Apple combats with Protectionism in India
Learn more about how Apple combats the protectionist laws in India to fight for growing its market share in the world's second-largest smartphone market.
Global Protectionist Trends
From fundamentally protectionist campaigns of world leaders such as President Trump’s ‘Buy American’ and Prime Minister Modi’s ‘Make in India’ to isolationist decisions of developed nations such as ‘Brexit’ – the global economy is becoming increasingly protectionist. Tax breaks to companies which “import jobs” back, deliberate currency fluctuations to make a country more favorable as an export market are commonly becoming employed ploys by national governments.
Protectionism is aimed at protecting local producers, jobs and businesses through tools such as tariffs on imports, subsidies, tax cuts etc. Protectionism proponents argue that governments should frame economic policy which caters to domestic audiences, while critics consider such policies to be short-sighted and incapable of addressing issues of growth or unemployment.
The Indian Context
India has historically been protectionist, especially when it comes to its retail sector, which is 98% unorganized and a major employer of local labor. The government has feared that a surge in Foreign Direct Investment (FDI) in retail might hamper local employment. However, over the last decade, steps have been taken to gradually increase FDI across various sectors, including retail. Current FDI allowances for most sectors range from 49% up to 100% [1].
The allowances for the retail sector still stand at a staggering 49%. For proposals involving FDI beyond 51%, the laws mandate at least 30% sourcing to be done domestically [2].
Apple in India – a victim of protectionism
Apple entered India a decade ago primarily focused on selling its flagship product – the iPhone. As per Indian FDI laws, Apple was not allowed to set-up any retail store unless it sourced over 30% parts domestically [6]. The iPhone was almost wholly manufactured in China, due to lower costs. This forced Apple to go-to-market in India mostly through “authorized resellers”.
Over the last 9 years, Apple has been unable to establish a strong footing in the Indian smartphone market, which is the world’s second largest smartphone market and is currently 97% Android [3]. Compared to 20%+ growth of the Indian smartphone market, Apple has witnessed single-digit growth and holds a meagre share of 2% [3]. Primary issues explaining this subpar performance are:
- High price: The average iPhone is priced at ~$600, while competitor smartphones vary from $80 to $700 and provide equivalent usage features. Stripping apart the costs, we see that a huge chunk comes due to the “go-to-market” model that Apple has been forced to adopt due to Indian legal restrictions. Firstly, the import taxes on fully-made phones vary from 12.5% to 28% [4]. Secondly, as Apple does not have own retail stores, their cost-to-serve increases by 15% to 20%. Due to the additional channel. Lastly, the high price also aids the creation of an active secondary market for refurbished iPhones, further hampering sales
- Competitive intensity: With 100+ smartphone players in the market, the competition to provide the most value-added smartphones at cheapest prices is fierce. 4 out of top 5 players are manufacturing in India enabling them to have lower cost structures and consequently, charge lower prices.
Apple’s Response
In the last decade, Apple made several petitions to the Indian government to relax regulations for FDI and/or permit them to open retail stores [5]. However, the protectionist Indian government has time and again, disallowed it. Apple also petiti
oned to sell refurbished iPhones in the Indian market themselves. That was also denied on grounds that it could make India a “dumping ground” for old technologies.
Finally, in May 2016, Apple CEO Tim Cook had a series of meetings with the Indian government on how Apple’s relationship with India can be best taken forward. The outcome of those negotiations has resulted in Apple initiating the assembly of iPhones locally in Bangalore, India in May 2017 [7], with further expectation of setting-up full-fledged manufacturing soon. In lieu of this commitment to “Make in India”, Apple anticipates a potential exemption from FDI regulations and/or reduction in prohibitive import duties.
Additional Recommendations
- In the short term, Apple should focus on reducing its cost-to-serve and gaining share in the fast-growing Indian market, while committing to set-up manufacturing in India in the medium term
- Apple should also consider investing in customizing its phones and applications for India (for e.g. the App store, iTunes, Siri) [3]. Most of its competitors have already done the same.
Closing Remarks
Like Apple, many multinationals have given into protectionist government policies to stay competitive in India – for e.g. Walmart, Starbucks etc. However, there are certain aspects of this “corporate-government interplay” which remain important questions:
- Should Apple commit the capital to manufacturing in India, which may not have equivalently skilled labor and technological know-how as China?
- On the other hand, should emerging countries like India, which grow through foreign capital influx to grow, mandate restrictive and protectionary regulations? Do such measures boost or harm the local economy in the long run?
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Sources:
[1] Indian Government Website for “Make In India” http://www.makeinindia.com/policy/foreign-direct-investment, accessed November 2017
[2] Asit Ranjan Mishra. “Modi government mulls allowing 100% FDI in retail, with caveats”, published by Livemint, May 23, 2017 [http://www.livemint.com/Industry/6EAO7iO19zi8yoW4FlPF1M/Modi-govt-mulls-allowing-100-FDI-in-retail-with-caveats.html]
[3] Aaron Pressman. “Why Apple is having so much trouble in India”, published by Fortune, August 5, 2016 [http://fortune.com/2016/08/05/why-apple-needs-india]
[4] Indian Government Export/Import website https://www.export.gov/article?id=India-Import-Tariffs, accessed November 2017
[5] Joseph Waring. “LeEco joins Apple in pushing India to ease local sourcing rule”, published by MobileWorldLive, April 20, 2016 edition [https://www.mobileworldlive.com/asia/asia-news/leeco-joins-apple-in-pushing-india-to-ease-local-content-rule/]
[6] Joseph Waring. “Indian won’t ease 30% local sourcing rule for Apple”, published by MobileWorldLive, May 26, 2016 edition [https://www.mobileworldlive.com/asia/asia-news/india-wont-ease-30-local-content-rule-for-apple/]
[7] Todd Haselton. “Apple begins manufacturing iPhone SE in India”, published by CNBC, May 17, 2017 edition [https://www.cnbc.com/2017/05/17/apple-begins-manufacturing-iphone-se-in-india.html]
Very insightful piece about the factors contributing to Apple’s lack of success in India, from the high price point and numerous local competitors to the protectionist agenda of the Indian government. Although I found it difficult to evaluate the overall impact of FDI allowances without in-depth knowledge of such restrictions or a specific definition of “FDI”, I can appreciate how such regulations are being used to prevent local industry from being crowded out by large multi-nationals.
While I see many potential benefits of Apple manufacturing and/or sourcing in India, there are additional risks not mentioned in the article that likely figure prominently in Apple’s decision-making process. For example, without substantial oversight, producing in India could create more opportunities for Apple’s manufacturing processes and other intellectual property to be stolen and sold to competitors. In addition to creating quality control issues, the dearth of skilled Indian labor mentioned in the article could also produce an oligopoly of local manufacturers with substantial leverage over Apple in future negotiations. Customizing its digital platforms and policies to the local market could also be expensive and even undermine Apple’s brand if the tweaks to its system are unsuccessful in catering to consumer preferences in India.
It is interesting to study the dynamics of protectionism in this context. Apple is big, but India is bigger, and as such a large economy with a perfectly well developed smartphone market, the reality is that Apple needs India more than India needs Apple. I understand why the government played hardball and in this instance am inclined to think their protectionist strategy will help the economy in the long-run. Whether these strategies support long-term growth when applied across all industries I’m not so sure.
Onto the question of whether Apple should manufacture locally. As you mention, most of their competition in the market already manufactures locally, and therefore by manufacturing in India as well Apple should not have a significantly higher core manufacturing cost structure. Presumably at least some of the higher costs of manufacturing in India would also be offset by reduced transport costs, and it is frankly a small price to pay for market access. I would also argue that, given the market opportunity, Apple could make the necessary investment in human capital which would only strenghthen its standing with government.
I completely agree with the above commenter regarding the decision to manufacture locally. If 4 out of the top 5 smartphone manufacturers have already been producing in India successfully and profitably, Apple should be able to do the same. In addition to the reduced transportation costs mentioned above, Apple would also save substantially on import taxes, in addition to being able to open retail stores and reduce their cost to serve customers. Furthermore, Apple would be able to move away from the “authorized reseller” model and capture more of the value for themselves. I think that the decision to produce locally in India was the right move.
Fascinating topic – great choice for your essay, Anuj! I was not familiar with the Indian government’s protectionist policies, so this provided an interesting case study of protectionism in a developing economy with impacts on one of the most prominent U.S. companies in the world. It was an interesting perspective, since I am more used to reading about the impacts of U.S. protectionism on manufacturers from foreign (often Asian) manufacturers.
Concerning the Apple case, I agree that there are many benefits to Apple moving manufacturing to India, including cost and the ability to capture greater market share in India. However, I also agree with Ryu’s comment that there are many risks to Apple’s move in India. In addition to everything Ryu mentioned, if I were Apple I would be concerned with the risk that other governments might follow India and demand that Apple concede to domestic manufacturing requirements in order to have access to the market.
Thank you for this essay, Anuj! I enjoyed reading it and learned a lot about the Indian policies that international companies face when they want to enter the country.
When thinking about Apple’s situation, I think that they absolutely cannot ignore India, given the size and the growth of the nation. If this means that they must comply with India’s FDI regulations, then they must do so in order to enter. Given the large pool of talent in India, I would be shocked if they were unable to find skilled labor or technological know-how. The greater concern that I have is around the price that they would be able to sell the iPhones for in India. The recent product portfolio expansion that Apple has done of offering the iPhone C should hopefully help with this, but they should further consider if there are other ways they can make the iPhone more affordable.
From India’s perspective, I think that they should lift the protectionary regulations. Such regulations act to disrupt the natural economics of development that would happen otherwise. India would benefit from having international companies enter easier, even if it means more competition for local companies in the short term. In the long term, this would enable citizens improved access to cheaper goods or if countries see that operating in India has its benefits, then they would naturally invest further in the country.
I enjoyed reading your essay. India is a huge market that most of companies want to get in. As India has been protectionists for a long period, Samsung built its cell phone factory in India in 2006 and has been expanding until now. These days, even Chinese electronic companies are investing aggressively in India. As India has a lot of smart people, foreign companies can hire and train them easily. Apple factory in India will catch up the efficiency of Foxconn within short period of time. However, the harder part for Apple in India is its market share. Increasing market share in India would be challenging for them because of the severe competition among all global big names and the existence of huge refurbish market of Apple products. About the protectionism, I personally think that it is somewhat inevitable for developing countries to give enough time to their domestic companies and industries to build sound foundation to compete with mature foreign companies. Also, the restriction that India government set is a good strategy to attract more companies and foreign direct investment.
Extremely informative piece! I was unaware of Apple’s struggles and lack of market share in India.
In response to your recommendation that Apple should focus on reducing its cost-to-serve and gaining share in the market in the short-term, I was unsure how Apple could do this without a fundamental change in India’s government policies. It seemed to me that the only way to deliver the product to the consumer was to leverage re-sellers. In this case, the re-seller is added into the supply chain as a middleman, and necessarily adds a markup, increasing the cost to serve. I’m not sure that Apple has any other choice than to start the process of manufacturing in India. I don’t see a case where Apple could convince the Indian government to relax its policies. As NM said above, Apple needs India more than India needs Apple. I do agree with Ryu’s comments that there are risks involved. Changing the supply chain always has inherent risks, but I’m not sure Apple has another choice if they want to be a player in India.
Being a proponent of globalization and free trade, this essay made me see that some isolationism might benefit emerging economies. From the perspective of the Indian government, its policies aid the country’s growth in skilled labor and technological improvements. Even though India might not have a competitive advantage in these areas now, if companies are forced to produce products domestically, in time, its technological know how and skilled labor resources will improve.
Given the large size of the Indian market, the added costs of inputs and investing in technological and human development do not seem to be greater than the economical benefit of producing in India due to a reduction of taxes, cost savings from distribution control and increased demand. Given the small size of Apple’s market share, the benefits of becoming a market leader in India are enormous. Over time, as skill level rises, Apple will likely be able to reduce its production costs.
I found this paper to be really interesting, especially as someone interested in emerging markets. I had no idea that Apple was at such low market share for such a fast-growing global player. With 100+ smartphone players in the market, I don’t know if it makes sense for Apple to climb this hill. Unless Apple is willing to really research the unmet needs of the Indian smartphone market in order to become a leader, the return on their investment may not be worth this effort. The other aspect I found fascinating is the question about protectionism being a benefit or barrier for emerging economies. I imagine India is trying to protect the resources of its people, to avoid the reaping of resources that many developing countries have suffered at the hands of global superpowers in the past 100 years.
Very relevant essay showcasing the delicate balance that governments need to take into consideration when establishing and enacting these protectionist policies. In the case of Apple and India, as some other comments mentioned, it is true that Apple needs India more than India needs Apple’s products, however in the push to have manufacturing investment and jobs in the country, there is also interest on India’s end to be attractive to large companies. In the subject of whether manufacturing the iPhone in India will allow Apple to gain traction in that market, we saw many media outlets and institutions assess the potential benefit (or impact) of changing the manufacturing location during the presidential elections in the U.S., when the now incumbent President called for Apple, and other companies, to bring back the manufacturing jobs to the U.S.
When assessing the impact of moving production to the U.S., many of the commentators found that labor cost is a small fraction of the cost of the iPhone, and that shifting the assembling portion here, would add potentially 5%-10% to the retail price (https://9to5mac.com/2016/06/13/iphone-made-in-usa-cost/). The other option that was evaluated by various analysts was shifting the entire production of the phone, including the manufacturing of its components, to the U.S. In this case, what they found is that the cost could easily double, given the level of efficiencies that the manufacturing ecosystem of suppliers and plants that exists in China for the iPhone, actually enabled to a great extent the current cost/price levels (https://www.marketplace.org/2014/05/20/business/ive-always-wondered/how-much-would-all-american-iphone-cost). In light of this, analysts concluded that shifting this to the U.S. was simply not economically viable.
In the case of India, one may argue that there are advantages on labor costs, but given the similarities with the analysis for the U.S. it is evident that Apple cannot recreate its entire manufacturing ecosystem from China, so it is very likely that Apple will still have to subsidize via lower margins it’s own growth to gain traction in the market.
Great essay, Anuj. I wanted to respond to the question you posed, “Should Apple commit the capital to manufacturing in India, which may not have equivalently skilled labor and technological know-how as China?” I think that while there may not be as many skilled laborers in India on an absolute basis, there would certainly be enough to manufacture iPhones. My assumption is that most of the design and engineering work would occur in the US, and the Indian operations would largely be confined to manufacturing. Especially given Apple’s global reputation, I find it hard to believe that Apple would not be able to staff its Indian operations with skilled employees. Additionally, India’s workforce is growing much faster than China’s, which is actually expected to shrink (https://www.reuters.com/article/us-india-workers/help-wanted-indias-make-in-india-drive-lacks-skilled-labor-idUSKBN0K71E020141230), so over time this workforce inequality may even out.
Given an estimated smartphone market size of c.300m devices in 2017E (https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/), a 1% market share increase in India translates into incremental revenues of c.$1.8bn for Apple (assuming that the average iPhone is priced at ~$600), indicating massive growth potential in a continuously expanding market. Once Apple does not have to bear with the stringent FDI regulations anymore (following commitment to set-up initial manufacturing facilities in India), the company will be able to operate at more profitable terms. In case underlying trade dynamics improve to a level at which Apple’s competitiveness & profitability benefits overcompensate the costs of ramping additional manufacturing capacity in India, Apple should certainly consider deploying additional capital in India.
Generally, I would argue that it makes sense for emerging countries such as India to apply a strategic/selective approach to trade regulations in order to “protect” core industries that drive the country’s economy (e.g. the smartphone industry in India). On the contrary, the country should welcome foreign capital inflows into sectors that are currently still underdeveloped (e.g. agriculture, infrastructure), in order to accelerate growth & innovation.
Excellent essay and very interesting topic, Anuj! I agree with many of the other comments, that the best move for Apple is to start manufacturing in India. I also agree with your recommendation that Apple try to adapt their products for the Indian market, hopefully finding ways to reduce costs along the way. Given how highly fragmented the Indian market is, I think Apple will need to rethink what their customer promise will be and how they will position themselves in this market, the consumer needs and therefore their operating model may not be the same as what it is in other countries. d
Amazing topic and very well written essay! I strongly agree with your recommendation to start manufacturing in India, which is another global manufacturing hub. However, this comes with another issues including lower labor productivity and organizational&logistical setbacks (https://www.intouch-quality.com/blog/manufacturing-in-india-vs-china).
I don’t believe that the elimination of the official resellers would help, I think the cost-to-serve through opening their stores would not be justified given the current softness in demand; that said, it is definitely a plausible long-term sales strategy. Another alternative they can do, is to start a “maintenance” arm, where they can capture the value in the refurbished Apple iPhones market.
Thanks for the great read Anuj! This is a very interesting and relevant topic not just in the context of India or Apple but for any global company combating protectionism in any country. While globalisation has made the world a smaller place, it has also made each country even more aware of threats from other countries and of rewards of bettering their economy – which leads to protectionism.
I agree with the comments above addressing the question around manufacturing in India. However, my reason stems from two places: one thats mentioned above is that proof of existence of the skills and infrastructure exists since so many others have already done it already. The other reason why I think it makes sense for Apple to start manufacturing in India is more from an efficiency and long-term strategy perspective. As Apple sales grow, it would need to keep expanding its manufacturing. Continuing manufacturing only in China carries the risk of putting all of their eggs in one basket. Utilising existing expertise in India and in the process improving it further gives Apple a stronger backend.