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Why Apple Shouldn't Be Scared of Cheap Phones in Emerging Markets

By Harsh Chauhan - Mar 15, 2017 at 9:29PM

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Feature phones could hurt iPhone sales in emerging markets, but this Fool thinks otherwise.

The iPhone SE in different colors

Image source: Apple.

Bloomberg columnist Adam Minter believes that the Apple ( AAPL -0.32% ) iPhone has an unlikely challenger in emerging markets such as India: feature phones. Minter points out that these feature phones cost just over $19 on average and are capable of carrying transactions digitally via SMS, which makes them a great value over costlier smartphones with an average price of $256.

The columnist also says that intermittent electricity supply in emerging markets could be a deterrent for smartphone growth, as feature phones have longer battery lives. Though his observations are true, the statistics speak otherwise, as Apple is growing its sales by leaps and bounds in emerging markets.

The data speaks otherwise

Feature phones are definitely not a problem for Apple in India, where iPhone sales jumped an estimated 39% in 2016 and led to 54% growth in its revenue for the region, according to data from research platform Tofler. Apple stepped up its game in India by doubling its advertising outlay, while also attracting top talent -- employee benefit expenses rose 25%.

The impressive growth comes despite IDC's estimate that feature phone sales grew by around 10% in India last year, even as smartphone growth slowed down to just 8%.

On the other hand, the Middle East and Africa (MEA) region is showing greater affinity for iPhones. Apple's shipments in this region shot up 133% in the third quarter of 2015, giving it 3.9% of the market, according to the last available data from Counterpoint Research.

The latest data for 2016 is not available yet, but IDC estimates that iPhone sales will grow in the MEA countries this year -- thanks to the anniversary-edition iPhone -- despite the raging popularity of feature phones there. While IDC also estimates that shipments of feature phones shot up by almost 32% in Africa in the second quarter of 2016, this doesn't seem to be having a negative impact on Apple.

What's driving Apple in emerging markets?

Apple's iPhone sales are strong in emerging markets -- despite the availability of cheap phones and problems that are often related to developing economies -- thanks to improving spending power and infrastructure development.

In India, for example, almost 79% of the population had access to electricity in 2012, up from less than 51% in 1990. African countries are also making great progress toward electrification, as the Republic of Congo's electricity access has grown to more than 41% from less than 25% over the same time period.

Even Zimbabwe, one of the weakest economies in sub-Saharan Africa, has seen similar growth in electrification. The challenge of charging a smartphone will diminish in such markets in the long run as steps are taken to provide electricity to more residents, leading to 79% smartphone penetration in 2020 from just 52% in 2012.

Improved spending power is another driver behind Apple's growth in emerging markets. For instance, consumer spending in India has shot up 23% in the past three years, and could grow another 18% in the next three years.

As it turns out, India will be the second-largest smartphone market this year, with shipments topping 200 million units by 2020. This is great news for Apple, as the projected rise in consumer spending could help iPhone sales. What's more, Indian customers can buy iPhones with interest-free equal monthly installments that make them more more accessible for Indian consumers.

On the other hand, Deloitte forecasts that Africa's annual GDP (gross domestic product) will grow by over a third in 2020 from 2015 levels. This could push iPhone sales there as young consumers in sub-Saharan Africa are quite image-conscious, spending over 50% of their income on personal care.

The Foolish takeaway

Feature phones are not going to hurt Apple in emerging markets: Because consumers will eventually enjoy greater spending power and a better quality of life, they will not stick with feature phones forever, leading to higher smartphone sales.

Apple, on its part, is trying to increase access to its phones in these fast-growing areas by setting up manufacturing operations and lowering costs, which should boost iPhone sales in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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