Apple (AAPL 0.64%) is caught in the crossfire of the U.S.-China trade war, with some worrying that tariffs on Chinese goods will hurt Apple's margins and that it may have to move manufacturing.
As Fool.com contributor Evan Niu relayed, the Nikkei Asian Review has reported that Apple has told its prominent suppliers to consider moving 15% to 30% of production capacity outside China to countries including India, Mexico, Vietnam, Indonesia, and Malaysia. (The Wall Street Journal reported Friday, however, that Apple is manufacturing its new Mac Pro in China.) There's no doubt that moving a big chunk of operations out of China could hamper the iPhone maker in the short run and result in higher costs.
If Apple does decide to move a part of its production, it will have to leave behind a nicely integrated supply chain in China. But moving into a market such as India could be beneficial for Apple from a long-term perspective. Let me explain why.
Image source: Getty Images.
India stands tall amid the global smartphone decline
The global smartphone market fell 6.6% during the first quarter of 2019, according to IDC. Apple was the biggest casualty of this drop: Its shipments plunged a whopping 30% year over year to 36.4 million units. This crash pushed Apple to the third position in global smartphone rankings, behind Samsung and Huawei.
But the Indian smartphone market was immune to this drop. IDC estimates that the Indian smartphone market grew 7.1% annually during the first quarter of 2019 as shipments crossed 32 million units. But Apple fell behind in the premium smartphone rankings in the country.
IDC points out that Samsung overtook Apple in the premium smartphone segment (phones priced above $500) in India during the quarter, cornering 36% of the market for high-end devices. The South Korean giant was followed by Chinese upstart OnePlus, and Apple slipped to third place.
This is bad news for the tech giant because smartphones are driving India's overall device sales. Shipments of feature phones in India dropped over 42% during the first quarter, so the year-over-year increase in shipments wouldn't have been possible without a bump in smartphone shipments.
Moreover, smartphones have a lot of room to grow in India as the half of the market still buying features phones could upgrade. But this is not the only reason why India's smartphone market is valuable.
Indian buyers are willing to spend more on their devices, according to market researcher techArc. The firm believes that sales of "premium" smartphones in India could jump 19% this year, while more expensive "luxe" devices could witness a 26% increase in sales to 9% of the market.
But Apple is missing out on all the fun because of one simple problem: a lack of manufacturing facilities in India.
India could answer some of Apple's problems
Thus the U.S.-China trade war could be a blessing in disguise for Apple if it elects to move a sizable chunk of its production to India. The company has struggled in this market because of a flawed policy of manufacturing older model phones and selling them at reduced prices. That strategy hasn't worked, as consumers have preferred to buy the latest devices from Apple's competitors.
But things started changing earlier this year when it emerged that Apple could soon start producing iPhones on a mass scale in India. Contract manufacturer Foxconn was reportedly on track to start the trial run of making new iPhone models in India a couple of months ago. This is probably why Foxconn is confident it could shift all iPhone production out of China if need be.
The good news for Apple investors is that making iPhones in India would allow it to avoid the 20% import duty that it currently pays on devices it sells in that market. As a result, the company would be able to price its iPhones much more competitively.
So if Apple indeed decides to move some of its production to India, it will be in a much better position to carve a bigger share of this market and boost sales.
