Will Aggressive iPhone 12 Pricing Kill Apple's Prospects in This Market?

Apple's (AAPL +0.15%) latest-generation iPhone 12 seems to have struck the right chord with customers, according to reports about the initial response to the specs on new devices.

Noted Apple analyst Ming-Chi Kuo estimates that iPhone 12 preorders are more than double iPhone 11 levels (only two of the four iPhone 12 phones are currently available for preorder). He predicts that 1.7 million to 2 million devices had been preordered in the first 24 hours, compared to 500,000 to 800,000 iPhone 11 devices in the same period last year.

While that's great news for Apple and a testament to the company's aggressive pricing of the 5G iPhone line-up, there's one crucial market where the new smartphones are priced exorbitantly: India. That doesn't bode well for Apple, especially as its prospects were looking up in India of late.

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Apple gets pricing wrong in India once again

Apple has brought a 5G device to the U.S. at an attractive price point of $699 with the iPhone 12 mini, but the same device starts at 69,900 Indian rupees (nearly $953). The standard iPhone 12 with a 6.1-inch display is priced at 79,900 Indian rupees (almost $1,090) for the 64 GB variant, much higher than the $799 price point in the U.S.

The following table gives an idea of the steep variance in iPhone 12 pricing between the U.S. and Indian markets.

Source: Prices taken from Apple's online stores in India and the U.S. 1 USD=73.35 Indian rupees as on Oct. 20

Clearly, Indian consumers will have to pay quite the premium to lay their hands on the latest iPhone lineup compared to consumers in the U.S. This isn't something new, as import duties and other taxes have historically inflated iPhone prices in India. Additionally, India's 5G rollout is still assumed to be at least two years away, and it may take at least four to five years for nationwide deployment.

Indian consumers may not be willing to cough up a princely sum for a 5.4-inch device considering that rivals have cheaper options that offer better technology, such as higher screen refresh rates, more memory, and bigger screens. As a result, Apple may miss an opportunity to capitalize on the hype around the iPhone 12 and capture a significant market share -- especially since the average price of a smartphone in India is expected to hover around just $170 this year.

However, Apple seems to have a secondary plan in place. Despite the iPhone 12's exorbitant pricing, Apple may continue to gain momentum in India's pre-5G smartphone market, which is reportedly growing at a compound annual growth rate (CAGR) of 14% as per third party estimates.

Plan B

The new iPhone 12 series is currently not made by Apple in India, so the device attracts huge import duties and taxes. A report by Indian business magazine Business Today points out that Indian consumers are going to pay 21,344 Indian rupees (around $290) for the iPhone 12 mini thanks to 22% customs duties and 18% in goods and services tax (GST).

But all is not lost for Apple -- it has backup, in the form of the iPhone 11, to drive sales. Last year's flagship has been selling like hotcakes on Amazon India during the festive season sale thanks to its attractive price of 47,999 Indian rupees ($654). The e-commerce giant pointed out that iPhone 11 sales on the first day of the sale exceeded the total number of iPhones sold during the entire sale period in 2019.

The device was initially launched at rupees 64,900 (around $885) in India last year, when it was an import unit. But Apple began local production of the device in India in July this year, which allows the company to save on import duties and taxes. As a result, the device is currently being sold at a huge discount to the launch price.

The good news for Apple is that it could start making the iPhone 12 in India. Leaked documents from Brazil's telecom regulator Anatel suggest that the device could be manufactured in multiple markets, including India and Brazil. Such a development may not be entirely surprising, as Apple's contract manufacturers are ramping up their presence in the country with the help of a government-sponsored scheme.

But until an India-made iPhone 12 hits the market, Apple can expect the iPhone 11 to do the heavy lifting. And once Apple's contract manufacturers upgrade their capabilities and start manufacturing the latest models in the country, the iPhone 12 may be priced more reasonably over there.

As such, Apple can continue attracting more users toward its ecosystem in India, despite the high initial price of the iPhone 12. It can sustain that momentum going forward by gradually enhancing its manufacturing and sales presence, setting the stage for growth in a potentially lucrative 5G market where 5G device shipments could hit 144 million units by 2025, per third party estimates.