For the longest time, India has had strict government regulations forbidding foreign ownership of "single-brand" retail stores. The only way around that rule was to source at least 30% of the products locally. Way back in 2012, the policy was amended and allowed for 100% foreign ownership (up from 51% foreign ownership) if and only if this local sourcing requirement was met.
This is largely why Apple (NASDAQ:AAPL) has never been able to open up its own Apple Stores in the country, instead relying on third-party premium resellers. While Apple's supply chain expectedly sources a lot of components and labor from neighboring China, it sources nearly nothing from India.
That may all be about to change.
Hear me out
The Indian government has recently acknowledged that it will consider retail store applications that do not meet the local sourcing criteria on a case-by-case basis. Apple has taken advantage of the opportunity and filed an application to set up a branded retail store, but it's unclear how many locations Apple is hoping to open.
Apple also overhauled its Indian operations a few years ago in an attempt to grow its presence in the world's second most populous nation. The Mac maker expanded distribution to a greater number of small franchisee-owned store-within-a-store shops, and saw iPhone shipments soar. That increase was off a relatively small base, but overall the changes were working.
Lessons learned from China
After China, India is expected to become the next growth market for smartphones, but lower income levels make Apple's premium pricing prohibitively expensive.
Archrival Samsung dominates the Indian market with a wide array of low-cost smartphone models, grabbing an estimated 24% market share in the third quarter of 2015, according to IDC. Local vendors Micromax, Intex, and Lava also carry a lot of weight, as does China's Lenovo. There were 28.3 million units shipped into the market during that quarter, and most of these models had 5-inch displays or larger and cost less than $200.
Much like China just a few years ago (but to a lesser extent today), there are a lot of first-time smartphone buyers in India. Apple will likely implement a similar strategy, where it attempts to address lower price points with older models. For instance, Apple was still selling the aging iPhone 4 in volume in China as recently as 2013. The iPhone maker knows that once a consumer adopts iOS, the consumer is very likely to stick around and eventually upgrade to a newer model.
Potentially opening branded Apple Stores gives Apple much greater control over the purchase experience, as well as warranty service. Apple may also be able to offer job creation for leverage, since it would need to employ locals at any retail locations.
The Indian market is going to be too big to ignore.
Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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