Why India is so important to Apple

Apple CEO Tim Cook is in India this week. He's opened two new Apple stores, is scheduled to meet with Prime Minister Narendra Modi, and he's seeing sights and visiting customers in the country.

The international trip is the strongest sign yet that India has become a huge strategic focus for Apple as supply chains move away from China and its smartphone market is increasingly saturated with iPhone owners.

India could echo the role China has played in Apple's business for the last 15 years: A massive market with an expanding middle class to power sales growth, and potentially a home base for the production of millions of Apple devices.

Analysts say that India's large population and maturing economy is ideally situated for Apple to make inroads by increasing marketing efforts and offering retail in the country. At the same time, India's government is eager to work closely with Apple to make it possible to manufacture in the country, CNBC reported.

There's room for Apple to grow on the subcontinent: Apple has less than 5% of the smartphone market share in India, versus about 18% in China, said Angelo Zino, senior analyst at CFRA research. The bulk of smartphone sales in both countries use versions of the Android operating system created by Google.

"As you look at India today, it's very similar to China 15 or 20 years ago," Zino said. "It's really that natural wealth effect over time that's going to help Apple really penetrate and see significantly higher revenue potential in India."

The opportunity could be massive: Apple did $74 billion in sales in China, Hong Kong, and Taiwan in fiscal 2022. That's about 18% of Apple's total revenue during the period.

India is not there yet. It's reported in a category with other markets called "rest of Asia Pacific," which reported only $29 billion in sales during the same time period.

Corporate filings in India covered by local media suggest that Apple's sales in the country were about $4 billion in fiscal 2022, and Bloomberg reported earlier this week that Apple reported nearly $6 billion in sales in the year ending in March.

Cook has also made the India-China comparison to investors.

"We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear," Cook said on an earnings call earlier this year.

India is the largest market that the iPhone hasn't fully cracked, meaning it is critical for sales growth.

Cook boasted in February that the company was successfully wooing "switchers" in the country. That's Apple's word for previous Android phone owners who have decided to buy their first iPhone. Cook said in February that Apple had its best sales quarter ever for iPhones in India in the quarter ending in December.

Indians who buy iPhones are much more likely to be "switchers" than customers elsewhere because Android dominates the Indian market, led by Samsung and several Chinese brands. Android had over 95% of market share in the country, according to Statcounter.

The main reason is price. Most phones sold in India are priced below even the least-expensive new Apple iPhone. Industry analyst IDC estimated in February that the average selling price of a smartphone in India is $224, which had increased 18% in 2022. Apple's entry level phone — the iPhone SE — retails for $429 in the U.S.

One way for Apple to address this gap is by allowing customers to pay for their phones in installments, or giving them a discount for trading in an older device. Cook mentioned these strategies when he was asked about India in February.

"There's been a lot done from financing options and trade-ins to make products more affordable and give people more options to buy," Cook said.

The two physical Apple stores opening this week and the online Apple store which launched in the country in 2020 are also expected to boost sales.

The second part of the strategy is to build Apple products in the country, a massive project that requires not only Apple's attention, but also efforts from its manufacturing partners and local and national governments.

Nearly all iPhones are currently assembled in China, which has caused some problems over the past five years, starting with trade tensions and possible tariffs during the Trump administration, and extending to more recent supply chain disruptions caused by Covid and China's Covid policies, which led to sales shortfalls.

India could end up being a big winner as Apple looks for non-Chinese manufacturing options. In January, India's commerce minister told CNBC that Apple was manufacturing its latest iPhone 14 in the country and had a goal to produce as many as 25% of all iPhones in the country.

Apple's primary manufacturing partner, Foxconn, which oversees a large portion of the assembly of new iPhones in China, is expanding in India, too, reportedly building a $700 million plant for iPhone parts in Bangalore.

In another parallel to China, the Indian government is eager to embrace Apple and use it as a symbol to attract other high tech firms to the country for manufacturing and development. Over the past 20 years, Chinese governments at multiple levels have worked to make massive factories like Foxconn's Zhengzhou factory — known as "iPhone City" — possible.

Modi wants to discuss Apple's plans for manufacturing around the country and creating manufacturing jobs, CNBC's Seema Mody reported. He also wants to know about the challenges Apple has faced in growing its user base in the country.

This isn't the first time that investors have been excited about Apple's potential in India, and some analysts warn that it may take a while before it becomes a huge market.

"I've told investors this: All the all the hype you're hearing about India this week is great," Zino said. "I mean, it is a massive opportunity in our view, over the next decade, but don't expect things to change overnight."

Apple has also faced challenges in its early experiments manufacturing in the country, most notably at a Wistron factory in Bengalaru assembling older model iPhones, which erupted in a labor riot in late 2020.

Apple has had its eyes on an India expansion since at least 2016, when Cook previously met Modi.

At that meeting, Cook told Modi about the potential for manufacturing and retailing Apple goods in the country. Now, six years later, Cook is back in India to open up the company's first two owned-and-operated retail stores.

Apple was bullish on India back then, too: "India will be the most populous country in the world in 2022," Cook told CNBC's Jim Cramer at the time, saying it had "huge market potential."

Apple's long-term strategy in India is best summarized by a quote Cook gave to local media during his 2016 trip to the subcontinent.

"We are putting enormous energy in here, and we are not here for a quarter, or two quarters, or the next quarter, or the next year, or the next year, we are here for a thousand years," Cook said.