In May last year, Apple CEO Tim Cook stated, “There are many people coming into the middle class, and I really feel that India is at a tipping point, which is great to be there.”
His comments highlight one of the reasons Apple has recently made an aggressive push to develop operations in India: the country has a large population and a growing middle class that is prepared to spend more money on high-end phones.
However, Apple’s focus is not solely on sales. The internet giant has expanded its manufacturing presence in India through Foxconn, a Taiwanese company that assembles iPhones. According to a Bloomberg article published this month, Apple currently manufactures around one in every seven iPhones, or 14%, in India.
Last year, an Indian government minister stated that Apple hoped to someday manufacture 25% of its iPhones in India.
Many investors are wondering if India may become Apple’s next China.
In the newest episode of CNBC Tech’s “Beyond the Valley” podcast, which you can listen to above, Tom Chitty and I talk about why Apple is targeting the Indian market and whether it can deliver on its promises.
If you have any feedback on this or past episodes, please contact us at beyondthevalley@cnbc.com.
You can subscribe to “Beyond the Valley” by clicking the links to your preferred platform:
Apple Podcast
Google Podcasts
Spotify
This is a transcript of the episode of “Beyond the Valley” that aired on April 11, 2024. It was altered for clarity and brevity.
Tom Chitty
Before we return to our main subject, we need to hear Arjun’s stat of the week, which is…
Arjun Kharpal
18.8% market share.
Tom Chitty
18.8% market share. Okay, Arjun. Why does Apple want to minimize its dependency on China?
Arjun Kharpal
I believe we need to go back to the height of Covid in China. In some areas of China, there were extremely rigorous Covid prevention measures in place. And it didn’t end at manufacturing facilities. So in 2022, there was a Covid outbreak in Zhengzhou, China, where Foxconn, a Taiwanese company that assembles Apple’s iPhones, has the world’s largest iPhone plant. Anything that caused inconvenience there, such as workers who had to be confined, etc.
Then there was considerable agitation among the workers there. And this resulted in significant disruptions to iPhone production outside of the primary location where the world’s supply of iPhones is produced. And I think that got Apple thinking; we’ve been talking a lot about Apple’s dependency on China and how it should be reduced, which hasn’t happened yet. But I believe that event called into question Apple’s reliance on China as a manufacturing hub. It therefore, I believe, hastened the company’s ambitions to diversify its supply chain. Where else can we make our products so that if there is an interruption elsewhere, we know we still have supply and can rely on other regions to ramp up production? And I believe that is exactly what happened. The Covid era sparked this. Some of those tight restrictions, I believe, showed Apple’s reliance on China in this regard. According to one estimate, China once produced about 90% of the world’s iPhones. So that gives you an indication of Apple’s dependency on the country.
Tom Chitty
From Apple’s standpoint as well. So I understand they’re de-risking their supply chain, but is it worth the cost of moving a supply chain, or at least part of a supply chain, from one country to another: different languages, lack of historical manufacturing infrastructure to support, you know, what China has been doing for several years, if not decades?
Arjun Kharpal
I believe that if you are Apple, a corporation with such many goods, it is worth the risk, because what happens if there is another uncontrollable incident, or as we all know, there are still massive trade tensions between the United States and China? It may be necessary for an escalation to impede Apple’s capacity to produce in China, as well as sell in China. So the way Apple sees it is that they are not going to leave China. China is Apple’s most crucial manufacturing hub. Yes, it has slightly lessened its dependency on China. However, it continues to play a significant role and will do so in the next years. I believe what you’re seeing is Apple investing more with its partners, such as Foxconn, which I highlighted in India and Vietnam. We’ll talk about that later. However, they are looking into other areas and investing more in them. So that they may gradually reduce some of the production in China. However, if you think about it, having the flexibility to scale up production abroad, let’s just say, there’s another issue in China, that disrupts If they are also manufacturing the iPhone in, say, India, they may be able to pick up the slack left by China. So, for Apple, not being able to get the device to market will cost them billions of dollars in revenue. You know, if they can’t get their iPhones and other products to market, no one would buy, and people will wait, thus it’s worth them investing billions of dollars to invest in other hubs. And I believe that is exactly what they are doing.
Tom Chitty
For it to truly work, however, other nations, such as India or Vietnam, which we’ll discuss later, must be able to do it from start to finish, or at least fill the roles that China was doing, which is not always cost effective.
Arjun Kharpal
Yeah. And I believe that is why the ramp-up has not been as aggressive or as simple as many people expected. We’ve been talking about Apple’s reliance on China for years, but not much has been done because, as you said, it’s a difficult process; you can’t just shift and move away from China; as much as India and other hubs are mentioned, it’s not easy to just set up manufacturing; it takes a lot. First and foremost, there are local restrictions and incentives to consider, as well as ensuring that the return on investment is justified. However, it is the competence, or the actual personnel, that can accomplish this. That’s a big part of it. So, when we talk about Apple manufacturing elsewhere, it will take a long time to significantly increase iPhone production elsewhere. And we’ve seen it in India thus far. So, according to a recent Bloomberg study, India now produces one out of every seven iPhones, or approximately 14% of total worldwide iPhone production. And that was double the previous fiscal year, which is aggressive. But you’re witnessing it happen. But the question is, how much can India take on and how quickly, given that it is still in the early phases. So, perhaps they have the capacity. But do they have enough to compete on the same scale as China? Another item to consider is that Apple will not want to rely on a single country again. Again, the whole objective of reducing reliance on China is to diversify the supply chain. So, they’re not going to announce, “Oh, we want you to know, 60% of iPhones will be produced in India.” Now. I doubt it. Last year, one minister suggested that Apple had said that, ultimately, they want roughly 25% of iPhones, as you said in your introduction, to be produced in India by 2030, which, you know, you feel like a quarter of the world’s iPhones, you know, that might be crucial, you know, some of those It will be sold in India, which is crucial because it is manufactured locally. That program focused on India’s desire to become Asia’s high-tech manufacturing hub. Apple’s efforts here are part of that, as are the government’s incentives for attracting international companies. So that’s what’s going on here. So, you know, they want to manufacture in India so that the products may be sold to Indians as well as exported. And so you’re seeing, I believe, the first indicators of what Apple and its partners can achieve in terms of establishing manufacturing in India. But, as you indicated, I don’t believe this is something that will happen or be equal to China very soon.
Tom Chitty
A couple of weeks ago, you remarked that when we discussed India as a tech center, or a prospective tech hub, we received some doubt from Indian listeners about whether it could genuinely step in and, you know, replace some of what China has been doing. At the end of that episode, you mentioned that we’re still a long way from India. So, just to provide some perspective for what we discussed a few weeks ago.
Arjun Kharpal
As you said, we addressed some of these concerns. You know, we were talking a little bit about what India is trying to do now, the groundwork that is being laid to try to compete with China in Asia as a manufacturing hub, a high-tech manufacturing hub. To be clear, it is nowhere near China at this point, which is pretty clear and evident. There are many challenges that exist in India, and I believe we have discussed some of them here. These include, you know, expertise and personnel, to execute some of this manufacturing, particularly in areas like semiconductors, which are tremendouslyHighly specialized, you know, and the labor that will be manufacturing these iPhones must be educated in the country, which takes some time, as well as other gadgets. There are also complaints about some of the red tape, bureaucracy that remains, some of the rules, and all of these types of things at this time, which are problems for the Indian market, as well as, of course, ensuring that there is some trust in the political system. So there are all of these issues that India, I believe, must address in order to become a real contender to China.
Not only that, but India is not China’s only rival. Vietnam, Thailand, and Indonesia are all trying to… as global electronics firms, not just Apple, but global electronics companies aiming to broaden their supply chains to other parts of Southeast Asia in general, will reap significant benefits. You’ve previously visited other countries. So India isn’t just attempting to compete with China in that way. There are other countries seeking for that position and competition, and they compete directly with India. So there’s a pretty interesting dynamic going on here. So, while it’s clear that India is nowhere near China in terms of its ability to be a manufacturing, high-tech hub at this point, what we were talking about was the kind of groundwork that Prime Minister Narendra Modi is laying in order to entice all of these foreign companies, including Tim Cook, the CEO of Apple, and many other electronics makers and semiconductor players, to set up shop in India. And, of course, India’s promise extends beyond industry to its huge people.
Tom Chitty
Yeah, I’d like to dig into that because it’s a big part of this. What are India’s most popular phone brands?
Arjun Kharpal
It’s Samsung. It’s Xiaomi. It’s Oppo. So it’s the Chinese brands versus Samsung.
Tom Chitty
Huawei?
Arjun Kharpal
Huawei, not so much, because they have had a number of issues on the foreign market. However, they were doing pretty well before US sanctions damaged their smartphone business. But the Indian smartphone market has thus far been dominated by low- to mid-priced devices, correct? You know, mostly Android phones. But what you’re seeing now, and this is why the India market in particular is becoming fairly essential, I believe, to Apple and Tim Cook’s thinking about where to target, is the vast population, what is it, 1.4 billion or so people there, but it’s demonstrating some of the same dynamics as what China demonstrated a few years ago, a growing middle class becoming wealthier and more eager to spend on technology, particularly in the big cities, such as Mumbai and New Delhi, where they opened their first Apple stores last year. And, as you may be aware, Apple frequently opens a real Apple store as a sign of a significant event. It’s a market they intend to target first, with Apple stores opening in 2023. This gives you an idea of what Apple is looking at in India. Yes, manufacturing is crucial. Yes. It will be an important hub for manufacturing iPhones, but the Apple is currently very interested in consumers. And the fact that the high-end segment of the smartphone industry is expanding in India is where Apple is focusing, and with these stores and increasing manufacturing, you can see a lot of work being put into this market. To give you a sense of scale, I mentioned before how many iPhones are currently being produced in India. Sales, thus the first stores opened last year. In the second quarter of last year, India became one of Apple’s top five sales markets. So it now competes with the United States and other countries. So it’s in! Top five. Apple’s market share is at around 7%. It currently lags behind Samsung, Xiaomi, and Oppo, all of whom are major Android makers. So Apple is still in the early stages of its sales growth. However, it is all part of setting the basis for what it thinks would be the next China.
Tom Chitty
I mean, isn’t that a huge area for growth? We’ve been talking for years about the smartphone market’s stagnant growth in Europe and the United States. But, you know, Apple is looking at India and thinking, “Wow, we only have 7% of the market there; we could grow dramatically.” And doing these other things with the supply chain is, in many ways, a win-win situation.
Arjun Kharpal
Yeah. And that is part of it. One of Apple’s more effective marketing strategies over the years has been to position itself as a high-end premium luxury brand in the smartphone market. And when you look at the Indian consumer, and as I mentioned, the expanding middle class, they choose premium luxury devices and items. And this is where Apple has an opportunity right now. And, of course, as we know, with Apple, the hardware is the, you know, one side of the equation, but also, you know, Apple makes billions of revenue from its services business, which includes things like its App Store fees, Apple Pay, Apple TV, all of those Other products and services. So, when you know it’s moving into these markets, it’s not only thinking about the iPhone; it’s also thinking about its services business with the people there, and how it may localize some of that, as well as all of the other goods, such as the Apple Watch and Macbooks. And so, I believe India stands out as a market for Apple in comparison to other countries in Southeast Asia because of some of the dynamics that are taking place, which I believe Apple believes will lead to a major future market. However, this is unlikely to happen soon.
Tom Chitty
So, Vietnam, as we indicated earlier, will be competing against that, correct? That is the challenge that Vietnam has, whereas India has a massive market, a growing middle class that wants and can afford a luxury product such as an iPhone. How can Vietnam compete when it comes to getting Apple to manufacture more or at least some of the components in Vietnam?
Arjun Kharpal
Vietnam is fascinating, and I was writing about it today. Actually, as we record this, Apple CEO Tim Cook is in Hanoi, Vietnam. He drank an egg coffee. I have gone to Vietnam before. I’ve never had an egg coffee. I believe, and perhaps any listeners in Vietnam can correct me, that this is a Hanoi specialty. And it’s made with coffee, condensed milk, and beaten egg, which sounds quite tasty. As if that were breakfast in a cup. Yeah. Do you know?
Tom Chitty
Yeah, I was visualizing the whipped egg as eggnog.
Arjun Kharpal
I believe it is something like that again. I haven’t had it, so I can’t say how it works, but I’d want to try it. Yeah, that sounds amazing. And Vietnamese coffee is quite robust and bold, which is excellent. So I think it tastes fantastic. But he did enjoy one of those. Apparently, he’s meeting with content creators, developers, and others. As he travels around the country, I believe Tim Cook’s visits are typically a sign of Apple’s dedication to that country. He has traveled to India, China, and Vietnam during the last year or two. I believe it gives you a sense of where the company’s focus is. So far, Vietnam has done an excellent job at billing itself. is a crucial manufacturing base for not only Apple, but also for other electronics manufacturers. However, you can now see the MacBook, Apple Watch, and iPad being built and assembled in Vietnam. That has been a major effort from Apple. I think it’ll be interesting to watch if any of the iPhone production shifts there, but it’s a similar tale. Do you have the competence to put up facilities there that know how to do this? Clearly, Foxconn is the important actor here for Apple. In terms of assembly, they are situated in Taiwan. They have their largest operation for iPhones up in Zhengzhou, China. You know, how do they set up shop? All of these questions still persist. But there’s another noteworthy fact about Vietnam: Apple has quietly become the country’s third largest smartphone player.
Tom Chitty
Against, I imagine, a full range of Chinese cellphones.?
Arjun Kharpal
There are two ahead of them. Guess the companies.
Tom Chitty
Oppo?
Arjun Kharpal
Yes, that’s two. Who is number one?
Tom Chitty
Xiaomi?
Arjun Kharpal
Not Chinese.
Tom Chitty
Samsung?
Arjun Kharpal
Yeah. However, it has quietly consolidated a strong presence in Vietnam’s smartphone market. That is fascinating.
Tom Chitty
So let’s turn the focus to China and what they must be thinking about the challenges to their own smartphone brands, since it feels just as much about that as it does about manufacturing shifting, or at least some of it. Do you think there will be some concerns about Apple making major moves right on their doorstep?
Arjun Kharpal
The Apple relocation to manufacturing outside of China is a microcosm of a larger war that China is currently experiencing, which is investor confidence in the country following Covid. Over the last six months, Beijing has made a concerted effort to spread out the red carpet for international enterprises in order to re-establish confidence. And so, when a global corporation like Apple begins to diversify its supply chain, and other corporations begin to minimize their reliance on the market, China will be concerned, particularly in terms of foreign investment. In terms of Chinese smartphone users, you They seem to be holding up well. They continue to do effectively in a variety of markets. Xiaomi and Oppo, in particular, have performed exceptionally well abroad. And I’d want to take this occasion to briefly mention another Chinese company, Transsion, which most people have never heard of. One of the world’s top five smartphone players, I believe it is presently ranked fourth. They own the brand Tecno. One of the world’s leading smartphone players right now. It’s comparable to the tale of Oppo and Vivo a few years ago, when these kind of brands emerged, like, yeah, these are sort of number three and four. Transsion has made major waves selling very steeply priced cellphones into emerging markets.
markets over the world, yet it rarely sells in China. They also sell outside of Latin America and Africa, among other locations. They, too, have created tremendous ripples. So the Chinese smartphone players are doing quite well. At the moment. Xiaomi in particular has experienced a resurgence. Of course, we had an episode on it a few months ago, but Huawei is also reviving and battling Apple in China. China is currently a difficult market for Apple in terms of sales. It is a difficult market. It is experiencing renewed competition, as I have stated, from Huawei, and some Chinese firms are introducing extremely good high-end offers. As we record this podcast, IDC released numbers showing that Apple’s global shipments in the first quarter were down roughly 10% year on year. I believe that a significant part of this is due to China and its market weakness. So, while Apple faces its own issues in China, the Chinese smartphone players are doing well right now. I believe the question for Apple is that it is experiencing sluggish worldwide iPhone sales and needs to grow. And I believe that eventually, when it looks at where the growth might come from, it will be looking at places such as India, like Vietnam, has plans for the next few years. It’s not like India and Vietnam will suddenly become two of Apple’s biggest markets. No way. It will take a long time to establish that brand and that client base in the hopes that these are the markets that will power the company’s future growth and unlock billions, if not tens of billions, of dollars in sales.
Tom Chitty
Good stuff. Alright. We will leave it there. But, before we travel, we must first complete the weekly stat. Do you want to remind us what it was?
Arjun Kharpal
Tom’s market share is 18.8%.
Tom Chitty
I’m simply going to say, I believe you gave this one away during the show.
Arjun Kharpal
Potentially. However, it is possible that this was a red herring.
Tom Chitty
Okay. Here we go. The market share of Apple smartphones in Vietnam.
Arjun Kharpal
I purposely mentioned Vietnam. But I was worried I’d confuse you because we were talking so much about India.
Tom Chitty
I understand. But it was. I felt like I could see, you know, we’d been sitting across from each other for a while, and your face made a face that suggested there was more to this.
Arjun Kharpal
Do I have a stat of the week face?
Tom Chitty
Yes, you wouldn’t be good at poker. Are you good at poker?
Arjun Kharpal
I haven’t played for a while. Yeah, I think my poker face is very poor. Yeah. I suppose I just smile when I get good cards and such.
Tom Chitty
You should acquire some shades.
Arjun Kharpal
Yeah, I just need to wear a mask.
Tom Chitty
Masks and shades. Cool. All right. Well, there concludes this episode. I am on a roll with stats of the week.
Arjun Kharpal
Yes, you are. Are you doing exceptionally well? Yes, we need some awards.
Tom Chitty
All right, before we leave, please follow and subscribe to the program. You may also rate us, and please remember to email us at beyondthevalley@cnbc.com. Thanks, Arjun.
Arjun Kharpal
Thanks, Tom.
Tom Chitty
We’ll be back next week with another edition of Beyond the Valley. Goodbye.
