Apple's emerging India play, strategy notably different from Vietnam

The three-day extravaganza has ended. Beyond the photo-ops with actor Madhuri Dixit and cheering staffers, Apple CEO Tim Cook, who jetted into India after a gap of six years, had a serious business agenda to discuss over serial consequential meetings: with Prime Minister Narendra Modi; the two men who oversee the country’s communication and IT sector, Ashwini Vaishnaw and Rajeev Chandrasekhar; the country’s telecom czars Mukesh Ambani and Sunil Mittal; and with the company’s India team.

Afterwards, there were politically correct statements about being bullish on India and pledges to invest and produce more iPhones in the country, but Cook did not offer more details on the tech giant’s India play. Discussions with government officials and with those who met the Apple top brass, however, provide some insights.

To begin with, the Cupertino, California-based giant’s India strategy is notably different from Vietnam, the other manufacturing base the company has chosen to assemble its products.

In India, Apple has decided to focus on a few products but on a large scale, as they did in China, instead of assembling the entire range of its products in smaller volumes. The product it has chosen as its flagship is the iPhone and building its supply chain (it will also produce some iPods with Foxconn). In Vietnam, by contrast, Apple Inc makes iPads, Apple Watches, MacBooks and iPods.

That strategy makes sense for India. iPhones account for 51 per cent of the company’s global revenues (90 per cent of them are still assembled in China), while all the other products including services account for the rest. The total share in its global revenues of the various products made in Vietnam account for roughly 28 per cent.

By assembling only iPhones, Apple’s three principal vendors in India — Foxconn, Pegatron and Wistron — could easily hit the higher end of the free on board (FOB) value committed under the production-linked incentive (PLI) scheme by FY26 at $20-25 billion. That would translate, said analysts, into one-fourth of global iPhones.

The minimum that the three have to do to ensure eligibility for incentives is much lower at $15 billion. But the PLI scheme provides the flexibility for them to produce more.

The good news is that in FY23 Apple vendors had already crossed the PLI commitment for the second year — to make iPhones with an FOB value of Rs 40,000 crore.

In two years, therefore, Apple’s vendors have moved over seven per cent of their global iPhones into India by FY23. They assembled phones with an FOB value of Rs 60,000 crore, of which 66 per cent is for exports.

The move has also helped the company push domestic sales, an area in which Cook is now focusing — 85 per cent of the phones sold in the country are now “made in India”, which gives them a cost advantage over importing iPhones by paying steep customs duties of 22 per cent.

And with Chinese brands such as Xiaomi, Oppo and OnePlus struggling at the higher end of the Indian mobile market, analysts expect Apple Inc should be able to hit $6 billion by FY24 against $4 billion in two years earlier. The inauguration of the company-owned stores in Mumbai and Delhi are part of this new game plan.

But given Apple’s ability to ramp up exports much faster than it can with domestic sales, the share of the former will only go up as a percentage of total value of production. Exports are expected to go up to 70-75 per cent of total value of iPhones by FY26, the last year of PLI.

For all the optimism, clear risks can emerge — mostly in the public policy space. These include having a continuously changing taxation regime, states’ resistance to liberalising labour laws, and in case of stringent action taken by the Competition Commission of India that is investigating anti-competitive moves by the company.

A top government official acknowledged that Cook raised these questions. “Cook did urge the government to continue with policy stability, support them in building the supply chain which we are already doing and step up skilling and easing labour laws,” said a senior government official.

Perhaps the most important concern was that while the PLI scheme has a sunset clause (after five years) there is no sunset clause on tariffs that can be changed any time even now and after five years. It’s a contentious issue that has been raised even by potential companies wanting to enter India’s semiconductor business.

“Lack of stability on customs duties could play havoc with exports and export targets. For companies focused on domestic sales, the risk is low as they can pass on higher taxes to consumers, as they did when GST was increased from 12 to 18 per cent on mobiles just before PLI. In exports you cannot do that because you have to be globally competitive,” said a consultancy company that handles global clients.

That is not the only bone of contention. Uncertainty in labour laws could also impact production ramp-ups. The Tamil Nadu government has just cleared a Bill for a 12-hour shift over four days instead of eight hours in six days; the question is whether the Centre will endorse it so that it can be implemented.

Apple executives, however, draw positives from the fact that the government is responding to the challenges the multinational has put on the table. On their part Apple is moving up localisation from 12-15 per cent on iPhones to 27-30 per cent by having the enclosure for the phone and the camera modules made locally, by the Tata group and Sunny Optical respectively.

On the other hand, the government has found a way to enable Apple’s major Chinese vendors to set up a base in India, a door that had closed following border tensions. The proviso is that they set up joint ventures with locals. Apple has government approval for 14 Chinese vendors, and the process to find local partners and apply for foreign direct investment approvals has begun.

If the journey charted out by PLI runs smoothly, Cook might well keep his promise of coming to India again “very soon”.

How Apple Inc is slowly reducing its China reliance

In 2021, 52-55% of Apple’s revenue was made in China, down from 60-62% in 2020. In 2022, it is expected to be 45-50%
 

Out of 150 new manufacturing locations added by Apple Inc in 2021, 79% were reportedly based outside mainland China
 

India already accounts for 7% of global iPhone production in FY23. It could go up to 15-25% by FY26, say analysts

Source: Deepwater Asset Management and analyst estimates based on commitments by Apple’s vendors