in India.

Bloomberg notes that India requires single-brand retailers, like Apple Stores, to source at least 30% of their components from India. That’s a tall order for a company like Apple, which sources materials for its devices from all over the world.

The company is also trying to reduce how much it is taxed on imports to India, Suva wrote in his note. “Apple is seeking lower import duties and other incentives to do so during a hot Indian election season and a government campaign to produce goods domestically,” Suva wrote.

In order to at least partially meet that requirement, Apple has announced that it will begin building iPhones in India. Those phones will then be sold directly to Indian consumers.

But building phones in India is only a part of the company’s problem. There’s also the simple fact that the iPhone is a premium device. And while India’s middle class is growing, there still aren’t very many people who can afford devices that range in price from 30,400 rupees ($464) for the iPhone 6, which the company recently released in the country after discontinuing it in the U.S., to 89,999 rupees (about $1,374) for a 256GB iPhone 7 Plus.

Instead, many consumers in the country opt for lower-cost handsets. “In 2016, 40% of the iPhones sold in India were the iPhone 5s priced below $400,” Kaur said.

Meanwhile, Samsung — which according to IDC Research owns 25% of India’s smartphone market — is making a large dent in the region’s smartphone market share by selling devices that cost less tan Apple’s offerings. 

Apple also faces stiff competition from familiar Chinese companies like Xiaomi, Lenovo, Oppo and Vivo, all of which have managed to make headway in India, muscling aside local manufacturers, as growth in their home market has slowed.

Apple’s iPhone 5s is currently available in India.

So will Apple produce a low-cost device specifically for Indian consumers?

As Ramon Llamas, research manager for wearables and mobile phones with IDC, explains it, building a low-cost iPhone for India would mean Apple would have to spend a good deal of money to target just one market. And while there is certainly opportunity in India, there’s no way to guarantee that spending that kind of capital to manufacture a device for a single country will pay off in the end.

“For Apple the question is, how far down the rabbit hole do you want to go?” Llamas explained. “It’s one thing to do sourcing, but when it get right down to it, once you’ve taken care of the sourcing, the question becomes, how far down can your bring the price? These phones are expensive devices.”

Kaur also notes that moving into the low-cost smartphone space would hurt Apple’s image as a premium device company. “One of Apple’s biggest strengths is the ‘premium’ tag attached to the brand, and if a product is brought in for a comparatively lower-end segment, consumers may not respond positively to it.”

Outside of its devices, Apple also needs to ensure that its software is tailored to the tastes of Indian audiences. As The Washington Post points out, Siri has trouble recognizing Indian cities and names.

Apple’s best bet is to try to work with the Indian government to build its own stores in the country and continue marketing its products to consumers with more disposable income. Kaur also suggests offering easy and affordable payment plans, presenting a strong marketing campaign and extending channel reach will play a key role for Apple to expand in the country.

Whatever path Apple chooses, the company needs to make serious moves in India soon if it’s going to see the kind of growth investors have come to expect.

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Email Daniel at dhowley@yahoo-inc.com; follow him on Twitter at @DanielHowley.