An iPhone Made in India: Should Apple Accommodate India’s Protectionist Agenda?
The “Make in India” initiative is forcing smart phone manufacturers such as Apple to consider disrupting their supply chain in order to better access the second largest smart phone market in the world. But is producing an iPhone with Indian component manufacturers who may lack technological expertise worth the inherent risks to product quality?
On September 25, 2014, Indian Prime Minister Narendra Modi announced the launch of his administration’s “Make in India” initiative, a national program intended to make India into a global manufacturing hub by encouraging both domestic as well as multinational companies to manufacture their products within India.[1] To enact this vision, Modi’s government enforced strict regulations which provide economic advantages to local smart phone manufacturers and encourage international smart phone manufacturers to shift production to India. As part of the initiative, the Indian government raised the import tax rate on finished smart phones to as high as 29.44% as of 2016.[2] In addition, Indian law was implemented requiring that single-brand retailers (such as Apple Inc.) source at least 30% of their components from India in order to open a retail outlet.[3]
The “Make in India” initiative hopes that these regulations will coerce smartphone companies such as Apple to set up manufacturing facilities in India.[4] In the context of increasing nationalist politics and related growth in protectionist economic policies, Apple and its competitors are being forced to decide how and to what degree they will rearrange their manufacturing supply chain to enter and grow in new markets. India is now the second largest smart phone market in the world (second only to China), with significant room to grow as less than a fifth of the Indian population owns a smart phone currently.[5] These qualities make India a uniquely attractive market opportunity which may warrant the risks and difficulties which come with reworking a supply chain to satisfy protectionist policies.
Apple’s near-term India plan has been to sell its products through distributors such as Redington and Ingram Micro rather than attempt to satisfy the 30% component sourcing rule.[6] This runs counter to the company’s global strategy of selling through company-owned retail stores in the US, Europe and China, and reflects the difficulties Apple has had in locating high quality Indian components manufacturers that meet the company’s standards. Apple’s near-term strategy has also included lobbying for special treatment from the Indian government, with the hopes of being at least temporarily exempted from the 30% local sourcing mandate until it can either locate domestic suppliers that meet its quality standards or build out its own Indian manufacturing capabilities.[7]
While Apple’s near-term strategy shows resistance to the “Make in India” initiative, the company has announced that its long-term plan is to invest heavily in its Indian manufacturing capabilities in order to satisfy government regulations.[8] This strategy follows that of its competitor Samsung, who announced it plans to more than double its manufacturing capacity in India by 2020.[9] Huawei Technologies, the third largest smartphone maker in the world, also announced in 2016 that it will start manufacturing headsets in India.[10]
As it pertains to the India market opportunity, I agree with the strategy taken by Apple both in the short term and in the medium term. In the short term, there is too great a risk to product quality and brand in partnering with subpar domestic component manufacturers just to satisfy government regulations. In the long term, however, the Indian market opportunity is too attractive to not make serious investment in Apple’s own Indian manufacturing capabilities and re-work the company’s manufacturing supply chain to satisfy the “Make in India” initiative. I would also encourage Apple to maintain its balanced effort of lobbying for special government treatment while at the same time making the investment needed to satisfy regulatory requirements. To give up its lobbying effort would signal to the Modi administration that it could hypothetically increase the local sourcing requirement beyond 30%.
On a global level, however, I would caution Apple management to not view the India strategy as a blueprint worth repeating should other less attractive countries also implement protectionist policies with the hopes of boosting local manufacturing. The attractiveness of the Indian smartphone market is unique both in size and expected growth, and therefore can be worth the risk to supply chain disruption. Should the current global trend in protectionism continue to grow, global companies such as Apple will need to decide on a case by case basis when supply chain disruption is or is not worth entering new markets.
Open Questions
Is producing an iPhone with Indian component manufacturers who may lack technological expertise worth the inherent risks to product quality?
Is spending years lobbying a country’s government for Apple-only supply chain exceptions worth the risk of delaying entry into a market or losing share to competitors?
[1] “About – Make In India”. 2017. Makeinindia.Com. http://www.makeinindia.com/about.
[2] BGR India. 2016. “Government Rolls Back 29.44% Import Duty On Mobile Phone Components” 9th May, 2016.
[3] https://9to5mac.com/2016/05/25/report-indian-government-rules-apple-must-sell-30-locally-made-goods-to-open-retail-stores/
[4] Miller, Chance. 2017. “Report: Indian Government Rules Apple Must Sell 30% Locally Sourced Goods To Open Retail Stores”. 9To5mac. https://9to5mac.com/2016/05/25/report-indian-government-rules-apple-must-sell-30-locally-made-goods-to-open-retail-stores/
[5] Venkatraman, Shriram. “Apple and the Smartphone Market in India.” Blog post. UCL: Social Networking Sites and Social Science Research Project. 6 May 2016. 15 Nov. 2017. ACI Scholarly Blog Index. Web.
[6] Apple plans to make in India. (2017, Jan 03). Global Data Point.
[7] “Not possible to extend concessions to apple under GST regime”. (2017, Oct 09). Businessline.
[8] Agarwal, S. (2017, May 24). Apple makes govt a promise, gets leeway to make in india economy: Macro, micro & more]. The Economic Times.
[9] Aulakh, G. (2017, Jun 06). Samsung’s make in india ringtone gets louder the economic times]. The Economic Times.
[10] Nikkei Asian Review. 2016. “Lenovo, Xiaomi Boost India Smartphone Market Share” 17th November, 2016.
Apple’s smartphones are in the premium segment, which puts the phones out of reach for most Indian consumers. Apple sells used phones to developing nations as a way to reach customers who can’t afford the newest product, so even if it could sell new phones in India the market potential is likely limited. It would still prefer to sell through it’s own retail outlets, however. In that way it seems to be taking the best possible approach: sell your product (mostly used phones) through distributors, lobby for exception so you can use your own retail stores, and long term identify suppliers who can live up to your quality standards so that as India becomes richer, you will be able to provide the full retail + device eperience.
Similar to the author, I agree that using the current Indian component manufacturers is not worth the risk to product quality and subsequently the Apple brand. Given that Apple’s website has an entire section dedicated to their suppliers’ responsibility, most notably stating,
“We have a great responsibility to protect the rights of all the people in our supply chain, and to do everything we can to preserve our planet’s fragile environment. That’s why we obsess over every detail of how we build our products. And it’s why we invest in education and training to provide opportunities and tools to help our suppliers’ employees today and in the future.” (https://www.apple.com/supplier-responsibility/)
it is clear that any concessions in this philosophy would have large effects on not only what Apple produces but also what it stands for.
That said, India is not your typical market. Currently, India is considered the second largest smartphone market, increasing by 23% or 40 million units by Q3 2017. Of this increase, however, Samsung and Xiaomi accounted for almost half. (https://www.canalys.com/newsroom/india-overtakes-us-become-second-largest-smartphone-market) With 1.2 billion people, growing at a rate of 1.17% on top of 14% of the current population is ages 0-14 with a median age of 27, there is no doubt this is a more than viable market in which Apple should invest heavily. Consequently, in the face of “Make In India,” it would seem at least a short to midterm step is less to lobby for Apple-only supply chain exceptions and rather, seek to partner with the Indian government to demonstrate bringing the values Apple has regarding the quality of its suppliers to the communities and people of India.
Given the points outlined above, I agree with Apple’s stated short and medium term action plans. The only thing I would add is that perhaps Apple might take a page out of Samsung’s book and communicate to the government that it’s launching a PR/community campaign centered on “Make for India” (http://www.samsung.com/in/makeforindia/) where it will partner with Indian communities to provide technology & skill development with the hopes that the goodwill gesture might help strengthen their lobbying efforts.
Really interesting read, thanks for posting. To address your question – is spending years lobbying a country’s government for Apple-only supply chain exceptions worth the risk of delaying entry into a market or losing share to competitors? – I don’t believe Apple can afford to tip-toe around entering the Indian market. India represents a strategic priority for Apple, and as you mention, it is the second largest smart phone market in the world. This WSJ article shows that Apple has been losing market share in India to low-cost smart phones made by both foreign and domestic rivals: https://www.wsj.com/articles/apple-looks-to-india-for-growth-1463512228. Because consumers’ smart phone brand loyalty is very sticky (i.e. people tend not to change their smart phone brands often, if at all), Apple must be sure it is one of the early entrants in the market. I believe another way for Apple to inspire a more immediate change in government regulation is to communicate directly with Indian consumers. Apple has the international brand power and customer loyalty to inspire the Indian people to demand retail outlets (and thus the latest Apple products), regardless of whether the components are produced in their country.
“The “Make in India” initiative is forcing smart phone manufacturers such as Apple to consider disrupting their supply chain in order to better access the second largest smart phone market in the world. But is producing an iPhone with Indian component manufacturers who may lack technological expertise worth the inherent risks to product quality?”
The “Make in India” initiative and its implications for smart phone manufacturers such as Apple is quite an interesting case study in barriers to entry, competition, bargaining power, and negotiation. I agree with the author’s belief that in the short-term, Apple must prioritize product quality even at the expense of delaying entry into the Indian market, but in the long-term must reconfigure its supply chain to abide by the “Make in India” initiative. While these appear to be sound strategies in today’s competitive environment, Apple will have to remain wary of its competitors, particularly given that some may be further along in investing in local manufacturing (https://www.wsj.com/articles/apple-scraps-like-an-underdog-in-second-biggest-mobile-market-1498123803?mod=rss_Technology). Although Apple’s brand strength may enable it to succeed despite lacking first-mover advantage in the Indian market, there is too much world smart phone market share at stake for Apple not to continuously revisit its entry strategy and supply chain decisions.
Apple has already announced their plan of opening a manufacturing facility in India. Put aside the government tariff on imported smart phones, manufacturing cost in India has become very competitive, as manufacturing cost rises in China, where the only Apple’s manufacturing plant locates. Additionally, in 2016, China’s information protective government suspended iTune and iBook. This is something to be worried even more. Therefore, I would consider manufacturing in India is a great choice for Apple.