When Tim Cook was in India back in 2016, he said that Apple was in the country for a “thousand years.” 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 world’s second-biggest phone market for feature phones and smartphones. Unfortunately for Apple, 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 India’s 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 the 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, Apple’s share of the Indian smartphone market has dropped to just 1 percent as of Q2 (April to June) 2018.
The iPhone’s share of India’s smartphone market is now at “its lowest in recent history,” according to Counterpoint. Tim Cook, who’s long been bullish about Apple’s prospects in India, faces what could be insurmountable challenges in finding a secure foothold in the world’s third-largest market for smartphones.
A price sensitive market
The biggest reason for Apple’s struggle in India is that its handsets are priced at the very top of the market, while the vast majority of Indian users buy cheaper devices. Apple’s 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 “premium smartphone market” — phones that cost Rs. 30,000, or roughly $450 — 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 when you saw those “India is now a bigger smartphone market than US” stories, but that hasn’t been true for any quarter since. All products in Apple’s current iPhone lineup — except the base variant of the iPhone SE, which starts at Rs. 26,000, or about $380 — have recommended retail prices that put them in this “premium” bracket. Even if Apple captures 100 percent of this market, you’re still looking at a ceiling of just 1.2 million units per quarter. Of course, Apple’s 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.
It’s no surprise then that the iPhone SE — a phone that launched over two years ago — is the second-best selling iPhone model in India, but it’s the top-selling iPhone that might come as a surprise to many. The iPhone 6 is the most popular iPhone in India right now by a wide margin. It’s a phone that will be exactly four years old in September, and it isn’t 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 “premium” Rs. 30,000 price tag, it’s routinely sold at huge discounts via both offline and online channels. Even though its internals are a generation older than the iPhone SE — which is essentially a faster iPhone 6s in a smaller body — 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 — which almost everyone does with their precious smartphone — it can basically pass off as an iPhone 8 at first glance, while the iPhone SE owners have no place to hide.
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 “higher demand of older iPhones sold at huge discount” 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 haven’t disappeared completely just yet. Many Apple-authorized retailers — the company has no direct retail presence in India, and relies on a network of distributors and retailers to sell its products — however, remain skeptical about the new strategy.
Death by taxes
Apple’s already difficult task has been made tougher in recent times by the Indian government campaign to bolster domestic manufacturing, dubbed “Make In India.” 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.
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 — many of which just are just glorified assembly units — add to the supply chain, the fact is they help OEMs get the sought after “Made in India” designation, which helps them avoid additional taxes.
Apple started assembling the iPhone SE in India last year, and it’s 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 Apple’s lineup in the minority that’s still being imported into the country. And with multiple hikes in import tariffs in recent months, India seems keen to punish the OEMs that haven’t fully embraced local manufacturing.
“The Cupertino giant [has] had to battle rising import tariffs due to lack of ‘Make In India’ domestic manufacturing capabilities for its portfolio,” Counterpoint Research’s Karn Chauhan wrote in April this year. “The 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.”
The rise in sticker prices of Apple products has had the effect of increasing the amount of unofficial — or gray market — imports in the country. “It’s cheaper to buy a return ticket to Dubai, buy an iPhone X, and come back, than buying one here,” says a prominent Apple-authorized retailer on the condition of anonymity.
These gray market operations would be a lot more profitable 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 pick up an iPhone in Hong Kong, the US, or wherever you’re traveling, is greater than ever before.
In other words, without factoring in what’s 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 “the highest-ever shipments in a single quarter.” The next quarter was even bigger, with Counterpoint reporting that 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 aren’t 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 alternative), but it’s important to recognize this development to fully understand the Indian market, and to not be blinded by the “size of the opportunity the country offers.”
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 don’t 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. “A Rs. 1 lakh (roughly $1,450) phone with just 3GB of RAM? I can get twice that for one-fifth the price,” is a statement one hears way too often in India.
While it’s easy to dismiss those points as personal preferences, it’s harder to forgive Apple’s 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 it’s still nowhere close to Google Assistant’s speech recognition capabilities, and it lacks features like local restaurant and movie information in India. There’s no sign of Apple Pay, even though Samsung Pay has been available in the country for over a year.
All this makes Apple’s job tougher in an environment where buying a budget smartphone doesn’t involve the same compromises that it did even a couple of years ago. Today, the needs of more than 90 percent of the world’s population are adequately served by a $250 smartphone, and that price is only headed downward.
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 don’t even notice.
If the only place you will ever see your pictures are on the phone’s relatively tiny screen or through the prism of an Instagram filter, you are unlikely to notice the shortcomings of your smartphone’s camera. It’s 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 it’s the same pressure that Apple faces in markets like India.
The way forward
That’s 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, it’s 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.
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 Apple’s strategy of not chasing volumes.
“Volume is not the only strategy in India,” says Canalys Research Manager Rushabh Doshi. “Apple’s iPhone shipments to India fell by about 50 percent in Q2 2018. But Apple’s paring back of distributor partners and move to a ‘brand-first, volume-next’ 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.”
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. “Our objective over time is to go in there [India] with all of our different initiatives from retail and everything else,” Tim Cook said on Apple’s most recent earnings call. “And so we’re working toward those things. It’s a huge market and it’s clear that many people will be moving into the middle class over time, as we’ve seen in other countries.”