Apple (AAPL 0.19%) has been working to diversify its supply chain thanks in part to President Trump's trade war with China, with the company's contract manufacturers setting up shop in neighboring India over the past year. There's another important benefit from doing so: earning brownie points with the Indian government. The country has long had regulations that impose local sourcing requirements on foreign companies that wish to own and operate single-brand retail locations -- requirements that Apple has historically been unable to meet.

The company is reportedly planning to invest $1 billion to expand manufacturing capacity in India, which should help it meet those requisites and start direct sales.

Two red iPhone XR models

Image source: Apple.

iPhone XR and iPhone 11 selling well in India

The Economic Times of India reports that the Cupertino tech giant has now commenced production of the iPhone XR at a Foxconn manufacturing facility located near Chennai following weeks of trial runs. Apple has already been assembling older models like the iPhone 6s and iPhone 7 at the facility to export to nearby markets such as Europe, according to the report, but is now pivoting toward newer models like the iPhone XR, which was originally released in 2018.

That iPhone XR, which is more challenging for workers to assemble, received a price cut when Apple unveiled the 2019 iPhone models last month. The company is also expected to start manufacturing the newer iPhone 11 at the same facility shortly.

Manufacturing handsets in India will allow Apple to skirt the 20% import tariff on smartphones. The country had boosted that tax from 15% to 20% back in early 2018 in an effort to "promote creation of more jobs in the country," Finance Minister Arun Jaitley said at the time.

However, Apple is not expected to cut prices even after factoring in tariff savings, according to the outlet's sources. High prices have long been the primary reason for Apple's minuscule market share in India, as most average Indian consumers can't afford iPhones. The recent iPhone XR price drop has helped boost sales and that model is now Apple's best-selling iPhone in the country, according to the report. The iPhone 11 has also been selling relatively well, since Apple also priced that model lower this year.

The premium segment is growing

Those recent improvements in unit shipments are encouraging, but the broader context is that Apple is coming off a small base in India. The iPhone maker's overall market share in India typically hovers around 1% to 2% because Apple only plays at the premium end of the market.

Within the premium segment, Apple lags rivals like Samsung and OnePlus and has around a 20% share of devices priced at approximately $430 or higher, according to recent estimates from Counterpoint Research. Another good sign for Apple: That part of the market jumped 33% in the second quarter.

Earlier this year, CEO Tim Cook disclosed that Apple generated $2 billion in revenue from India in 2018, or about 0.7% of total revenue last year.