Company-owned Retails Stores or a Manufacturing Hub - what is important for Apple in India?

"I am very bullish on India" - these were the words of Tim Cook at one of Apple's recent earnings calls. Apple's investment and positive outlook in India rightly resonate with his bullishness. Apple launched its first company-owned retail store in India on April 18th this year. While Apple had been eager to open a company-owned store in India since 2016, it took them 7 years to execute the plan. In terms of production, Apple has been manufacturing iPhones in India since 2017, though it was only for older models. Since 2021, Apple has boosted manufacturing as well with newer models being produced in India. In the Indian context, does Apple place a greater emphasis on the manufacturing or the brick-and-mortar retail channels, considering that both are integral parts of its value chain?

To answer this, it is crucial to understand an important link that connects both manufacturing and single-brand retailing - India's Foreign Direct Investment (FDI) Policy. Until 2018, India's FDI policy allowed 100% FDI on a single-brand retail only if 30% of the sourcing is done locally; in crude terms, FDI policy warranted companies to manufacture its product in India if they want to open a company-owned store. This clause was relaxed in 2018, which now required a company to show incremental local sourcing year over year over a period of 5 years, from the launch date of its first store, and henceforth, achieve 30% local sourcing after the completion of the 5 years. This allowed Apple to open its store in India without meeting the sourcing criteria immediately, which likely was a bottleneck. Now that they have opened a store and will likely expand, they must achieve 30% sourcing criteria by 2027.

Did Apple increase its production capacity primarily to facilitate its entry into single-brand retailing, or is the strategy centered around establishing India as a vital manufacturing hub, with the opening of retail stores being a consequential outcome of this strategy?

Let's explore the individual strategic advantages that a retail store and a production unit could offer to Apple.

Apple's market share in the smartphone segment in India was ~5% in the year 2022. Apple's growth in the smartphone segment in India was ~11% YoY in 2022, whereas Apple's global growth in the smartphone segment was ~7% YoY in 2022. Higher growth in India can be attributed to a combined effect of the growing smartphone market in India and an increase in the purchasing power of the Indian population. Whatever the reasons, India is a lucrative and growing market for Apple, and not just in the smartphone category. It surely makes sense to have the products produced locally, resulting in lower production costs and higher margins. While Apple is actively expanding its manufacturing presence in India, it is important to acknowledge that the journey ahead may not be entirely smooth or without challenges. Because semiconductors account for ~55% of iPhone's manufacturing cost, it will be interesting to see how much of the semiconductor demand can be met locally. Other issues such as non-flexible labor laws, and operational challenges such as lower-quality standards are something that Apple needs to deal with in India, which otherwise is a 'no concern' situation in other geographies such as China.

Apple recorded a revenue of $1.3B in the year 2022. Apple's resellers in India, no doubt, have done a fantastic job over the years. However, the upsides of having a company-owned store cannot be undermined; stores would sell experiences not just smartphones. Enhanced service and better experience would increase the potential to up-sell and cross-sell products. The stores could also serve as a central point to tap into the revenue coming from the 'services' (app store, music, cloud to name a few). Apple services account for 20% of global revenue in 2022. While no data is available on what percent of revenue from India came from services, it can be safe to assume that it will be much less than the global average.

While the organic growth of Apple in smartphones, PC, and wearables is certain, it is the service category that it would be interested to tap into. With the increasing propensity of the Indian population towards subscription platforms (In-app, OTT to name a few), this could be a brilliant move on Apple's part. Naturally, the stores can be an important part of this strategy, creating brand stickiness and improving brand loyalty.

If I have to guess, investing in company-owned stores is the larger part of Apple's strategy compared to manufacturing in India. With double-digit growth in the smartphone segment alone, Apple knows that the market is ripe in India and is aware of the growth it can get in untapped segments such as 'Service'. While manufacturing could be a part of the long-term strategy, the short-term outlook would mostly be to fulfill the FDI criteria of 30% local sourcing. It may not be surprising if we see Apple expanding its stores in the next few quarters.