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Business trends

Apple beefs up India supply chain as market gains importance

Steep duties make importing from China less competitive

Apple controls just 1% of the smartphone market in India, where Samsung, Xiaomi and other makers dominate.   © Reuters

MUMBAI/TAIPEI -- Apple has been quietly expanding its sourcing in India over the last two years, in a bid to catch up with South Korean and Chinese rivals in the fast-growing market.

While it still relies on manufacturing partners in China for more than 90% of its annual shipments, there are now five sites supplying iPhones and components in India against none two years ago.

Taiwan-based Wistron assembles older iPhones at two sites, while the Indian units of Flextronics of Singapore and Salcomp of Finland provide chargers. China's Yuto Packaging Technology is also now packaging older models, the iPhone SE and 6s, in India, according to documents seen by the Nikkei Asian Review.

The trend is expected to accelerate as the South Asian market becomes increasingly important for Apple, especially as the Chinese market loses steam.

On Tuesday, the Californian tech giant will unveil its latest quarterly results in New York, which are expected to confirm growing pessimism over the outlook for the smartphone market in 2019, and its struggles in China, the world's biggest smartphone market.

Apple's failure so far to penetrate the Indian market stands in sharp contrast to rivals such as South Korea's Samsung Electronics and China's Xiaomi and Oppo. Nikkei's analysis shows that Apple has recognized that it will only boost Indian sales by increasing local sourcing and manufacturing. India's stiff 20% import duty on mobile devices makes iPhones in India among the most expensive in the world and is one reason Apple has just 1% of the market there.

In the bigger scheme, India could also become an alternative base for Apple suppliers planning to move out of China amid the ongoing trade war. Major iPhone assembler Foxconn is ramping up investment in India, though it has not confirmed the purpose of its spending. According to a stock exchange filing on Saturday, the Taiwanese company has poured some $213.5 million into an Indian subsidiary since September in what it describes as a long-term investment in the country.

Apple has been talking up the benefits of a shift into India for some time, and the last two years show signs that it is happening, if slowly.

Samsung is among the global smartphone makers that have expanded their production in India to avoid steep import duties.   © Reuters

The first mention of India's potential for iPhone sales and production came from CEO Tim Cook a few months before his first visit to the country in 2016. "I view India as where China was maybe seven to 10 years ago," he said at the time. Before that India was not on Apple's map as a candidate for either sales or production.

"The fact that India is the third country to have assembling facilities [after China and Brazil] itself should tell you how important it is to Apple," said a source at the company. "While manufacturing, more of local sourcing and assembling other phone models are also in the plan, it is too early to be considering them. It's just been one and a half years since we began assembling [there]," the source said.

Five supply facilities may seem insignificant compared with the number it has in countries such as the U.S. and China, but given the small market share its holds in India, the number could also be seen as a commitment to expand there.

Apple has to act as its market share is falling fast. It has halved from the 2% it recorded in the April-June 2017 quarter, according to data by Counterpoint Research. Despite its cachet as a status symbol, the older but cheaper and locally assembled iPhone 6S failed to catch on with buyers. Cheaper alternatives are only adding to the headwinds. "Apple iPhones have become costlier in [the] last couple of years as most of the leading smartphone vendors are manufacturing their smartphones in India to comply to local 'Make In India' regulations," Counterpoint said.

Smartphone companies shipped a record high 42.6 million units to India during the third quarter of 2018, data by IDC India shows, up 9.1% on the year. Xiaomi maintained its leadership position with a 29.7% market share, followed by Samsung, Vivo and Micromax. Apple did not make the top five.

Its South Korean and Chinese rivals have been assembling devices in India for some time and are already beginning to shift manufacturing there.

These mobile phone makers assemble 90% of their devices for the Indian market locally, according to Jaipal Singh, associate research manager at IDC. "When it comes to Apple, most of their devices are still imported," he said, adding: "85% of Apple products are imported from outside India. So there I think they're lagging in the process."

The supply ecosystem in India is still developing, Singh said, and it will take some time before companies consider relying on Indian manufacturers rather than local subsidiaries of global original equipment manufacturers. In the case of Apple, for example, all of its suppliers are local units of foreign companies.

Counterpoint Research Associate Director Tarun Pathak reckons that the trend for OEM opening shops in India is in the positive and Apple suppliers too will become part of this trend.

"It will take time, after 2019, first when there is clarity in the general elections -- which government is coming and what will the rules and regulations be like -- and there will be a lot going on in terms opportunities for exports from India," Pathak said. "More and more suppliers are showing interest in India as a market. In the next four to five years, the number of local suppliers should grow to 150-plus from 120-plus as of now."

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