India isn't gonna be Apple's next big market and its OK
Apple has been a company that for years has made slick hardware and combined it with easy to use software. However over time the company has come to primarily depend upon iPhones as its money making machine. The iPhone is responsible for a large part of Apple's revenue and an even larger part of its profits.
Recently though, the iPhone has ended up having significant headwinds as described in Neil Cybart's Above Avalon post. In its Q2 2016 results, iPhone sales had declined for the first time on a Y-o-Y basis and even overall revenue had fell for the first time in thirteen years. While some would argue that this is just because of the blow out results iPhone 6 had produced, even on a trailing 24 months basis iPhone sales seem to be on a decline. The major markets for Apple i.e US, China, Japan and Europe are all saturated or near saturation. In fact in the very present quarter, iPhone sales in China had declined a massive 26%.
All the low hanging fruit that enabled iPhone growth are almost over. Expanding distribution and carrier partnerships was a great way for Apple to boost iPhone sales, particularly the partnership with China Mobile made the iPhone available to world's largest carrier by users. Also the jump to phablets with iPhone 6 Plus and 6S Plus was also a great growth enabler, many people who jumped ship to Android because of phablets started coming back to iPhone as experienced by the record number of Android switchers in the past few quarters.
The low hanging fruits for iPhone growth are over and Apple's core markets have very little scope of growth. The three largest smartphone markets in the world are China, America and India. Apple dominates the American smartphone market and has conquered a large part of the Chinese smartphone market.
But when it comes to India, the story is quite different. The country's smartphone market is far from saturation as witnessed by a 23% growth in the most recent quarter and smartphone penetration is just 27%. With just 27% smartphone penetration, there is huge scope of growth for smartphones in India.
However till date Apple hasn't been able to capitalize on India. Apple isn't even among India's top 5 smartphone manufacturers and has a rather minuscule 1-2% market share in India. With Apple's growth in its core markets coming to a stand still, there's growing consensus that India will be the next big growth enabler for iPhones and by extension Apple. However that's very less likely to happen for the reasons I'm going to mention below.
1. India isn't China -
To equate India to China would be inappropriate. Chinese consumers have four times more disposable income than Indian consumers. This plays a significant role as iPhones are pretty expensive in both India and China barring the iPhone 5S.
Also unlike China and other core markets, carriers don't account for a large part of smartphone sales in India. Indian operators don't involve in subsidizing smartphone rates like Chinese and American operators. With Apple strictly limiting itself to the high end, the price of iPhones is by far Apple's biggest hindrance to its dominance in India and previous attempts to venture in mid-range category such as iPhone 5C didn't pan out in India and current attempts like iPhone SE will be no different. Of course, the iPhone SE hasn't skimped on specs like the iPhone 5C but try explaining that to the general public.
2. Messed up pricing -
The cheapest iPhone currently available in India is the 16GB iPhone 5S selling for around $329 in India unlocked. $329 is considered as mid-range in India and iPhone 5S has accounted for the largest portion of iPhone sales in India.
After the iPhone 5S, the next cheapest iPhone in India is the 16GB iPhone SE which sells for around $580 in India. $580 is right in the premium category of Indian smartphone market. Along with the iPhone SE, the 16GB iPhone 6 also sells for $580 and every iPhone model after that only becomes more expensive.
However the problem here is that the majority of iPhone sales in India are primarily driven by the iPhone 5S which will most probably phase out with the launch of iPhone 7/7 Plus that will be made available in India by November. But the crucial aspect over here would be to see if the iPhone SE or iPhone 6 is able to fall from $580 in the current state to $329 in just a matter of 5 months. That's a 43.72% drop in price in a matter of just 5 months.
Predicting the price drop of iPhone SE is difficult as it has launched just a month back in India. However iPhone 6 16GB launched in October 2014. The general procedure is for Apple to cut iPhone prices by $100 when a new model launches. Currently iPhone 6 retails for around $580 on online market places.
Even when the new iPhone 7 and 7 Plus launch, the drop in price of iPhone 6 would be such that it wouldn't go below $450. I also do not expect iPhone SE to retail below $450.
So if the iPhone 7/7 Plus is launched and iPhone 5S is phased out, the cheapest available iPhone's price would actually increase by $120-$150. I also don't expect Apple to vigorously discount the iPhone 6 because the iPhone ASP has already started its downward trend. Apart from this new FDI rules proposed by the Indian government effectively bare online market places from discounting products. A lot of previous iPhone discounts on online market places was done by the marketplace itself, that's effectively barred now.
3. Ban on imported refurbished iPhone sales in India -
Refurbished iPhones would have played a key role in Apple's growth in India. The launch of Apple Upgrade Programme and the leasing plans from T-Mobile and Sprint mean that a lot of iPhones in America are turned over every year.
Both the Apple Upgrade programme and the leasing plans allow users to get the latest iPhone by returning back their previous iPhone. This means a plethora of just one year old iPhones, most of which would be perfectly capable of being used further. However India has turned down Apple's request to import refurbished iPhones in India effectively locking out this market.
Refurbished iPhones when sold can carry much more margin since the phone's original value has already been realized at its first sale. This meant that Apple could very well sell an iPhone SE for just $200 in India and make a pretty decent profit out of it at the same time. It was the perfect way to gain market share yet protect margins as much as possible. The fact that the Indian government has turned down Apple's request for the second time means that this avenue of sales is almost fully closed for the foreseeable future.
4. Services not optimized for India -
In its recent quarterly calls, Apple has repeatedly tried to highlight services as a big revenue source for the company however the same services hardly have any value in India.
Apple Maps no way matches Google Maps in India. Siri is nothing compared to how well Google Now is as a assistant for most Indians. Apple Music hardly competes against Saavn as far as local Indian music is concerned. Any service that Apple releases, India will almost always be at the bottom of its priority.
5. Would India matter anymore ?
Its now worth asking if India matters anymore to Apple. The move to block the sale of refurbished iPhones significantly limits Apple's potential in India. Refurbished iPhones were the only that could have helped Apple gain market share while at the same time protect margins as much as possible.
Once the iPhone 5S is phased away, Apple for the most part will have a portfolio of iPhones costing above 30,000 or $450. This puts Apple firmly in the high end category of Indian smartphone market and this category accounts for <5% of smartphone sales in India. Apple's global share of smartphone profits is already an enormous 94% or so, even if Apple does well in India volume wise, the profits from India will be minuscule compared to what Apple earns in US, China etc.