How will Apple, the poster boy of Make in India, deal with end of PLI?

In 2016, a few days before Apple Inc chief executive officer (CEO) Tim Cook came on his maiden visit to India, the government rejected the company’s proposal to import and sell refurbished iPhones in the country. If that was not enough, Cook’s request to allow Apple stores in India and grant some leeway on the 30 per cent local sourcing clause was rejected by the commerce minister at the time, Nirmala Sitharaman, in Parliament.

It looked like Apple’s relationship with India had reached the point of no return.

Yet, seven years later, and more than halfway through the five-year term of the government’s Production Linked Incentive (PLI) scheme, Apple has emerged as the poster boy for foreign manufacturing in India and an advertisement for “Make in India”. It has brought scale, ramped up value-addition, and could soon become one of largest manufacturing MNCs in the country.

What is more, unlike MNCs in sectors such as automobiles or consumer electronics, Apple has focused on making India a hub for exports, without relying on the promise of the large domestic market. India accounts for only 1.5 per cent of Apple’s global sales.

Along the way, Apple has demonstrated a model for a company with a global value chain to successfully engage and collaborate with the government, a model Tesla and Micron are understood to be studying. An Apple Inc spokesperson did not respond to email queries related to this article.

Big bet on India

Apple Inc has made a much bigger bet on India than expected. In the ongoing third year of PLI, its three vendors have assembled iPhones worth Rs 60,000 crore freight on board (FOB) value between April and October 2023. FOB, also referred to as Free on Board, describes the time — usually when the consignment has to travel from a major port to the buyer’s warehouses or vendors — when the seller is no longer responsible for the goods and the buyer has to pay for transportation.

On the current run rate, Apple’s vendors will end 2023-24 (FY24) having made iPhones worth Rs 1 trillion crore. That is about a third more than their target of Rs 74,000 crore. This means India will account for more than 10 per cent of iPhone’s global production this financial year, up from 7 per cent in FY23, and Apple would achieve its target of shifting that much capacity from China to India two years ahead of schedule.

That is not all; Apple is looking at surpassing its original PLI commitment. The plan is to double the value of iPhones assembled to Rs 2 trillion crore FOB by the end of FY26.

Again, based on the current run rate, Apple’s vendors would account for more than half of the total exports of mobile phones, worth $15 billion, expected by the government in FY24, which could make it the fourth largest item of export from the country.

No smooth sailing

It has been a roller coaster ride. It took three years of intense discussions for the government to relax the local sourcing rules for single-brand retail and agree to include the manufacturing value of vendors in the calculation. 
 

When it was permitted to sell through its online store, Apple promised not to indulge in heavy discounting that would hurt physical retailers. It also agreed to the government’s demand to make the latest iPhones in India at the same time as in China ­within three years.

The biggest challenge was to establish a global supply chain in India so it could fulfil its promise to the government of 30 per cent value addition. With more than 80 per cent of its component suppliers in China, the simple way was to bring them to India, which is what Apple tried initially. But this ran into rough weather in 2020, even before mass production of iPhones kicked off, as India’s relations with China acquired an edge and India put restrictions on investments by Chinese companies.

Apple urged the government to relax the rules, but that seemed to be a tall task. A small window opened to pre-clear 14 of its Chinese vendors, but this did not go far. By the end of 2022, Apple began to concentrate on building an India-specific supply chain with the Tata Group and by bringing in South Korean, Japanese, and Taiwanese companies.

Tata began by making a component called “enclosures” for the iPhone, and struggled initially, but is now exporting to China. 

The group has taken a big step forward by acquiring Wistron, one of the three iPhone assemblers in India.

Talks are on to bring iPhone display assembly to India with non-Chinese players. Apple has tied up with Japanese TDK to set up a manufacturing plant to make lithium ion cells for the battery, which will begin commercial production in 12 to 18 months and enhance the value addition by another two to three percentage points.

Sources in the know say it is clear that with the current iPhone localisation of 12 to 15 per cent, doubling it by FY26 is not going to be easy. Apple is believed to have conveyed to the government that this could get delayed by two years.

Post-PLI challenge

“Not many Indian companies are willing to put in the capital required to be a global Apple supplier. They do not have the technology and they do not have the experience, so rejection rates can be high. Apple will need to do a lot of handholding,” says the top executive of a firm that supplies to Apple. Apple engineers who can do the handholding are based in China and may face difficulties in obtaining visas.

Another challenge is the increasing tariffs on inputs for smartphones, which makes India less competitive relative to China and Vietnam. This could become acute once PLI incentives are phased out.

For instance, the effective impact of the duties in India on a smartphone such as the iPhone could be 5 per cent on the FOB value, while these inputs come to China and Vietnam at zero duty. “If this issue is not taken care of, India might not be able to take the next big jump in ramping up exports after PLI is over,” says the top executive of a premium mobile device company.

To get more scale than envisaged and nearly double the value addition, Apple’s vendors will need to replicate the model of Chinese mega-factories in India, which have given the scale that fuelled Apple’s success. For comparison, Foxconn’s plant in Zhengzhou accommodates up to 300,000 workers during the peak shift. The largest iPhone factory in India can take in 40,000 workers in a shift.

Larger factories in India will require getting workers from all over the country and putting them in dormitories close to the factory. They will need transport. Women form a higher percentage of smartphone factories than in other sectors. Some labour laws might have to be tweaked to make certain shift hours possible.

On the bright side, in Tamil Nadu, a government agency is building dormitories for 18,000 women that is being taken up by Foxconn. The Karnataka government has come out with a draft to encourage construction of dorms. The state has also cleared legislation for more flexible and longer hours of work, such as 12-hour shifts.

It may not take another seven years for the next stage of Apple in India to ripen.