India's government and Apple (NASDAQ:AAPL) have had an on-again, off-again relationship recently. After CEO Tim Cook visited the country in May, the Foreign Investment Promotion Board ruled that Apple doesn't qualify for exemption from the 30% local sourcing rule for "cutting-edge technology" companies that want to open single-brand retail stores in the country.
But last week, Prime Minister Narendra Modi's cabinet reportedly approved a three-year exemption on the local sourcing requirements for companies wanting to open single-brand retail locations that sell "cutting-edge technology," according to Bloomberg. At the same time, the plan is to make it easier for companies like Apple to qualify for the exemption.
The news that the cabinet is on board with this loosening of rules opens the door for Apple to open up stores in one of the last remaining major growth opportunities for its iPhone line.
Getting its own place
Apple is currently required to sell its products in India through re-sellers and in its store-within-a-store locations. Those formats prevent Apple from controlling the retail experience the way it does with its stores in other countries.
Apple's stores are a key part of the company's overall strategy. Not only do they extend and advertise the Apple brand, but the locations provide a customer-service center for Apple device owners. Apple Store employees are qualified to answer customer questions and help fix issues with devices. While re-sellers can provide advice as well, Apple Store employees undergo extensive training to help customers get the most out of their devices (and upsell customers to more expensive devices while they're at it).
Additionally, opening up its own retail locations could allow Apple to offer a financing plan as it does in the United States with the iPhone Upgrade program. That would make it easier for Indian consumers to afford the premium-priced iPhones. Even the new low-priced iPhone SE costs approximately $584 in India because of tariffs and other taxes.
The majority of smartphones sold in India cost less than $120, with the average sales price just $70, according to research from Gartner. With Apple's least expensive model significantly more costly, providing a superior customer experience through its own retail locations would go a long way toward justifying its pricing.
A big growth opportunity
India remains the market with the biggest growth opportunity. It's the second most populous country in the world after China, but while Chinese consumers purchased around 438 million smartphones last year, Indians bought just over 100 million.
Meanwhile, feature phones remain popular in the country. Sales of feature phones totaled 167 million in India in 2015, according to Gartner, making up 61 percent of total mobile phone sales in the country. That represents a huge market of potential smartphone buyers going forward.
The Indian market has been dominated by Samsung (OTC:SSNLF), which took an estimated 26.6% of the market in the first quarter of the year. The company caters its smartphones to certain emerging markets. In India, Samsung markets its J-Series of Galaxy smartphones that retail for between $200 and $250.
India is where China was about five years ago, right before it started growing exponentially and overtook the U.S. as the largest smartphone market. In 2012, Apple generated $22.5 billion revenue in Greater China after experiencing 78% growth year over year. Last year, the company generated $58.7 billion in the region. Apple increased its store count in the country from six stores at the beginning of fiscal 2012 to 36 today and it plans to have 40 by the end of the year.
Apple is experiencing strong growth in India, similar to China in 2012 and 2015. In the first quarter, sales increased 76%, and they grew 56% in its second quarter. Apple is grabbing share from Samsung on the high end of the market, just as it did in China. Apple doesn't break out India's sales.
Establishing more retail locations could spur further growth as it extends the brand and increases the value of its products. With a pathway clearing for Apple to open its own stores in the country, it could spur another round of growth for Apple after seeing its sales contract this year.