You know the old expression, and Apple a day keeps the doctor away… well I had some thoughts on the stock on Friday (Home for the Tax Holidays) as it relates to some hot-button political issues (taxes/cash repatriation/immigration/domestic jobs- manufacturing) and this morning I wanted to highlight an article from Bloomberg’s Saritha Rai. It’s on Apple’s prospects (and challenges) in India, World’s Fastest-Growing Smartphone Market Could Become a Manufacturing Hub:
India overtook the U.S. this year to become the world’s second-largest smartphone market by users and is projected to generate a billion smartphone sales in the next five years. Yet the value added through local manufacturing is paltry compared with other countries like China and South Korea, where 70 percent and 50 percent of the work is done domestically, according to the research. Modi, who has made the Make in India program a centerpiece of his economic policy, wants more of those jobs if his country is providing such a lucrative market.
The main point here, is that foreign smartphone companies who hope to sell to hundreds of millions of Indian consumers in the next decade will need to localize r&d and production if they hope to sell through retail channels, which has been Apple’s differentiating strategy to capture a disproportionate share of the high end smartphone market in the last decade, per Rai:
Apple Inc., Samsung Electronics Co. and Xiaomi Corp. have been stepping up their efforts in India as growth in the U.S., China and other markets slows. Apple CEO Tim Cook made his first trip to India in May and his company has been lobbying for the right to set up its own retail stores. Under current rules, companies such as Apple need to procure 30 percent of their components in India if they want to operate their own retail outlets.
AAPL is coming off of its first fiscal year with annual earnings and sales decline in 15 years. The company has been unable to meaningfully replace declining iPhone and iPad sales with a new category or product hit, growth markets like India will need to pick up the slack from markets like China where growth has massively decelerated in the past year. On AAPL’s Q4 call two weeks ago Cook once again highlighted the opportunity in India:
“Our iPhone sales in India were up over 50 percent in fiscal 2016 compared to the prior year, and we believe we’re just beginning to scratch the surface of this large and growing market opportunity,”
It’s important to note that this is off a very low base. As Arjun Kharpal from CNBC described:
But like China, India will be a tough market to crack Apple, despite almost 125 million smartphones set to be sold in total this year, where iPhones are still a small player.
The company shipped around 2.5 million units between October 2015 and September 2016, according to Counterpoint research, giving Apple a 2.2 percent market share. While this is up from the 1.6 percent share in the previous year, Apple could struggle to penetrate a country that is used to buying cheaper devices.
Device pricing in emerging markets like India might have a massive impact on the company’s profitability, which Business Insider this weekend highlighted Analysts are openly worrying about Apple’s future profitability. Back in April I had some thoughts on AAPL’s opportunity in India, and why it might be very different than that of China over the last 5 years:
Yeah smartphone penetration is very low in India, and will be a decade long growth story. And I also know that iPhone’s are aspirational products that people of all demographics in most geographies will stretch to buy, but this trend in countries like China and India is challenging because of the cost of an iPhone (not subsidized) is 13.5% and 26.5% of annual household income respectively. In the segment, Tim Seymour mentioned markets like Indonesia. But as BGR.com (via Deutsche Bank from last August) noted, an iPhone costs about 40% of the median annual house income in that country. AAPL’s slowing total sales growth is a function of price, they are hitting a wall with new customers who can afford their product that in the latest quarter represented 68% of their total sales, had an average selling price of $691 and margins above the company average of 40%.
AAPL has less than 2% market share in India, recently crossed $1 billion in annual sales a country that has a population of 1.2 billion people, and smartphone penetration below 20%. And AAPL knows full well that India will very soon be the second largest smartphone market after China, where less than half of new cellphones sold in India are smartphones, while 4G penetration is very low, low single digits actually
Make no mistake, India is a far more important to AAPL in 2017 than whether or not they sell 30 million watches. The country offers the next leg of hyper growth, but that could come at the cost of lower profitability for a company with a whopping ~40% gross margin on their device and that accounts for 70% of their $200 billion+ in annual sales.