Apple — in which I have no financial interest — has a growth problem and tried to solve it by selling iPhones in India. That’s proven to be an epic fail.
Apple shares trade 28% below their October 3 high. And that leaves open a question for investors: Can Apple grow faster? Its India strategy suggests it can’t.
Apple thought India would be a good source of growth. Apple started selling the iPhone there in 2008 — by 2011, Apple’s India sales hit $100 million — rising to $1 billion by 2015, according to the Wall Street Journal.
CEO Tim Cook visited in 2016 with hopes of increasing that number to $5 billion by 2020. That goal remains elusive. Apple achieved only $1.8 billion in India revenues this fiscal year — less than half Apple’s goal for the year, according to the Journal.
Apple’s iPhone market share in India is plummeting. So far in 2018, iPhones shipped in India are down 40% and Apple’s market share there has dropped to about 1% from about 2% in 2017, Canalys estimated.
In a November conference call with analysts Cook said, “I sort of view these as speed bumps along a very long journey. The long term is, I think is very, very strong.”
This raises a fundamental question for any CEO: Where will growth come from?
For Apple, the tip of the growth spear used to be new products — specifically ones that deliver much better quality to consumers than what competitors are offering in an already huge market. The last time Apple did that very successfully was in 2007 when it introduced the iPhone.
Apple hasn’t come up with a successor so it has tried another source of growth: selling the iPhone in countries with large markets where it does not have much market share.
As I wrote in Disciplined Growth Strategies, there are specific hurdles that companies must overcome to achieve that goal. Among the most important is to understand what customers want in those countries and deliver a product that does a better job at meeting those needs than competing products do.
Apple was right to realize that India represented a large opportunity. According to the Journal
With 1.3 billion consumers, the country is the world’s biggest untapped tech market. Just 24% of Indians own smartphones, and the number of users is growing faster than in any other country, according to research firm eMarketer.
Cook traveled to India in 2016, met Prime Minister Narendra Modi, posed for photos with Bollywood stars, visited iPhone retailers and a Hindu temple, and wore “a traditional scarf and a type of orange mark on his forehead that is typically applied for auspicious purposes,” according to the Journal.
There are five reasons why Apple has fallen short of Cook’s auspicious purpose in India.
1. iPhone priced too high
eMarketer says that India will host 39 million new smartphone owners in 2018. But Apple is not winning over many of them because its products are priced too high.
Apple charges about twice what customers are willing to pay. The Journal reported that over 75% of smartphones sold in India cost less than $250 and are bought through local, unaffiliated shops in the countryside where most Indians live.
Apple’s lowest-priced phone in India is the iPhone 7 which sells for $550 with phased out iPhone SEs going for about $250.
Chinese rivals — including OnePlus, Xiaomi, Oppo and Vivo – are gaining market share by selling smartphones for less than $200 and signing up Bollywood and cricket stars to promote them.
2. iPhone battery life too short
When Steve Jobs was leading Apple he prided himself on ignoring market research and giving customers what he believed they should want.
In India that strategy is not working for Apple. OnePlus has conducted extensive market research in India and learned that improving battery performance is a crucial product feature there “because customers often work long days away from electrical outlets and spend hours commuting through Indian cities’ thick traffic,” according to the Journal.
Counterpoint Technologies found that in the premium segment OnePlus leads Apple with a 30% share to Apple’s 25%.
Will Apple respond by offering a $150 iPhone with a battery life that’s longer than OnePlus’s product?
3. No Indian manufacturing
That could happen. The reason is that India imposes a 20% tariff on products sold there that are manufactured outside India. Apple imports the iPhone from China. While its rivals there make their products in India. So in 2017 Apple set up a plant near Bangalore to assemble its iPhone SE — seeking tax concessions for importing materials, noted the Journal.
It remains to be seen whether Apple will be able to lower its costs enough to make a profit on setting its price below that set by its Chinese rivals in India.
4. No iPhone stores
Though most Indian consumers do not buy smartphones in urban stores, Apple wants to open an official Apple Store there. But it has failed because India requires single-brand retailers that are more than 51% foreign-owned to buy at least 30% of their manufacturing materials from Indian vendors.
Apple makes most iPhone components elsewhere in Asia and has not been able to convince the government to give it a break. The Journal reports that government officials want Apple to invest more in local production and bring more high-tech jobs to India.
5. Management turnover
Since 2016 Apple has had two India general managers and is about to get a third. In 2016, Apple appointed Sanjay Kaul — previously an executive at Research In Motion’s Indian operation — to lead Cook’s India strategy.
The Journal reported that Kaul increased Apple’s network of distributors and tried to extend iPhone sales beyond New Delhi and Mumbai, to smaller, growing cities.
Kaul left Apple in late 2017 and was replaced by Michel Coulomb, who had overseen Apple’s South Asia operations—including Singapore. Coulomb — who cut the number of distributors and targeted wealthier Indians in upscale shopping malls — will be replaced in January by a former Nokia executive, Ashish Chowdhary, noted the Journal.
With Apple’s stock down sharply, is it time to buy them? Not if Apple keeps blundering when it comes to growth strategy.