By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.
The Wall Street Journal reports today:
Apple Inc. is discussing with the Indian government the possibility of manufacturing its products in the country, according to two senior government officials, as the company seeks to grow its sales and presence in the South Asian nation.
In a letter to the government last month, the Cupertino, Calif., firm outlined its plans and sought financial incentives to move ahead, the officials told The Wall Street Journal. Senior Trade Ministry authorities in recent weeks met to discuss the matter.
Pursuing such a strategy certainly makes sense for Apple. For although its products are cult items among India’s affluent, the company currently only has less than a 5% market share, according to the Journal. Apple had asked the government in January to allow it to open retail stores in the country. It was restricted from doing so by foreign direct investment (FDI) requirements that tied the retail operations the company can open to meeting local sourcing requirements.
The lack of easily availability of the latest Apple products– and their higher price, compared to the United States (and also Singapore)– inevitably leads to many requests to frequent visitors to India that begin with the “When you next come back to India, would you mind….” Speaking purely selfishly and self-interestedly, I welcome the opening of seeing proper Apple stores in India, because it would mean I wouldn’t have to dodge so many of these requests– which sometimes come from the most casual of acquaintances.
The key question is: what sort of “financial incentives”– aka deal, will the Modi government be willing to agree to that would allow Apple to get access to what’s now the second largest smartphone market in the world (when measured by users, as opposed to product costs).
Second Largest Smartphone Market
In the last couple of decades, India has considerably liberalized its economy, and that includes facilitating outside investment. Yet it has been in some ways more reluctantly embraced neoliberalism to the extent that other Asian countries have done. Nonetheless, as reported in June article in The Hindu, the Modi government in June announced a:
“radical liberalisation” of the Foreign Direct Investment (FDI) regime by easing norms for a host of important sectors including defence, civil aviation and pharmaceuticals, opening them up for complete foreign ownership.
Yet this was by no means a blanket, across-the-board-libralization. The government was not willing in June to turn over the keys to the candy store in its smartphone market. And in fact, again quoting from the same article, it instead took the opposite tack:
[T]he government has tightened rules for such companies producing items with cutting-edge and state-of-art technology — by giving them only a three-year blanket exemption from the 30 per cent local sourcing norm over and above the five years where the 30 per cent procurement requirement would have to be met as an average of five years’ total value of the goods purchased. This is to ensure that they manufacture in India rather than making profits through just trading activities.
India Surpasses US as Second Largest Smartphone Market
India has become the second-biggest smartphone market in terms of active unique smartphone users, second only to China, and crossing 220 million users, surpassing the US market, according to a report by Counterpoint Research, quoted in a February article in The Hindu.
The various figures I’ve seen put the rate of current smartphone penetration at just under 30%. As an aside, although the huge size of India’s population means this 30% translates to a huge absolute number of smartphone uses, the relatively low overall percentage of such users is one of the problems exacerbating the government’s disastrous demonetization policy, with its push to get people to eschew cash in favour of digital transactions. (I have written about demonetization, here, here, and here). Although even the poorest of Indians often have basic mobile ‘dumb phones’, these do not accommodate digital transactions.
What Happens Next?
At the moment, it appears that Apple needs greater access to the Indian market more than the average Indian needs access to iPhones. Quoting today’s Journal article again:
In the quarter ended Sept. 24, Apple reported its first annual revenue decline in 15 years amid lukewarm iPhone sales. But revenues have been rising in India, Mr. Cook said at the time, adding that “We still believe we’re just kind of scratching the surface there.”
Apple would just be scaling up its penetration in a huge dynamic smartphone market, described by Tarun Pathak, senior analyst at Counterpoint Research, in the February article in The Hindu quoted above in these terms:
“Though India still has a long way to go as the smartphone penetration of the total potential population is still below 30 per cent. As a result, India continues to attract new smartphone brands every quarter adding to the more than 150 smartphone brands selling their devices in the country. Furthermore, government-driven initiatives such as Make in India and Digital India had gained momentum in 2015 to attract more players in the mobile value chain. Almost half of the total mobile phones shipped in India during the quarter were assembled in India, driving the Make in India trend. We estimate this trend to scale even faster and broader in 2016.”
So to repeat my question: What Happens Next? I guess we’ll just have to wait and see.
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Given Apples desperate need for new markets for growth now that they seem to have run out of new ideas, I would have thought Modi has all the cards. Not least because the longer they stay out of India, the more chance there is that India will develop indigenous companies that could in the long run compete with Apple worldwide. They certainly have the technical know-how to do it.
I agree with you– but then I wondered whether I was missing something. If I am, I don’t think it’s obvious.
I am afraid I disagree with the writer of the post and with others too. It is a fallacy to contend that India will make its own Apple- like products as it has the know-how. Here permit me a short laughter. Indians, including the elite ones like Apple as it is not made in india- everything foreign is glamorous to possess here. And Apple certainly has a hallowed product presence (never mind that most of its core parts were developed in US Government Labs).That India can make an indigenous product is an empty boast. India can barely make scooters and motor cycles though the know how is a hundred years old. The ones made in India are shoddy- foreign ones like Honda Kinetic and Italian Vespa are hot products Indian are eager to buy….Most of Indian watches are made even today on Swiss know how…..Indians just cannot make high quality technical products period. So why bring on “racist laws” and local know how here? Another attempt at empty argumentative Indian talk?!
I have to agree with you about Indians not capable of making any sophisticated technical products, let alone invent something.
Almost all the basic components for making a smartphone are available on the open market. Its really just a case of packaging them together and marketing – something Indians are more than capable of doing. Plenty of relatively small companies make phones which would be of a quality of the iPhones from 4 or 5 years ago, which if sold cheaply would be perfect for the Indian market.
Agree with PlutoniumKun. The subassemblies are all commonly available and it is “just” a matter of systems integration which the Indian engineers can handle just fine ( didn’t they just sent a spacecraft to Mars for a paltry $75M ).
I don’t think shoddy manufacturing is proof of anything regarding Indian competence, it is more likely that with such a large underserved population the lowest price producer is able to sell and make a tidy profit because the market is not demanding better as he can always find buyers for his shoddy goods. Post-war Japanese made crappy goods for a long time not because they didn’t know any better but because that is what their western buyers demanded.
The major questions are the ability to replicate Apple’s walled garden OS, attractive design and the relative security of its devices. When Blueberry went to India it was the beginning of its end because it had to publicly give up the security it was famous for and permit backdoors except on corporate accounts, will this happen to Apple ? Has it already in exchange for access to China ? After Xin came to power I suspect Apple may have turned off international iMessage and FaceTime access within China thus severely compromising the benefits of their walled garden. Friends I used to be able to call in China via FaceTime I can’t anymore.
Shoddy manufacturing is the central feature of Indian manufacturing sector and therefore indicative of incompetent technological culture. Analogies without historical context- even in the ‘comment’ section of a website- are indeed running on slippery earth. For Japan’s shoddy products in the 1950s are still famous (at least among Economic Historians), it took less than twenty years for Japanese capitalism to capture the heavy machinery and car markets in U.S. and Europe by 1970s, feeling its way from marketing Transistor Radio Set in1950s. That is a short time indeed. What may be noted is that the very stature of Japan and its ‘competence’ the world had occasion to see in the defeat of Imperial Russia at the hands of the Japanese in 1905-full fifty years before reinventing its capitalism. That force of military organization points to severe ‘competence’ at societal level. Needless to say that India is an ‘independent’ nation for more than 70 years and still its products are shoddy across the spectrum (excepting the handicrafts and silk-textiles traditional sectors). That is a long time indeed and calls for my utterance-Indians just cannot make high quality technical products period. The only war India has fought since 1857 was in 1962 when it was savagely mauled by the Chinese. (Skirmishes with Pakistan are generally small affairs though looking dangerous with increasing weapons capacities on both sides). Competent products are made by competent Capitalism that is created by a competent Cultural attributes and India lacks them totally period. All else is old fashioned Indian boasting.
This is more about China than India, China has its foot on Apple’s throat, both major market and in supply of components. Apple’s nervous about how China can and has already manipulated its stock price.
Can you elaborate on that? So far as I’m aware almost all components for iPhones come from outside China – most notably Japan, Korea, Germany and (even!) the US. How has China manipulated Apples share price?
Touch screens, for one were made in China, and with the failure of Apples Sapphire screen partner in the USA, which was in part a move to get off the China teat, they are looking around for another partner. Failure of the US partner in part was due to not finding a clean, non-labour intensive way to make the screens, BTW, the story of how Ananda actually built a factory and started making touch screens before they even had a contract from Apple as part of convincing Apple to go with China for the iPhone first production is one of those stories that consultants like to use/abuse about the new market.
Stock manipulation, I’ve made three post on NC in the past about different cases. If you want, then dig through Google search to find comments under my name on apple. I don’t have the time.
Interesting, thanks.
I guess there will soon be suicide prevention nets in India, as in China. Heck, maybe they’re already there, since Foxconn has some factories located in India (I don’t think their Indian factories make any Apple products yet).
Apple had asked the government in January to allow it to open retail stores in the country. It was restricted from doing so by foreign direct investment (FDI) requirements that tied the retail operations the company can open to meeting local sourcing requirements.
Gee, looks like (racist) white working people wrote the laws in India! Better get Big Dog Bill on that right a way.
Must be nice. Why can’t USA do that? I can see Hillary now – “It will never, ever, happen.” Only sexist Bernie bro’s and racist white working people and their young female girlfriends who haven’t done their homework would support that.
Weird that you can have “complete foreign ownership” of a product in the defence sector but not smartphones. Shows how unimportant those big destructive toys really are.
Apple needs a new growth venue.
http://www.zdnet.com/article/2016-apples-year-of-ups-and-downs/?loc=newsletter_large_thumb_featured&ftag=TRE17cfd61&bhid=22293505075082242411452950795158
Let’s see, maybe ApplePay can be the official way that every Indian peasant buys their daily ration of food now that they are working to eliminate cash. What do you think is a fair service charge? 1%, 4%?
Think of the profits!
Remember this every time that you use a credit card in a small business in America. The credit card company refunds only 98 to 94 cents on the dollar. Grocery stores typically make 3% net profit. You are helping to destroy small businesses when you use credit cards.
Agreed. That’s why I’m still writing checks to those small businesses. Or I’m paying cash.
Although to be fair, there are functioning dumbphone payment systems out there (bKash, m-Pesa), and India could theoretically forge ahead on digital payments without pushing smartphones.
Jesus! I was being sarcastic and ironic.
You are a young techie obviously who took me seriously. I shudder for our future.
Paraphrasing Benjamin Franklin:
“Those who would give up essential privacy to purchase deserve neither privacy nor freedom.”
it wasn’t a response to your comment…
m-Pesa cash agents are more secure than Indian banks? Private cash agents will eliminate India’s corrupt briberies?
Though there is much to loathe about the smart phone supply chain, manufacturing is what India desperately needs both for productivity growth and structural transformation of the economy. Yes, for sure, IIT graduates can reverse engineer an iPhone so protecting the local industry is not a bad idea. However, the scale of what is needed in terms of employment in the advanced manufacturing sector outweighs protection imo.
While there will be much talk about the financial dimensions of the “deal” Apple cuts with Modi and with the very real potential for labor violations (which are pervasive in India just like in China), I think far more important questions relate to the operational side of executing the entrance into the domestic market. Where will the factories be located? Will universities and other skills-based training institutions be connected to production? Will it simply be assembling finished goods (boring, little chance for upgrading) or will the factories actually produce components/peripherals for export? What process and other technologies will be used to mitigate environmental impact?
Its easy to be cynical about these developments but each time a large MNC moves production into a middle-income country like India is an opportunity to get a better deal, especially where the PM has the cache and capability to actually shape the agreement instead of being steamrolled. The fallout from demonetization is going to be continue so perhaps Modi might make a more bold move with Apple since the deal will be public?
Despite the logic of protectionism fitting in this case, my experience with elite IT actors in India is they really have no desire to be protectionist. If Apple follows suit, I suppose the iPhone will join the long list of products and services that are needlessly subsidized by capital (hello, UBER!) while the government continues to cut subsidies on basic goods and services for the poor.
“When you next come back to India, would you mind….”
:)
delightful Jerry
and btw Modi would be willing to go all the way to get iphones manufactured in India…Tim can expect a sweetheart deal.
This isn’t going to expand Apple’s market. People rich enough to afford an iPhone already have a smartphone, meaning any expansion of that 30% market penetration won’t be with iPhones.
Furthermore, anyone rich enough to own an iPhone either travels or has friends and relatives who travel or live abroad who can buy them an iPhone.
So in the end ,while it makes a good story to keep the wall street wolves at bay after a disappointing year, it’s highly unlikely to actually help.
Texting while driving should be technically prevented, if possible. It makes me sick to see so many people doing it — especially young women. People are so incredibly full of themselves and concerned about their appearance to others in their circle, yet negligent in their responsibility to society and to the broader ecosystem. Maybe that’s OT but it needs to be said.
Apples’ glory days are behind it. They made their money through branding. Indians such as myself are skinflints and are not swayed when it comes to the price point. Apple will find that it has to offer deep discounts to attract market share. Discounts that will return them nothing. And if they think that Indians will pay for downloadable content they are just too naive to be in this market.
The smartphone industry is just too mature to develop technical breakthroughs. It will end up like the hard disk industry. Steady to no growth is what is ahead for it. As for the XX percentage that do not have smartphones, they have no money and are content with the feature free Nokia and LG phones.