Apple’s Emerging Market Challenge

Last week, Apple reported that sales of iPhones were down in the last quarter vs a year ago and, from the numbers, it was clear Apple’s iPhone growth has peaked. Apple’s forward-looking predictions for the next quarter show iPhone sales will also be down over the same quarter last year. As a result, their stock took a significant hit, although most of the financial analysts saw these numbers as the new normal and almost all put out a buy recommendation suggesting the worse is behind us.

The one bright spot was the news their services business was stellar and, in fact, is now bringing in more revenue than the Mac business does. Finally, the financial analysts see Apple’s services business as a big deal and are factoring that into Apple’s long-term growth.

However, the big question seems to be, could Apple ever really grow the iPhone market again? It is clear now the introduction of the iPhone 6 was an anomaly in that the larger screen met with huge demand as a large pent-up audience wanted a bigger screen. In that sense, this giant bump in sales was a one-off event and, as we now see, it would have been almost impossible for Apple to repeat that type of sales bump with the iPhone 6+ series. It appears the 4 inch iPhone SE will meet the needs of quite a few buyers who felt the 5 and 5.5 inch screens of the iPhone 6 series were just too big but even this demand is not enough to get them back to the huge growth numbers of the past.

There are two technology boosts I see coming that include dual cameras and their entry into VR with a VR-dedicated iPhone that could revitalize iPhone demand. A VR iPhone could actually be the one that forces a huge upgrade at some point. I will address these opportunities in a separate piece in the near future.

However, there is one specific area Apple could target that could cause a bump larger than the one they got with the iPhone 6 series — going after the market in India. Today, Apple has about 1% of that market. At the same time, only about 25% of the Indian population (1,276,267,000 people) has smartphones. That leaves a market of just under 1 billion who could buy a smartphone. Today, most of them sell for under $200 with some selling for around $100 or lower. Only the wealthier folks in India can even afford an iPhone.

We have been doing a lot of research in India these days and see that, while Apple is a known brand in India, there is not the same interest or demand outside of the upper crust audience. This is in huge contrast with China. Apple is considered a luxury brand in China and even those just entering what we call the middle-class lust after an iPhone. In fact, owning an iPhone changes a person’s status within their peer group.

But in India, it is price that matters. Indians are much less focused on status and brands as they are focused on getting the most bang for the buck. Tim Cook said in the earnings call that Apple has their eyes on India and “India is today what China was 10 years ago.” That is true in two key areas. First, India is rapidly changing and tech has had a big influence on these changes. Access to the internet is getting better and being used for new levels of communication and commerce. This has influenced the second key — it is helping people get better jobs, a better education and to raise their earning potential. This is being done on a small level today and why it is similar to China 10 years ago.

However, economists who follow India suggest the impact of a potential rising middle class in India could be huge for its people and its economy. But they also peg this rise to people who have access to the internet and can use it to get a better education, manage their farms and markets, get better jobs, and potentially make more money.

Although Apple could wait another four or five years to jump into India big time and hope a rising middle class could afford an iPhone, I would think they would want to be a part of helping this market grow and make a major contribution to the overall economic development. But to do so, Apple would have to create an iPhone just for the Indian market at a price that would be acceptable to this very cost conscience audience.

Given Apple’s current iPhone premium pricing, this presents quite a conundrum for them. That pricing will continue to only attract the rich in India. On the other hand, if they were able to create an iPhone with more flexible pricing, they might be able to get the mid to upper end of this emerging middle class and, over time as more join this range of consumers, they could grow that market substantially.

From our research in India, pricing needs to be in the $239-$279 USD range. This is the price point the mid to upper middle class seem to be able to tolerate. Of course, the problem is that there are a lot of smartphones in the $149-$229 range that are actually very full-featured and even this group buys the “more bang for the buck” smartphones when it makes sense.

This is the challenge Apple faces if they really want to grow their iPhone market substantially in India. Whether they do it now or later, this is the pricing challenge they will face. They could hold off and let others take a stronger aim at this group of users and hope to jump in later. They could also start a major branding campaign in India and make this market more receptive to an Apple product within a year or two and hope to make it into some type of status device.

It is not clear how Apple will attack this market but, from the research we are getting from India, it seems getting a bigger start now would really help them gain momentum as this market develops through better wireless networks and an audience of users who are starting to move up in society and will want a top notch, high-powered smartphone.

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Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

10 thoughts on “Apple’s Emerging Market Challenge”

  1. I would think that the used iPhones that will be generated from the Apple Upgrade Plan would be a good starting point in India. They would be sold by Apple at a price point that would hit a significant portion of the emerging middle class.

    1. It would to a point and especially with the upper class. But to really reach a broader audience the price would have to be more affordable to that audience. Apple will never play int the low end but priced in the ranges I suggest they could gain many more new users.

      1. Not quite true: the Indian government will not grant Apple an exemption from the taxes every not-made-in-India device is subjected to. Apple can sell them, they just have to pay high import duties like everyone else.

      2. Discussing Apple’s prospects in India without considering and understanding the “make in India” initiative is obviously a mistake. For anybody with a good understanding, this is totally predictable.

        https://en.wikipedia.org/wiki/Make_in_India

        As long as the “make in India” initiative gains support, the government will probably try to confine Apple within a small high-end niche using a variety of tactics.

        1. There appears to be this perpetual fear in India that some foreign company might make money by selling them goods or services. Combine that with a policy focused on national champions and you get an environment that is quite unfriendly to the likes of Apple (and Nokia, and Vodafone, and Facebook, etc). Sooner or later (usually sooner) the outsiders all suffer some rather unusual legal, tax or regulatory setback — the only thing we don’t know yet is which of those will trip up Apple.

          1. Although I have insufficient understanding of India, I suspect their fear of foreign countries making money is grounded in the colonial rule by the British Empire and their struggle for independence (Ghandi’s spinning wheel and Swadeshi). Combine that with how Japan, Korea and China used protectionism successfully, and I think India has a very strong case.

            Nokia used to have a handset factory in India (Chennai) that was one of their biggest and which employed 8,000. This is the kind of thing that helps grow the middle class, which will then have the money to buy iPhones. This is the kind of thing India wishes Apple would do, and what they actually did in China.

            http://www.ibtimes.com/nokia-step-closer-selling-shuttered-india-factory-once-employed-8000-1932758

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