During Indian Prime Minister Narendra Modi’s meeting with American business leaders during his recent visit to the U.S., Apple CEO Tim Cook is reported to have spoken with him about Apple’s first assembled-in-India iPhone – the iPhone SE. Apple started assembling the iPhone SE in Bangalore in May through its partner, the Taiwanese contract manufacturer Wistron Corporation. Over time, this is expected to be scaled up to full manufacturing. (iPhone SE was launched globally in April last year and at a starting price of $399 was positioned as Apple’s cheapest iPhone.) While at present the Cupertino, Calif.-based technology firm sells its iPhones in India through multiple channels like franchisee-run exclusive brand stores, multi-branded stores and online, it is now waiting for approval from the Modi government to set up its own company-owned stores in the country.
Apple is also in talks with the government on various issues like duty waivers on imports of components and permission to bring refurbished iPhones to India. In the company’s earnings call in May, Cook noted that Apple was “underpenetrated” in India and was “putting a lot of energy” here. He said: “We are very optimistic about our future in this remarkable country with its very large, young and tech-savvy population, fast growing economy and improving 4G network infrastructure.”
It’s not hard to understand why India is important for Apple. Last April while announcing its quarterly results, Apple reported, for the first time ever, that sales of iPhones had dropped. The company sold 16% fewer iPhones in January to March 2016 than it had during the same period in 2015. This year, for the first three months of 2017, iPhone sales remained flat. The company sold 50.76 million iPhones, 1% less compared to the same period last year. The drop in China, Apple’s second largest market which accounts for 25% of its profits, was steep: 20%, according to industry estimates.
Ravi Bapna, professor of business analytics and business information at the Carlson School of Management, University of Minnesota, notes: “Assembling iPhones in India is a strategic diversification move by Apple to simultaneously hedge against its manufacturing reliance on China and more easily — with potentially lower costs from ‘make in India’ benefits — tap into the growing upper middle class market in India.”
India is the world’s second largest mobile phone market after China, the third largest smartphone market after China and the U.S. and, most importantly, the fastest growing smartphone market globally among the big markets. According to technology market research firm Counterpoint Research, smartphone shipments in India grew 18% annually in calendar 2016 compared to the global smartphone market which grew at 3%. In the first quarter of 2017, while globally smartphones grew by 10% year-on-year, in India the growth was 15% reaching 29 million units.
“The rollout of 3G/4G mobile broadband networks and digitalization of almost every use-case has been spurring the demand for 3G/4G capable smartphones in India. Smartphone penetration here, which is among the lowest in the world, is on the verge of a massive growth as more and more people adopt smartphones to connect to the internet for rich multimedia communication, content and commerce,” says Neil Shah, research director, devices & ecosystems at Counterpoint Research. The government’s sharp push towards digital payments is also giving it a huge boost.
Anshul Gupta, research director at research and advisory firm Gartner, points out that with slowdown in sales in major markets, India represents the largest opportunity for handset makers. According to Gartner’s data, smartphones (which currently account for around 50%) are expected to account for 62% of all mobile phones sales in India in 2018. “And, while at present the average selling price of smartphones in India is around $100, two or three years down the line, the pyramid at the top will be big,” he adds.
“Apple is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.”–Neil Shah
Benefits of Local Manufacturing
Apple needs to quickly strengthen its India story to make the most of this opportunity. According to Counterpoint’s data, for the January to March quarter this year, the premium smartphone segment in India — phones priced at more than Rs.30,000 ($465) — grew at 35% year-on-year. Apple garnered a 43% market share in this category; up 10% from the same period last year. In the overall smartphone market it has only a 2.6% share (up 0.1% from last year). In terms of India’s smartphone revenue share, Apple is in fifth position with 8.6%. In the first quarter of 2016, it had 10.1% share and ranked second.
Counterpoint’s Shah sees Apple’s new assembling activities in India as a measure towards “building its foundation” in the country. “Apple,” he says, “is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.” According to industry estimates, local assembling and manufacturing can give savings of around 12%. Pointing out that at present India is one of the costliest markets in which to buy a new iPhone and that less than 3% of the total smartphones sold here are in the $600 and above range where most of Apple’s models are positioned, Shah says: “India has never been a priority market for Apple until now when it is seeing that in the next two to three years, the Indian smartphone user base will swell to almost half a billion users and many of them will be buying their second or third smartphone.”
Market intelligence firm International Data Corporation (IDC) estimates that by the end of this year, India will have the second-largest smartphone installed base (smartphones in use) with 334 million smartphones. “This huge smartphone base coupled with the fact that India continues to be largest feature phone market in the world provides tremendous opportunity for phone makers to woo users who are looking to replace their smartphones as well as those migrating from feature phones to smartphones,” says Navkendar Singh, senior research manager at IDC India.
Singh considers Apple’s move to assemble its phones in India as “critical” in terms of the cost savings it will give the company. “This can be used to bring down prices as well as for expanding distribution, channel margins, retail marketing spends and to ensure placement in smaller towns and cities, where the consumer is highly aspirational and strives for a premium brand like Apple.”
Singh also points out that with around 40 local and foreign brands including Samsung, Oppo, Vivo, Xiaomi, Gionee, Micromax, Intex and Lava already assembling and manufacturing in India, the country is fast emerging as the new manufacturing hub for mobile phones and components. He cites “relatively lower labor costs, government push and incentives for local manufacturing coupled with high differential duties on import” as some key reasons for this. “Approximately 65% of phones sold in India are assembled in India. And in the next few years, vendors are expected to start exporting devices to South East Asia and African countries from their India manufacturing operations,” he adds.
Dinkar Ayilavarapu, partner at management consulting firm Bain & Company, gives another perspective. “I wouldn’t undermine what Apple has achieved in India. What is undeniable is that they are a large player in India despite a small volume share. And that could change with domestic manufacturing. Apple, he adds, will “always be a premium priced, premium segment” operator. “I don’t think manufacturing in India is going to change that. For now, manufacturing in India is for iPhone SE, which will be the bulk of what they sell in the country but it will still be premium-priced relative to most other phones in India. Also, most large manufacturers do end up making phones in India, so in many ways this is expected as you scale up.”
“India provides tremendous opportunity for phone makers to woo users who are looking to replace their smartphones as well as those migrating from feature phones to smartphones.”–Navkendar Singh
Chinese Brands at Play
How big a bite Apple manages to get of India’s growing smartphone market remains to be seen. For now, it’s Chinese brands like Xiaomi, Vivo, Oppo, Gionee, Lenovo, Motorola and others who are having an Indian feast. A recent article in business daily Business Standard reports that according Germany-based research company GfK’s global handset update for March 2017, India accounts for 67% of Xiaomi’s sales outside China, while for Vivo it is as high as 73% and for Oppo 48%. For Gionee, 25% of total sales (including China) is from India.
As per IDC numbers, in the first quarter of 2017 China-based vendors captured 51.4% of the smartphone shipments in India with 16.9% sequential growth and 142.6% growth over the same period last year. In contrast, share of homegrown vendors like Micromax, Intex, Karbonn and others dropped to 13.5% in Q12017 from 40.5% in Q12016. Also, for the first time, in Q12017, a smartphone model from a China-based vendor became the highest shipped smartphone as Redmi Note 4 from Xiaomi replaced Korean firm Samsung’s Galaxy J2 which was the top model in Q42016. The Business Standard article quotes a Xiaomi spokesperson as saying: “India is the most important and largest market for us outside China. Our chairman has announced that we would like to invest $500 million in India over the next three to five years in manufacturing, R&D and aftersales, after having invested the same amount till now in the existing business.”
IDC’s Singh attributes this sharp growth of Chinese brands to strong investments in brand building, huge marketing spends and continuing deepening of the distribution networks in the India market. This, he says, is creating “pull and push” for these brands in both offline and online channels. “They have successfully established themselves as a real option for smartphone consumers who are looking for a great quality device, with latest specs and technology, but don’t mind spending a little extra if the whole package is offered as a great value.” Adds Carlson’s Bapna: “In many sectors Chinese companies are out-innovating, by order of magnitude, their global counterparts. One only needs to visit innovation hubs such as Shenzen to see what companies such as Huawei and Tencent are bringing to the table. The Indian consumers have a sharp sense of value, and they see this in the Chinese smartphones.”
Counterpoint’s Shah divides the success of Chinese companies in India into two phases. Phase one, he says was around online distribution while phase two is around offline distribution. He explains: In 2013-2014, Chinese brands such as Motorola and Lenovo entered India with a go-to-market strategy drawing from the e-commerce-only smartphone brand Xiaomi’s success in China. They partnered exclusively with India’s biggest online retailer Flipkart with a direct go-to-consumer model allowing them to distribute smartphones at aggressive price points with no investment needed in multi-layer distribution or marketing. Following Lenovo and Motorola, most of the Chinese brands such as Xiaomi, LeEco, Coolpad, Meizu and others entered India through the e-commerce route. “It has been an easy entry strategy without needing much investment. These companies have been able to offer aggressive price points because of their greater scale in China or other markets which Indian brands didn’t enjoy,” says Shah.
Since the second half of 2016, he continues, there has been an “onslaught” from Chinese brands such as Oppo and Vivo on the offline distribution market on various fronts. For instance, in terms of promotions — Vivo retained its sponsorship for the Indian Premier League, the hugely popular cricket tournament, paying around $340 million for five years; pricing — cheaper than market leader Samsung; place — tier 1 to tier 4 markets; and product — excellent quality thanks to their own R&D and manufacturing. “In just a span of six to eight months, both Oppo and Vivo (both owned by BBK Electronics) have jumped to the top five rankings in terms of market share in the Indian smartphone market.”
Ayilavarapu of Bain thinks the Chinese stronghold could be a passing phase. Pointing out that the largest player in volume and value is still Samsung, a Korean company, he says: “Yes, the Chinese do have a strong share in smartphones but these things change and do so quite quickly. Market share is an outcome in many ways of a product pipeline, so this is a reflection of how the players thought of products a couple of years ago. At its core this is a reflection of product and technology change, and it happens quite often. As new disruption or newer products emerge, it won’t be surprising if others take share.”
“Most players are competing on price-to-feature comparisons. They need to build key differentiators.”–Anshul Gupta
Can India Firms Fight Back?
Why did Indian players lose out in the first place? Rajeev Jain, chief financial officer of Intex Technologies, which according to IDC was at third position with a 9.2% market share in Q12016 but today doesn’t rank among the top five smartphone players in the country, points to two key factors. One, Indian firms were simply not ready for the sudden shift from 2G to 4G that happened when telecom operator Reliance Jio Infocomm disrupted the market last year with its aggressive 4G services. Unlike the Chinese vendors who had 4G products, Indian players had large inventories of 2G and 3G handsets. Two, for Indian firms, the major growth was in rural areas. Most transactions here happen in cash. This got severely impacted during the demonetization exercise last year when the government in a sudden move derecognized the existing Rs.500 ($7.40) and Rs.1,000 currency notes as legal currency. “Even as we were grappling with these two major developments, the Chinese took over the market,” says Jain.
There were other reasons, too. For instance, Indian firms missed out on the pulse of the market, like the craze for selfies and the huge attraction of front-facing cameras. They continued to focus on low-cost entry level phones even as the consumers were willing to pay more for better products with innovative features. They also did not invest in strengthening their retailing network and marketing.
“Indians love brands. Unfortunately many Indian firms have focused on making their brands discount. On the other hand, Chinese companies have focused on making their brands count,” says Jagdeep Kapoor, chairman and managing director of brand marketing consultancy firm Samsika Marketing Consultants. Gartner’s Gupta adds: “They did not build on their strengths and did not develop their portfolios adequately. Most importantly, they did not come up with any innovations.”
Bapna reiterates there is a “larger systemic issue” around technology innovation ecosystems. “When you get a cluster of companies such as Huawei and Tencent in a single region such as Shenzen, you get significant knowledge and human capital spillovers. Also, Chinese universities are ramping up their research capabilities, paying premium dollars for top American academic talent in areas such as machine learning and AI (artificial intelligence) — and that forms the backbone of the next-gen digital business models. There is no such parallel in India, and universities in India are not embedded in collaborative research and innovation with industry,” he notes. Intex’s Jain laments that there are no incentives for R&D in India. “‘Make in India’ is only a jargon. We have to convert it into reality,” he says. Jain is confident, though, that they can make a comeback. Intex, he says, will soon be introducing 25 new models, 16 in smartphones and nine in feature phones.
IDC’s Singh suggests that to get back into the game, Indian firms need to play on their strengths in the sales and distribution networks they had. “These vendors have immense opportunity in quality smartphones at below US$100 which is losing steam since they lost the plot to higher priced offerings by China-based vendors. They should also focus on giving better device experience in terms of OS functionality, camera and battery in this affordable price segment.” Gartner’s Gupta says the main challenge for Indian vendors is to come up with quality smartphones in the $100 to $200 price range with 4G connectivity and the latest processor. “Most players are competing on price-to-feature comparisons. They need to build key differentiators.”
On July 21, in a move that could well disrupt the market at the lower end, Reliance Jio announced a made-in-India 4G phone named JioPhone for as low as Rs.1,500 ($23). This amount will be fully refundable after three years making the phone virtually free for the buyers. The JioPhone comes with unlimited data at Rs.153 ($2.37) a month, free voice calls and free SMS and other features. The pre-bookings for this phone will begin on August 24 and it will be available from September.
Meanwhile, Finnish brand Nokia, which was once the smartphone leader is trying to make a comeback after a long hiatus. In a recent interview with business daily Economic Times, Arto Nummela, CEO of HMD Global, the Finnish company that manufactures and markets Nokia handsets, said: “We are driving the India portfolio first because of the love for the brand in India…. We believe that India will be the biggest market for us in the initial phase.”
“‘Make in India’ is only a jargon. We have to convert it into reality.”–Rajeev Jain
Not everyone is convinced though. Samsika’s Kapoor says: “While Nokia is a familiar name for Indian consumers, its perceived value has gone down. It will have to reinvent itself.” IDC’s Singh feels Nokia’s brand image should be able to give it “initial traction in the market, which needs to be sustained by product portfolio, marketing and distribution investments and a well thought out channel strategy.” Bapna thinks it is going be an uphill battle for Nokia. He points out that Nokia “did not readily transform from a product to a platform-based business model, and the switching costs and network effects are against it. There is a war for app developers, and platform markets are known to be winner-take-all. Customer- and app developer-centric innovations that are part of a strong platform strategy are the key to success in this market.”
Ayilavarapu notes that what worked for Nokia when they were earlier in India was a “large distribution and service network and a high quality team which allowed for exceptional on-ground execution.” But distribution, he says, is not as much of a barrier to entry any more with the emergence of ecommerce. A new player could scale up very quickly if they have the right set of products to offer. “Ultimately, this is the technology space, where changes happen often and players emerge and disappear, on account of these shifts. So the question is: What is the shift which they see, that they will benefit from?”
Gupta, however, believes that a strong physical retail presence is critical to survive in India, for not just Nokia but every player. He points out that while online sales are growing and account for around 20% to 25% of all smartphone sales in India at present, vendors whose products are easily available offline will have an edge. Nokia at its peak, he recalls, had 100,000 retailers selling its product. It’s the same with Samsung now, and Oppo and Vivo are also strengthening their offline presence.
Another key aspect, Gupta says, is customization; devices need to be tailored for the India market and connect with the local buyers. This could be through specific features, local content or even through marketing and promotions. Citing the example of Oppo and Vivo who positioned themselves as selfie experts and targeted the social network savvy younger demographic, Gupta says that many times vendors bring globally launched products, but the trick is to create a niche for your products and connect with the target segment. “At the end of the day, vendors who can develop a strategy of differentiation in terms of experience and ecosystem around services and products will have an edge.”