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Apple, Inc. Hits a Retail Roadblock in India

By Evan Niu, CFA – May 26, 2016 at 10:45AM

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The Mac maker won't be getting a pass to set up shop.

Apple Store Istanbul. Image source: Apple.

The brief window of opportunity has closed as swiftly as it was opened.

Apple (AAPL -3.68%) has been trying to get its retail stores into India for years, but has long been blocked by a sourcing requirement in which at least 30% of a product's components must be procured locally within the country. This is a requirement for any single-brand retail location that is owned and operated by a foreign entity.

Earlier this year, the Indian government said it would consider exceptions to the rule on a case-by-case basis. Earlier this month, Apple was reportedly planning on opening three retail stores in the near future, alongside a start-up incubator. The development office was officially announced days later, as CEO Tim Cook was visiting the country to talk with government officials including Prime Minister Narendra Modi.

Unfortunately, Indian government officials have decided to stand behind the sourcing requirement. Apple won't be getting a pass.

No ifs, ands, or buts

Reuters and Bloomberg report that India's finance minister Arun Jaitley has decided that Apple must comply with the local sourcing requirement if it wants to set up shop in the world's second-most-populous country. Prime Minister Modi is technically able to overturn Jaitley's decision.

Certain consumer electronics products are eligible for an exception if they are considered "state of the art" or "cutting edge," but Apple products do not qualify under the guidelines.

India has been making a big push toward bolstering its manufacturing economy, so it makes some sense why the government is standing by the sourcing requirement. The government is using the requirement as a way to drive foreign capital investments.

All is not lost

Beyond a possible intervention by Modi, prominent Apple contract manufacturer Foxconn announced last year that it was planning to invest $5 billion in India in the coming years to build a new electronics manufacturing facility. At the time, it wasn't clear what types of products would be made at the new factory. The plant is expected to employ approximately 50,000 workers.

A few weeks ago, The Economic Times said that Foxconn was about to buy a 1,200-acre plot of land in Maharashtra to build a $10 billion plant exclusively for Apple's production needs. This is likely Apple's best shot at meeting the requirements, since it has virtually no component suppliers in India. It's unclear if this would allow Apple to meet the local sourcing criteria, but presumably it would help -- a lot.

Apple will get there eventually

India has always been a tough market for Apple to crack into for a wide range of reasons, including the retail distribution challenges. Cook even bluntly acknowledged recently that iPhone prices in India are too high, in part due to numerous duties and taxes that are levied on the device. There are plenty of other challenges too, including lower average discretionary income and carrier relationships, among others.

But India has enormous growth potential for Apple once the company figures out how to address these hurdles, and Apple isn't giving up anytime soon.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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