Apple (AAPL 1.39%) recently reported that revenue from the Greater China region rose 70% year over year to $16.1 billion during its first quarter, accounting for over a fifth of its top line.
Although Apple didn't report exact iPhone unit sales in China, UBS estimates that 36% of Apple's iPhone sales now come from China, compared to 24% from the U.S. That shift is encouraging, since China only has a smartphone penetration rate of 43% versus 74% in the United States, despite having more than four times as many people.
An Apple Store in Shanghai. Source: Wikimedia Commons, myuibe
While robust sales in China are great news for Apple, investors shouldn't overlook the importance of India, the second most populated nation in the world. Apple reportedly sold 500,000 iPhones (including older models) in India during the first quarter -- double the amount it sold in the prior year quarter. Half a million units represent less than 1% of the 74.5 million iPhones that Apple sold worldwide during the quarter, but that percentage could quickly rise over the next few years.
The growth potential of the Indian smartphone market
The Indian smartphone market is often associated with low-end devices because the average Indian household income makes only around 158,000 rupees ($2,550) per year. That's why cheap feature phones are popular and the country's smartphone penetration rate remains around 10%.
Average Indian incomes are climbing around 11% annually, but the income gap is widening. Over the past two decades, India's income inequality has doubled. In 2011, the Organization for Economic Cooperation and Development (OECD) reported that the top 10% of India's wage-earners make 12 times as much as the bottom 10%, while 42% live on less than $1.25 per day. Meanwhile, India's high net worth individuals (those who have over $1 million in investable assets) spend an average of $650,000 annually, according to Wealth-X. The size of India's middle class is expected to grow from 50 million people in 2010 to 200 million by 2020, according to EY.
Thanks to the growth of India's middle and upper classes, the country's luxury market could grow 86% in constant value terms between 2013 and 2018, according to Euromonitor International. By comparison, China's luxury market is expected to grow 74% during that period. Those growth figures matter to Apple, which is highly dependent on the iPhone's reputation as a status symbol.
Apple's iPhone 6. Source: Apple
That shift in wealth has fueled stronger demand for smartphones. During the third quarter, IDC reported that India was the Asia-Pacific region's fastest growing smartphone market, with quarter-over-quarter growth of 27%. Research firm eMarketer predicts that the percentage of Indians owning smartphones will more than triple to 32% by 2017.
Therefore, a rising number of affluent customers and soaring demand for smartphones could create a fertile new market where the iPhone could thrive.
A Samsung-dominated market
The Indian smartphone market is currently dominated by Samsung (NASDAQOTH: SSNLF), which controls 29% of the market, according to IDC. Indian brands Micromax and Karbonn, respectively, control 18% and 8% of the market.
Samsung faces several hurdles in India. First, Google (GOOG 0.79%) (GOOGL 0.63%) partnered with several Indian handset makers last year to launch Android One handsets, which cost as little as $100. These cheap devices keep users tethered to Google services, undermining Samsung's attempts to branch away from Android with its own app ecosystem. Meanwhile, Microsoft (MSFT 0.35%) is flooding the market with low-end Lumias, which cost even less. Samsung responded by unveiling a $100 phone running on its own OS, Tizen, but Tizen has a much smaller library of apps than Android or Windows Phone.
Apple, however, doesn't have to fret over that low-end battle. Instead, it just needs to dominate the high end of the market as its rivals race to the bottom of the low-end one. Granted, Apple stands to sell less smartphones than Samsung this way, but it will make a much higher profit per phone sold.
Long-term growth potential
One number which I'm concerned about is Apple's rising dependence on the iPhone, which accounted for 68.6% of its top line last quarter. However, big emerging markets like China and India can prolong the iPhone's life by offsetting eventual declines in developed markets. If India's middle and upper classes continue to thrive and fuel higher demand for luxury goods, the country could soon take its place alongside China as one of Apple's pillars of global growth.
