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Apple, Inc. Set to Expand in Indonesia

By Evan Niu, CFA - Dec 16, 2016 at 2:38PM

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Will the iPhone maker still end up missing out?

iPhone 7 is about to go on sale in Indonesia. Image source: Apple.

It may not be the most exciting smartphone market in the world, but every little bit helps when you're trying to squeeze out growth in any way, shape, or form.

Apple (AAPL 0.88%) is now set to expand into Indonesia, after committing to a $44 million investment to open a new research and development (R&D) center in the region over the next few years, according to Reuters. Starting next year, Indonesia will implement a rule that requires all 4G smartphones to include at least 30% of local content, but that requirement can be satisfied in a few ways. It can be hardware, software, or investments. With Apple's supply chain deeply entrenched in other regions, the Mac maker went with the latter route, and recently earned a "local content certification," according to the report.

The local sourcing requirement is similar to a law in India, except that India's requirement pertains primarily to hardware components. Apple is unable to meet the requirement as is, despite its best efforts to be exempt under an exception for "state of the art" products. Apple still has a lot of work to do in order to crack India, which promises to be a massive smartphone market in the years ahead.

Last month, Indonesian government officials announced that Apple would be opening an R&D center in the Indonesian capital of Jakarta in 2017. That's just the latest in a string of R&D centers that the company is setting up across Asia.

This is Samsung turf

Again, this isn't a particularly big market at the moment. There were roughly 55 million smartphone users in Indonesia in 2015, and quarterly unit sales are typically in the single-digit millions, according to eMarketer. However, eMarketer expects the smartphone user base to jump to approximately 92 million by 2019, so there's definitely some growth potential for the Indonesian smartphone market, which is already the third-largest in the Asia-Pacific region behind China and India.

The Indonesian smartphone market is still immature in many ways. Network infrastructure remains an ongoing development, and wider network access will help boost adoption. Smartphone penetration is estimated at around 47%, according to GSMA Intelligence. In Mary Meeker's 2016 Internet Trends report, Indonesia falls into a group of countries that have medium to high barriers to broader internet adoption due to challenges around incentives and infrastructure, combined with mixed demographic trends. Affordability has been a key driver of smartphone adoption, which is obviously a hurdle for Apple given its premium positioning. The average retail price of a smartphone in Indonesia in 2014 was just $212, per Meeker's estimates. GDP per capita in 2015 was only about $3,300.

IDC released market share estimates for Indonesia just this morning, pegging Samsung as the market leader with 32% market share. China-based OPPO came in No. 2 with 17% share, followed by ASUS with 8%. The market researcher notes that most of the growth is coming from the $250-to-$300 price segment of the market, although entry-level handsets in the $100-to-$200 range are still the core part of the market. Note that Apple doesn't directly participate in either of those market segments.

There is some definite opportunity here as the market develops, and a wide range of companies are evaluating ways to comply with the local content regulation, which will likely spur continued growth. The risk is that Apple still ends up missing out by pricing itself out.

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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