India upsets the Apple cart

Last month, when Apple’s Chief Executive Tim Cook gave a surprise keynote at the World Internet Conference in China, his appeal for an open internet raised many eyebrows. Not only was it Cook’s second visit to the country in the past two months, but attending a conference that promotes censorship on internet was rather ironical. However, at a time when Apple is facing attacks on multiple fronts —sales of iPhones have been falling for the first time since launch in 2007 — securing markets of the future only reflects the depth of his business acumen.

For a company that operates in hundreds of countries across the globe, problems from time to time are par for the course. However, December 2017 will go down as a particularly bad month in its history. From a bunch of class action suits for slowing batteries to violation of copyrights over its new Apple Store logo in China to its market share falling globally, difficulties have grown on all fronts. But what could hurt Apple the most are the hurdles that it now faces in a relatively smaller market — India.

Recent policy changes made by the government are turning out to be a matter of serious concern for the makers of the iPhone and MacBook. To promote localisation of manufacturing and reduce its import bill, the government increased basic customs duty on mobile handsets — from 10 percent to 15 percent. As Apple continues to import over 85 percent of the handsets that it sells here, the policy change has resulted in the company raising the prices of iPhones by 3.5 percent. Although Apple is considered a premium brand, heightened competition from Samsung, Google Pixel and emerging players like OnePlus has increased the company’s difficulties of late. According to preliminary estimates from Counterpoint Research, sales of iPhone 8 and 8 Plus have remained below expectations since their launch. 

In its bid to increase the user base that currently stands at a little over seven million in the country, Apple may have to consider the costs. Heavy discounting on new models like iPhone 8 Plus — which was launched at  Rs 73,000 in October and is now available at a 10 percent discount on e-commerce sites like Amazon and Flipkart — and pushing older models like iPhone 5S at less than Rs 15,000 may hurt the brand. Apple’s brand value currently surpasses the value of all its other assets. “Apple at  Rs 16,000 (for example) is an oxymoron. But this is unique to India. As the company now aims to grab a pie of the mass market and wants to have a larger share here, it has to work out a new brand framework,” says  brand consultant Harish Bijoor.

The fallout of its aggressive sales strategy is already showing in its bottom-line. While Apple’s profit numbers for 2015-16 are not yet available, between 2014-15 and 2015-16, its net profit margin declined 79 basis points — from 3.75 percent to 2.96 percent. One basis point is one-hundredth of a percentage point. 

To emerge from this mess, says Tarun Pathak, associate director, Counterpoint Research, Apple may have to implement a few fundamental changes in its India policy. For one, it’s time for Apple to significantly increase local manufacturing and sourcing. Currently, its sources only iPhone SE from Foxconn. However, if its popular models — such as iPhone 6, 6 Plus, 6S and 6S Plus, among others —are also made locally, it could save Apple over eight percent of its current manufacturing cost.

“Apple may look at monetising its services— its contents and payments bank. To grow its user base, it may also look into creating a developer ecosystem here. Also, opening of Apple Stores in India can make a big impact,” Pathak says. 

Globally, Apple Stores have played a key role in growing the brand and whipping up enthusiasm about new products. Apple has been planning to open such stores in India for quite some time now, but the matter is still in the negotiation stage with the government over sourcing norms. However, sources in the know say, that the government is no more willing to offer Apple any special concessions in terms of lower import duty or local sourcing —currently, foreign players are required to source 30 percent of their requirements from India to open own retail stores. With hopes of such a waiver dimming, Apple may have to rethink its India blueprint in the New Year.