Apple's (AAPL -0.25%) iPhone sales have hit a ceiling as its key end markets aren't growing anymore. For instance, North American smartphone shipments were almost flat last year, while the Chinese market shrank 4% in 2017. Similarly, smartphone sales in Europe have also started regressing, as shipments there fell 6.3% year over year during the first three months of 2018.
These are Apple's three biggest markets, so it isn't surprising to see that, according to data compiled by Statista, iPhone shipments fell 8% in 2016 and rose a modest 2% in 2017. The situation isn't expected to improve much this year, as lukewarm reception of the company's flagship iPhone X has reportedly forced it to scale back production plans.
However, things could have been different for Apple had executed better to tap growth in the world's third-largest smartphone market: India.
Image Source: Apple.
Missing out on a big opportunity
IDC estimates that smartphone sales in India increased 14% in 2017 to 124 million units, and this number should swell further as the country's smartphone penetration rate stands at just a third of the number of mobile users in the country. This is because India is primarily a feature-phone market, which is probably why Apple treated it as a low-priority market.
But this is a big mistake, because smartphone penetration in India is growing by leaps and bounds. Just a fifth of mobile phone users in India owned a smartphone back in 2014, but by next year, smartphone penetration in the country is estimated to rise to almost 40%. Apple has taken the tack of selling outdated smartphones to satiate the growing demand in the country, as its latest devices were always priced a bit too high for customers.
The strategy did work for some time, but it has started backfiring thanks to the emergence of flagship phones at affordable prices. People buy those newer models rather than older iPhones. For instance, Apple still sells the 32 GB iPhone 6S in India for nearly $526 (at the average USD/INR exchange rate of 66.52 for the past six months). Customers can get a much better device, such as the OnePlus 6, launched earlier this year, at the same price.
By comparison, Apple sells the same device at a 17% lower price in the U.S. of $449. A similar story is seen with the iPhone X, which starts at a base price of $999 in the U.S., while the same device costs nearly $1,400 in India. Similarly, the iPhone 7 was launched at a 40% premium in India as compared to the U.S.
Not surprisingly, the emergence of cheaper flagship devices has taken a toll on Apple's sales in India this year. It has moved 30% fewer iPhones in this market in the first six months of 2018, according to IDC. So the terrific sales momentum that it was enjoying earlier has now stalled, and its share of the premium smartphone market in India has fallen from 43% last year to 20% now.
Data from Counterpoint Research and IDC, via The Economic Times. Chart by author. *2018 shipments are for the first six months of the year. For comparison, Apple sold 41.3 million iPhones across the world in the latest quarter, a 1% year-over-year jump.
Apple is paying for its lethargy
The blame for this slowdown lies with Apple, as it has been slow to develop manufacturing facilities in the country, thus it must import devices and pay high duties. There was a lot of fanfare last year when it emerged that the company is going to set up a manufacturing facility in the southern part of India, but it isn't an advanced one, since it can only make the iPhone 6 and the iPhone SE.
Samsung (NASDAQOTH: SSNLF), by comparison, showed how serious it is about the Indian market when it recently revealed that it has expanded its manufacturing facilities in the country. The South Korean smartphone giant pumped in nearly $728 million to expand its mobile manufacturing facility that will allow it to make 120 million units annually as compared to the earlier capacity of 67 million. In fact, Samsung claims that this is now the world's biggest smartphone production factory considering the number of units it can churn out every month.
This is a key reason why Samsung has managed to eat into Apple's share of the premium smartphone market in India, as local manufacturing facilities have helped keep prices of its latest-flagship lower than Apple's latest generation smartphones.
What next?
Smartphone users in India are expected to jump from an estimated 291 million last year to nearly 500 million by 2022, as per eMarketer. Meanwhile, Morgan Stanley estimates that India's per-capita income could double over the next decade, which should increase Apple's addressable market.
But Cupertino will have to play its part by taking this market seriously and expanding manufacturing operations. The good part: The company's manufacturing partners are already looking to expand their operations. Wistron will reportedly invest $100 million to expand its existing facility, while Foxconn has committed to invest $5 billion to set up its own manufacturing unit.
These developments could help Apple bring down prices in India and allow it to reach a broader audience, which is what the company needs to turn its fortunes around in this growing market.
