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Apple, Inc. Is Still Working on Cracking India

By Evan Niu, CFA – Nov 8, 2016 at 3:30AM

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The Mac maker is looking for a government handout to boost manufacturing.

Image source: Apple.

For years, Apple (AAPL 1.56%) has tried to make inroads within the world's second-most populous country. The iPhone maker has struggled to make much progress due to a wide range of structural challenges associated with expanding its presence.

Four years ago, a policy change at India's Department of Industrial Policy and Promotion (DIPP) revised its rules on foreign companies owning single-brand retail stores, which theoretically opened up a path for Apple to set up its own retail stores. The main catch was a requirement that any such store must source at least 30% of the value of its products from within India, an effort to bolster the local economy. Apple has been working with Indian officials ever since, continuing to evaluate how to set up shop because Apple is unable to meet that sourcing requirement.

Earlier this year, Finance Minister Arun Jaitley rejected Apple's request for leeway on the requirement. Apple had been seeking an exception based on the fact that its products are "state of the art" and "cutting edge," which make them eligible for an exception.

Another piece of the puzzle

The Economic Times is reporting that Apple is now asking for various incentives from the government, as it is considering ways to expand manufacturing within the country. The government has been trying to woo international companies to bring electronics manufacturing to India, and Apple hopes to score some of the incentives being offered. There are several government agencies involved, but the DIPP will soon issue an opinion that may influence other agencies. Foxconn, Apple's primary contract manufacturer, has been discussing plans to open up a manufacturing facility in India, and certainly Apple scoring some incentives would help offset some of these costs since the facility is reportedly going to be exclusively making Apple products.

Having devices manufactured in India would help reduce the import tariffs that drive up the costs of iPhones and other imported products. It's worth noting that even if Apple is able to successfully get incentives to expand manufacturing, there are still other challenges that it faces. The incentive wouldn't directly affect Apple's ability to set up its own retail stores, which would theoretically go a long way with improving distribution and owning the customer purchasing experience. iPhones are still prohibitively expensive to the vast majority of average Indian consumers, which is why Apple has just a 2% market share, according to Strategy Analytics.

It's not too late

CEO Tim Cook has been talking about Apple's opportunities in India for years, so it doesn't inspire much confidence that the company has made such little progress over this amount of time. Of course, it's extremely hard to compete when local rules and regulations have stacked the deck against you, but it's also probably true that India isn't at the top of Apple's priority list right about now.

That being said, Cook did add some color around India on the last quarterly conference call, noting that iPhone sales in fiscal 2016 were up 50% in India. There's also been a lack of network infrastructure:

On India, I think it's important to look not only at per-capita income, which may be what you're looking at, but sort of look at the number of people that are or will move into the middle class sort of over the next decade. And the age of the population, if you look at India, almost 50% of the population is under 25. And so you have a very, very young population.

The smartphone has not done as well in India in general. However, one of the key reasons for that is the infrastructure hasn't been there. But this year or this year and next year, there are enormous investments going in on 4G and we couldn't be more excited about that because it really takes a great network working with iPhone to produce that great experience for people.

The reality is that Apple probably does have plenty of time, considering the demographics of India as well as the socioeconomic landscape. If the population is still young and the middle class hasn't hit critical mass yet, Apple may be able to bide its time as it tries to line up all the other pieces of its strategy.

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. 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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