The iPhone accounts for the vast majority of Apple’s revenue and an even greater majority of Apple’s profits. Depending on how well the iPhone sells, Apple can either have a spectacular quarter or a really bad quarter. Apple is trying to make investors focus more on its growing service revenues, but for the forseeable future, iPhone will continue to be the center piece of Apple’s earnings.
To be clear, iPhone has been the best selling electronic gadget ever. In fact, very recently the billionth iPhone was sold. There is hardly any other product that has made as much sales, revenue and profit as the iPhone has. It has had enormous growth ever since it was launched back in 2007. The first time pressure was felt on iPhone sales was when the iPhone 5s had launched. However, Apple moving to the phablet territory with the iPhone 6 and Apple’s deal with China Mobile had increased iPhone sales once again. But the boost gained from China didn’t last much and for the past 2-3 quarters, there is again an increased pressure on the iPhone sales.
Renewed focus on India
Right when growth in China started to taper off, there was a renewed interest in India. The reason for this was simple. Almost everyone who wanted to own a smartphone in US, Europe, China, Japan etc already have one. Although most of Apple’s top markets were now staurated, emerging markets still hold a lot of growth potential because of their low smartphone penetration rate. The biggest of these emerging countries is India. Some estimate that India is already the second largest smartphone market behind China.
Both China and US are having little to no growth and are almost saturated. India by comparison has a smartphone penetration rate of just 25-30% and solid space to grow. On paper, it makes total sense for Apple to try and dominate India in a big way but is India really the market to bring back the iPhone growth? We’ll try to analyze that in this article.
Reality Strikes: Total addressable market is very low
Although on paper India seems like a pretty big market for Apple, the actual addressable market is very small. The vast majority of smartphone shipments in India come from the sub $200 category. Android smartphones with good enough specifications at $100-$200 from manufacturers like Xiaomi, Lenovo (and even Samsung) etc rule the roost.
Apple by comparison has no presence in the $200 smartphone segment. Even the cheapest iPhone i.e iPhone 5S costs around $300. Models apart from the iPhone 5S such as iPhone SE, iPhone 6 etc cost even more. According to smartphone analytics company CMR, the smartphone segment above $300 constitued just 7% of the total Indian smartphone market in 2015.
It’s just this 7% where Apple can play. Even in this 7%, Apple isn’t the top smartphone vendor. Samsung dominated the $300+ segment in 2015 with a 46.1% market share while Apple was a close second with 43.8%. OnePlus consituted 6% of the $300+ smartphone market in 2015. It is true that the $300+ smartphone category isn’t easy to break. It requires high brand affinity, marketing and a highly differentiated product but that doesn’t mean Apple has that category all to itself.
Samsung has been upping its game in the smartphone market for quite some time now. The S7 and S7 Edge in particular have been regarded as some of the best smartphones in the market. The Galaxy Note7 doesn’t seem to disappoint either. Also, Samsung’s Galaxy A series have given it a strong position in the $300-$400 segment. Apart from Samsung, OnePlus has also been a growing force in the $300+ smartphone market. The OnePlus 3 has received rave reviews and unlike previous generation of OnePlus devices, their latest flagship is available without any invite and has managed to replenish stock since its launch. This should definitely help the Chinese company improve its sales and its share of the $300+ market even more this year. It is true that companies like HTC and Sony aren’t as competitive in this segment as they once were, but that’s replaced by even fiercer Samsung and OnePlus.
The iPhone SE
The iPhone SE was heralded by some as the key to break Indian market for Apple. So far though there has been no visible indication that iPhone SE has done well in India and for a couple of reasons –
- An initial goof-up of the launch price of Rs 30,000 was revised to a steeper Rs 39,000 which made iPhone SE fall into a whole different category altogether.
- Phablets dominate the Indian smartphone segment and that should come as no surprise. For many Indians, smartphones are their primary computing device and a big screen is essential for media consumption. iPhone SE’s 4-inch screen size was a real bummer.
- Right when iPhone SE was launched, the government had implemented new FDI rules which prevented e-commerce firms from directly or indirectly altering the costs of goods sold in market places. A lot of smartphone discounts were directly attributable to e-commerce websites such as Flipkart, Amazon, PayTM etc themselves susidising the costs of smartphones.
Many people and analysts had predicted that the iPhone SE’s price would drop significantly in India over the next few months but nothing happened. iPhone SE has only been discounted by Rs 3-4k over the months on most e-commerce websites. So the iPhone SE that was originally priced Rs 39,000 is now available for Rs 36,000, this will hardly pursue new buyers and would only act as a pleasant surprise to people who already planned on buying the SE.
In short, the iPhone SE just turned out to be an exact replica of iPhone 5C. It did well in US, UK etc according to data from Kantar but failed to make much of an impact in emerging countries despite its mid-range like price tag.
Hinging upon the 5S
A lot of Apple’s sales in India is accounted by the iPhone 5S. Some estimate that as much as 50% of iPhone sales in India is accounted by the iPhone 5S. This is understanable considering that iPhone 5S is the cheapest iPhone in the market. After iPhone 5S, the next cheapest iPhone i.e the iPhone SE is almost twice its cost. However one has to wonder how long the iPhone 5S is going to last in the Indian smartphone market.
When the iPhone 7 launches, it would be time to phase out the iPhone 5S in India. Many people had predicted that the iPhone 5S would be phased out with the launch of iPhone SE, but that never happened. However when the iPhone 7 launches coming September, it would make the iPhone 5S almost three years old and I don’t think that Apple is going to continue selling a three year old iPhone.
Once the iPhone 5S gets phased out, it would leave a huge void in Apple’s portfolio for two reasons. The first one being that iPhone 5S is presumed to account for 50% of iPhone sales. Second is that according to CMR, out of the 7% market share of smartphones costing above Rs 20,000 ($300) in 2015, 52% of that 7% is accounted by the Rs. 20,000-30,000 price segment. Currently, only iPhone 5S is available in that segment.
When the iPhone 5S gets discontinued, the iPhone SE can get discounted to a price range of Rs 25-30K while the iPhone 6 will fall from 40K to 30K. But the problem is that Apple is already grappling with falling ASP because of the iPhone SE. I am not sure if Apple will bring iPhone SE below 30K in India once iPhone 7 launches especially considering the recent price hikes. Apart from this, there’s always the possibility that iPhone SE can get discontinued midway like what happened with iPhone 5C.
There is a very real possibility that Apple might not have any device between Rs 20-30K in the coming months and if that happens, Apple would lose 50% of its potential market that’s already very small.
4G and Apple Store
Apple opening its own stores in India has been a topic of great interest. There have been a lot of reports upon Apple opening its retail stores in India. At one point, it’s reported that Apple has been granted clearance to open its own stores in India while at other times it’s reported that Apple’s request has been denied. At the center of this debate is FDI rules in India for single retail. Currently, if a foreign company is to open its own stores in India, they need to source at least 30% of the components locally. iPhone’s components are mostly produced in China, Taiwan and South Korea. Hardly any component that goes into the iPhone is sourced from India from what we know.
There is an exemption for state of the art products. The government is ready to grant Apple this exemption for three years. But after that, Apple would have to source 30% of the iPhone’s value locally. This doesn’t seem favorable to Apple as they haven’t replied to the government’s proposal yet. However, even if Apple sets up stores in India, I don’t think it will change things much.
I understand that Apple stores have a unique design, and customer service is top notch, but Apple already has a retail presence in India through its “Apple Authorized reseller” program. These resllers have professionals vetted and trained by Apple, and provide a pretty decent experience all the way from helping you choose the right gadget to servicing it for you. Even if Apple does open up its own stores in India, the core problem of people simply not being able to afford iPhones will not go away. The reason iPhones don’t sell in India is not because there’s some brand better than Apple, it’s simply because people can’t afford it.
I have deep respect for Tim Cook but I can’t understand the correlation between 4G rollouts in India and iPhone sales. When Tim Cook came to India, he had placed special emphasis on 4G rollouts. This has been true for China, iPhone growth in China and 4G uptake are almost linear, but it’s not the same case for India.
As I had mentioned in my previous article, China was dealing with a broken 3G network for as much as a decade. India by comparison, has had proper WCDMA based 3G networks for 6 years now. Also, 4G is not something that’s limited to high end phones. Phones starting for as low as $100 come with 4G support. It’s true that the $100 smartphone won’t support carrier aggregation, but the end user wouldn’t even bother about it.
A small drop in the bucket
According to Strategy Analytics, India accounts for just 2% of Apple’s iPhone shipments in the latest quarter.
There is no way India would ever be able to act as a major market to stem the iPhone decline. iPhone shipments fell by 6.4 million this quarter compared to the previous year i.e Q3 2015. Let’s assume Apple has a similar shortage of 7 million in Q3 2017. Even if I’m to be generous and assume that Apple through some miracle manages a 200% Y-o-Y growth rate in India, even then, the total iPhone shipments would just be 2.4 million during Q3 2017. The only way Apple can manage a 200% increase in shipments is by reducing prices significantly, which will further reduce the already falling ASP and hurt profitability even more. Apple isn’t the compaby that chases volume.
Coming to profitability, Apple is already commanding 94-95% of the smartphone market’s profits, dominating India’s $300+ smartphone market would likely give them a percentage more at best. I’m sure that 1% can mean a lot to Apple but Samsung and OnePlus have only upped their game this year while Apple has a flop in its hands which is the iPhone SE.
Another phenomenon of the smartphone market is that growth cycles are now bi-annual rather than yearly. For example in case of Samsung, it seemed with the S6 that Samsung’s hey days are over. But when the S7 launched, Samsung’s smartphone divison came back to growth on the back of people upgrading from the S5. Same can be true for iPhone, when the iPhone 7 launches, there will be a massive upgrade from current iPhone 6 users and at that time no one would bother whether iPhones is growing or decreasing in India.