New Delhi: Within weeks of the Narendra Modi government rejecting Apple Inc’s demand for Customs duty concessions for its suppliers who could look at manufacturing in the country, Cupertino-based tech major has pinned its hope on India even as global sale of iPhones dipped.
At the analyst call after the second quarter earnings early Wednesday (India time), Chief Executive Tim Cook said, “We’re very optimistic about our future in this remarkable country with its very large, young, and tech-savvy population, fast-growing economy, and improving 4G network infrastructure.” Cook said in his opening address that revenue in India grew by strong double digits during the quarter ended April 1, setting a record.
Chief Financial Officer Luca Maestri quantified the “strong double-digit” growth for India — over 20 per cent. The company achieved double-digit growth in the US, Canada, Australia, Germany, the Netherlands, Turkey, Russia and Mexico, Maestri said. “Our growth rates were even higher, over 20 per cent in many other markets, including Brazil, Scandinavia, the Middle East, Central and Eastern Europe, India, Korea and Thailand.”
Globally, Apple sold 50.76 million iPhones in its second quarter financial year, down from 51.19 million a year earlier during the corresponding period. In India, around 2.5 million iPhones are estimated to have been sold between October 2015 and September 2016.
While the talk on India revolved around high growth (mainly of iPhones) and 4G network access, top executives remained tight-lipped on the regulatory hurdles Apple faces in the country as well as on the company plans in this geography.
For instance, when Simona K Jankowski of Goldman Sachs asked Cook if it was reasonable to assume that Apple would sell 10 million to 20 million iPhones in India next year, keeping in mind the growth and 4G roll-out, the chief executive officer spoke of having “a ton of energy going into the country on a number of fronts”. According to the transcript of the analyst call available at Seeking Alpha website, Cook said, “We’ve been investing quite a bit… it is the third-largest smartphone market in the world today behind China and the US… So, we believe, particularly now that the 4G infrastructure is going in the country and is continuing to be expanded, there’s a huge opportunity for Apple there. So that and the demographics of the country is why we’re putting so much energy there.”
To another question from Jim Suva of Citigroup Global Markets on Apple’s road map for India and whether it needed to work more with the government to set up stores and production units as well as to improve sales further, Cook agreed that the company was “underpenetrated there”. The company is “bringing all the things that we brought to bear in other markets that we’ve eventually done well in, and that’s from channel to stores to our ecosystem and so forth,” Cook added. He referred to India’s growth rates in relation to iPhone sales as “really good by most people’s expectations”, but said, “maybe not mine as much”. Cook’s meeting with Prime Minister Narendra Modi last year in New Delhi had centred on the promise that India market held, and the country has delivered in terms of consumer response.
The company is bringing all the things to the India market, Cook said. But when and how are among the questions that have kept industry watchers glued to the scene. Business Standard spoke to people close to the company and analysts to piece things together on Apple’s likely India road map for setting up fully-owned stores, starting manufacturing in the country, stepping up assembly lines, selling Apple-certified pre-owned phones and opting for the e-commerce route.
Store plan can wait
Even as Apple had proposed early in 2016 to set up fully-owned stores in India, 30 per cent local sourcing norm as part of the single brand retail foreign direct investment policy (FDI) policy has kept the plan on hold. A senior official at the Department of Industrial Policy and Promotion (DIPP) told this newspaper recently, “There’s been no retail proposal from Apple for a long time.”
Sources in the know said that the company was clear that compliance with the sourcing clause was not feasible. Case-to-case approval for niche cutting-edge companies was among the solutions devised by bureaucrats so that a company such as Apple could be spared from mandatory local sourcing. But definition of cutting-edge has been in the making for at least a year. Even as the government subsequently decided that a company manufacturing substantially in India would not have to comply with sourcing norms for owning retail outlets, the mathematics is still not working out for Apple, a source said.
There’s no show-stopper time frame for opening stores in India, a person familiar with the workings of the tech major said. Currently, there are franchisee stores in the country. “Apple could wait for long, till it has the right environment to set up stores as these are iconic destinations the world over. Typically, the company would not look at more than two to three stores in five to 10 years.” He cited global numbers to explain that Apple has no flagship store in many countries, including in Singapore. Dubai recently opened one. There are 495 stores in 18 countries, with maximum in the US, followed by Canada. China is high in the pecking order, too, with 40 stores, but Belgium, Mexico, Macau have only one each; the UAE, Netherlands and Sweden have three each; Turkey and Brazil have two each.
Make in India
However, the narrative has shifted to manufacturing in India now, at least from the government side. But for Apple, manufacturing will not take off till it makes business sense for the company’s component suppliers and the vendor universe, another source associated with production pointed out. Apple had asked for 15 years of Customs duty waiver, to be able to import components such as iPhone kits and other equipment needed for smartphone manufacturing, without incurring a high cost.
Anyway, now the GST (goods and services tax) regime will subsume those duties, a senior official in the finance ministry said, adding, “Nobody can do anything about tax concessions now.” He was replying to a query on the government rejecting Apple’s duty-waiver proposal. It would mean the company would continue to wait for the right time to start manufacturing in India, quite like having its stores.
Assembly line
Assembling in India is one route that is on. In fact, Wistron Corp - No. 92 & 93 Industrial Suburb II Stage, Yeshwanthpur, Bengaluru, India — stands out in the list of top 200 suppliers of Apple on the official website. It is the only one name associated with India to begin assembling of iPhones. To begin with, Taiwanese original design manufacturer Wistron will assemble iPhoneSE in the Karnataka plant. Last-mile work is in progress and things should start in about two months, a source at Wistron indicated.
However, it is the other Taiwanese firm - electronics contract manufacturer Foxconn - that caught public attention with its mega $5-billion now-on now-off investment proposal for Maharashtra. Sources close to the development said even as Foxconn is a big supplier for Apple worldwide, there’s nothing in India yet to connect the two. But, in the coming months or years, things could change and Foxconn could possibly start manufacturing for Apple even in India, they pointed out.
Other plans
Starting online stores is among its plans, and buying iPhones online could be a possibility in the future for Indian shoppers, one of the sources quoted above said. Then there are two more pieces in the Apple jigsaw — sale of Apple-certified pre-owned phones in India and the concept of phased manufacturing that the Ministry of Electronics and Information Technology recently floated. The proposal to bring pre-owned phones into India was rejected by the government and the company has not returned with any revised plan on that. Phased manufacturing is something that Apple top bosses may be discussing already with the government, at least to figure out what it exactly means.
