Why the iPhone can't compete in India
Kunal Dua (@duak) is the Editor-in-Chief at Gadgets 360, Indiaâs largest tech news website with over 40 million unique visitors.
When Tim Cook was in India back in 2016, he said that Apple was in the country for a âthousand years.â With iPhone sales in India on a downward trajectory, the joke doing the rounds is that Apple might actually need that kind of time to make a significant dent in the worldâs second biggest mobile phone market. Unfortunately for Ap ple, any good joke often contains a grain of truth.
Apple reportedly shipped fewer than 1 million iPhones in the first half of this year, according to Counterpoint Research; less than 2 percent of the estimated 60 million plus smartphones that were shipped in the country during the time. Meanwhile, rival Samsung, which has dominated Indiaâs smartphone landscape for several years, shipped 17.4 million smartphones in the same time period, according to analysts at Canalys, while Xiaomi shipped nearly 19 million units.
Apple, a company that seeks profitability per handset over sheer volume, has never really competed with t he likes of Samsung in terms of overall smartphone shipments in India. Still, the latest numbers are disappointing for a company that was steadily increasing market share on a higher volume of sales in recent years. Apple shipped 2.6 million iPhones in India in 2016, a growth of over 50 percent compared to the year before. That number rose to 3.2 million in 2017, but by the end of last year there were signs that the growth was slowing down. According to Counterpoint, Appleâs share of the Indian smartphone market has dropped to just 1 percent as of Q2 (April to June) 2018.
The iPhoneâs share of Indiaâs smartphone market is now at âits lowest in recent history,â according to Counterpoint. Tim Cook, whoâs long been bullish about Appleâs prospects in India, faces what could be insurmountable challenges in finding a secure foothold in the worldâs third largest market for smartphones.
A price sensitive market
The biggest reason for Ap pleâs struggle in India is that its handsets are priced for the very top of the market, while the vast majority of Indian users buy cheaper devices. Appleâs flagship 256GB iPhone X is priced in India at Rs. 1,08,930, or roughly $1,600, while the average smartphone retails at roughly one-tenth the price. According to Counterpoint Research, the âpremium smartphone marketâ â" phones that cost Rs. 30,000, or roughly $450 â" contributes to just 4 percent of the overall smartphone sales in India.
For the last three quarters, smartphone shipments in India have hovered around the 30 million units mark. Yes, they topped 40 million in Q3 (July to September) last year whe n you saw those âIndia is now a bigger smartphone market than USâ stories, but that hasnât been true for any quarter since. All products in Appleâs current iPhone lineup â" except the base variant of the iPhone SE, which starts at Rs. 26,000, or about $380 â" have recommended retail prices that put them in this âpremiumâ bracket. Even if Apple captures 100 percent of this market, youâre still looking at a ceiling of just 1.2 million units per quarter. Of course, Appleâs share in the premium market is nowhere near 100 percent, as it has the likes of Samsung and OnePlus to contend with at the top-end in India.
Itâs no surprise then that the iPhone SE â" a phone that launched over two years ago â" is the second-best selling iPhone model in India, but itâs the top-selling iPhone that might come as a surprise to many. The iPhone 6 is the most popular iPhone in India right now, and by a wide margin. Itâs a phone that will be exactly four years old in Sept ember, and isnât even officially listed on the Apple India website.
Apple silently relaunched the iPhone 6 in India and China in March last year, and though its sticker price is just north of the âpremiumâ Rs. 30,000 price tag, itâs routinely sold at huge discounts via both offline and online channels. Even though its internals are a generation older than the iPhone SE â" which is essentially a faster iPhone 6s in a smaller body â" and both are available at roughly the same price (in fact the SE is often cheaper) the iPhone 6 continues to be more popular for a couple of reasons.
The first is the bigger screen size, which is important when the smartphone is the only Internet-connected device you own, which is often the case in India. Second, is the fact that if you put your iPhone 6 in a case â" which almost everyone does with their precious smartphone â" it can basically pass off as an iPhone 8 at first glance, while the iPhone SE owners have no place to hi de.
While still expensive compared to most smartphones sold in India, the fact that these two iPhone models are often available at around Rs. 20,000 (roughly $300) makes them accessible to a larger section of the population. This strategy helped Apple grow in 2016 and through most of 2017. But with increased sales of cheaper iPhone models, the average selling price had to decline, and it seems not everyone in Cupertino was thrilled about that.
In December last year, a new head of operations took charge at Apple India with slowing growth and the âhigher demand of older iPhones sold at huge discountâ reportedly among the reasons for the change. Industry sources say the new leadership has indeed tried to deemphasize discounts as a strategy to gain volumes, though the discounts havenât disappeared completely just yet. Many Apple-authorised retailers â" the company has no direct retail presence in India, and relies on a network of distributors and retailers to sell i ts products â" however, remain sceptical about the new strategy.
Death by taxes
Appleâs already difficult task has been made tougher in recent times by the Indian government campaign to bolster domestic manufacturing, dubbed âMake In India.â By increasing import duties on mobile phones while simultaneously making imports of the components required for local assembly duty-free, or taxable at lower rates, the Indian government has been pushing smartphone makers to set up shop in the country.
OEM vs ODM
OEMs, or Original Equipment Manufacturers, are companies that manufacture products based on the design and specifications provided by a client. Foxconn, for example, is Appleâs âDesigned in Californiaâ OEM.
ODMs, or Original Design Manufacturers, are companies that design, and often manufacture, new products based on the product ideas of a client. The product is often sold under a variety of brands, but the ODM t ypically retains ownership of the intellectual property.
Practically all major smartphone manufacturers have tied up with ODMs to set up manufacturing facilities in the country. While critics have questioned the amount of value these facilities â" many of which just are just glorified assembly units â" add to the supply chain, the fact is they help OEMs get the sought after âMade in Indiaâ designation, which helps them avoid additional taxes.
Apple started assembling the iPhone SE in India last year, and is now said to be making the iPhone 6s there as well. According to Counterpoint Research, 96 percent of all smartphones sold in India in Q1 (January to March) 2018 were manufactured in the country, which puts most of Appleâs lineup in the minority thatâs still being imported into the country. And with multiple hikes in import tariffs in recent months, India seems keen to punish the OEMs that havenât fully embraced local manufacturing.
âThe Cupert ino giant [has] had to battle rising import tariffs due to lack of âMake In Indiaâ domestic manufacturing capabilities for its portfolio,â Counterpoint Researchâs Karn Chauhan wrote in April this year. âThe import tariffs have increased thrice in the past five months, leading to an increase in the price of already expensive iPhones in India during the quarter.â
The rise in sticker prices of Apple products has had the effect of increasing the amount of unofficial â" or gray market â" imports in the country. âItâs cheaper to buy a return ticket to Dubai, buy an iPhone X, and come back, than buying one here,â says a prominent Apple-authorised retailer on the condition on anonymity.
These gray-market operations would be a lot more profitable though, if you could smuggle multiple iPhone handsets in one go, which people certainly keep trying to do. With Apple India now offering warranty support for phones purchased outside the country, the temptation to p ick up an iPhone in Hong Kong, the US, or wherever youâre travelling, is greater than ever before.
In other words, without factoring in whatâs likely to be a thriving gray market in India, analyst reports estimating the number of iPhones shipped to India only tell part of the story.
Feature phones still going strong
Now this may seem like a strange sentence to be reading in 2018, but feature phones are back in a big way. The truth is, they never really went away in India. And despite three years of slowing sales, they still accounted for over 50 percent of all mobile phones shipped in the country as of the third quarter last year. Then came the fourth quarter which saw sales of feature phones shoot through the roof.
According to IDC, vendors in India shipped a total of 56 million feature phones in Q4 2017, making it âthe highest-ever shipments in a single quarter.â The next quarter was even bigger, with Counterpoint reporting tha t feature phone sales in India doubled year-on-year in Q1 2018, while smartphone sales remained flat.
So what caused this crazy growth in feature phone shipments? The introduction of a 4G feature phone by Reliance Jio, the telco that has caused the biggest disruption in the Indian telecom space in several years. After having forced the competition to follow its lead in offering free voice calls across all plans and reducing data rates to a fraction of what they used to be, Jio last year introduced a feature phone that packed many features offered by entry-level smartphones but at a fraction of the price.
The Jio Phone captured nearly 36 percent of the feature phone market in India in Q1 2018, which, to reiterate, is still bigger than the smartphone market in India in terms of pure volume. Feature phones arenât likely to be stealing market share away from Apple in India (those buying a $25 Jio Phone are unlikely to consider even the cheapest iPhone as a realistic alt ernative), but itâs important to recognize this development to fully understand the Indian market, and to not be blinded by the âsize of the opportunity the country offers.â
The this-is-not-the-USA consideration
Then there are a bunch of other factors that put the iPhone at a disadvantage when compared to the competition. Indians love features like dual-SIM support and expandable storage for the convenience they offer, and the iPhone lacks both. (And no, we donât value the headphone jack as much as many Americans do, sorry.) The average Indian phone consumer also tends to value a spec-sheet over the user experience when making a purchasing decision, which also puts the iPhone at a disadvantage. âA Rs. 1 lakh (roughly $1,450) phone with just 3GB of RAM? I can get twice that for one-fifth the price,â is a statement one hears way too often in India.
While itâs easy to dismiss those points as personal preferences, itâs harder to for give Appleâs software shortcomings. Apple Maps, for example, does not support navigation in India and lacks even the most basic points of interest in major cities, rendering the app practically useless.
Siri does a better job at understanding Indian accents than it used to, but itâs still nowhere close to Google Assistantâs speech recognition capabilities, and lacks features like local restaurant and movie information in India. Thereâs no sign of Apple Pay, even though Samsung Pay has been available in the country for over a year.
All this makes Appleâs job tougher in an environment where buying a budget smartphone doesnât involve the same compromises that it did even a couple of years ago. Today, the needs of more than 90 percent of the worldâs population are adequately served by a $250 smartphone, and that price is only headed downwards.
Most $250 smartphones today have a decent enough build and do a good job with overall performance and battery life. The biggest difference between a smartphone in that price segment and a premium smartphone is the camera performance, and that is a difference that most people donât even notice.
If the only place you will ever see your pictures are on the phoneâs relatively tiny screen or through the prism of an Instagram filter, you are unlikely to notice the shortcomings of your smartphoneâs camera. Itâs this inability to sufficiently differentiate their premium offerings that has reduced the likes of Sony and HTC to bit-part players in the smartphone market, and itâs the same pressure that Apple faces in markets like India.
The way forward
Thatâs not to suggest Apple will go down the same route as Sony or HTC anytime soon. Globally, the iPhone is doing as well as ever, and with the launch of iPhone 8 and iPhone X, the average selling price has actually gone up, not down. But unless the company suddenly decides to introduce a $300 iPhone, i tâs hard to see how Apple can immediately start selling more units in markets like India in a way that will gain them significant market share.â
In the short term, Apple could ease some of the pressure by moving more of its manufacturing to India, but with the limited size of the premium smartphone market in the country, you have to wonder if the gains would be worth the investment.
While Apple continues to wait for the iPhone user base in India to hit the 10 million mark, some analysts are in agreement with Appleâs strategy of not chasing volumes.
âVolume is not the only strategy in India,â says Canalys Research Manager Rushabh Doshi. âAppleâs iPhone shipments to India fell by about 50 percent in Q2 2018. But Appleâs paring back of distributor partners and move to a âbrand-first, volume-nextâ strategy will reap rewards as it will ensure better margin per device. Getting priorities right will be important to smartphone vendors, and it will be a choice between profitability and volume growth.â
Obviously, Apple would prefer profitability and volume like it enjoys in the US, but that will require time. The company certainly has the resources to play the long game in India. âOur objective over time is to go in there [India] with all of our different initiatives from retail and everything else,â Tim Cook said on Appleâs most recent earnings call. âAnd so weâre working toward those things. Itâs a huge market and itâs clear that many people will be moving into the middle class over time, as weâve seen in other countries.â
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