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The U.S. Is No Longer the Second-Largest Smartphone Market

By Jamal Carnette, CFA – Feb 9, 2016 at 10:38AM

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India passed the United States when it comes to smartphone sales.

National flags of the three largest smartphone markets. Image source: Flickr user Danny Howard.

After losing the title as the world's largest smartphone market to China a few years ago, it was only a matter of time before the second most-populated country, India, would follow. Although the U.S. is the richest of the three countries, the fact that both Asian nations are nearly four times larger population-wise with growing GDPs per capita made this seem inevitable.

Last year was the tipping point, says Counterpoint Research. India experienced 23% more smartphone shipments in 2015 over the prior year, pushing past the 100-million-unit mark. In doing so, India grew its smartphone user base to 220 million units, surpassing the United States in the process.

As a consolation prize, the two companies that benefit most from India's smartphone growth are both from the U.S.: Alphabet (GOOGL -0.01%) (GOOG 0.02%) and Apple (AAPL -0.66%).

Alphabet and Apple say namaste to India
It's safe to assume that Alphabet's Android operating system will win the market share battle in India. The low-cost manufacturers that run Android are simply a better fit for India's economy. This is consistent with Counterpoint's finding that Samsung led with a 25.7% market share in the South Asian country last year.

While Alphabet should be happy with smartphone growth there, India's lower-income consumers will be more difficult for the company to make money on from advertising and search-based revenues than consumers in developed nations.

But it's not just Alphabet. Apple surprised investors when government filings revealed the company grew India-based revenues by 44% last year. Those filings also noted that Apple did $1 billion in business in India that year, but stopped short of discussing product shipments. Counterpart's research finds Cupertino sold 2 million units in the country last year and has the third-largest revenue share there because of the iPhone's high-end price tag.

Growing sales in India could help Apple both inside and outside the country. Apple's newly issued leasing program is contingent upon being able to sell prior-gen units once returned. These off-year models would be a natural fit for developing markets and should introduce new users into Apple's sticky ecosystem at a lower price point.

Will India's growth pick up?
India's growth has been slower than China's. For an example of the differences of GDP/capita growth rates between India and China, look no further than the data supplied by the World Bank (figures in USD):

 

Data from World Bank

But there are reasons to believe that India could grow rapidly in the foreseeable future. Although overshadowed by Japanese Prime Minister Shinzo Abe and his growth-oriented market reforms dubbed Abenomics, or the slow but steady transition of the Chinese economy to a more market-oriented one, India's Prime Minister Narenta Modi has also pushed forward with a pro-growth agenda in his country. 

Last year, for example, India relaxed its rules on single-brand retailing. Apple responded by filing paperwork to open its first Apple Store in the country. This sounds negligible, but foreign direct investment will help India grow its GDP per capita by supplying necessary capital and investment the company needs.

It seems Modi's plans are working. According to The World Bank, India is expected to be the world's fastest-growing economy in 2016 with 7.8% GDP growth. You can bet Alphabet and Apple will try to do benefit from this trend.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and 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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