India Should Not Be Hyped As Apple's Next Growth Frontier

  • There have been compelling bullish and bearish articles that have been written regarding Apple in India.
  • But other factors such as GDP per capita, LTE penetration, stiff competition and pricing challenges, suggest a neutral outlook.
  • I believe Apple will succeed in India but its revenues, in absolute values, will not be enough to make an impact on Apple's total revenues.

I think Apple (NSDQ:AAPL will succeed in India but not enough to make a significant impact on Apple's revenues.

This is because Apple's Trailing Twelve Month ("TTM") revenue stood at $234.99 billion. Meaning that for sales from India to make a dent, they will need to be really huge.

Also, Apple has been in India for a couple of years, growing at an average of 68% in the last three years.

But Apple entered into the Indian market sometime back. I looked at Apple's past quarterly reports and the only time they first mentioned India as a potential growth frontier was in Q2 2014.

"...The first half of 2014; Brazil was up 61%, Russia was up 97%, Turkey was up 56%, India was up 55%, Vietnam was up 262%." - Apple's Q2 2014 earnings call transcript..."

And in Q2 2015

"...In terms of what's going on with iPhone, the 35% growth is almost three times the market. And if you look at it at a little narrower regional level, Western Europe grew 30% versus a market of 7%, so four times market. Japan grew over five times market. We doubled in Korea versus a market that was shrinking. And India we grew at 93% and this is on top of the Greater China numbers that we've already covered that grew 87% during the quarter against a market of 5%. And so we did exceptionally well I think in any way that you look at it..."

And in Q2 2016

"...And third, with only 42% smartphone penetration of the global handset market today, iPhone is still attracting millions of first-time smartphone buyers each quarter, especially from emerging markets. For example, in India our iPhone sales were up 56% from a year ago..."

And yet in spite of these astronomical growth numbers, India's total sales when coupled with sales from other countries such as Brazil, Russia, Turkey and Vietnam, only account for ~6.28% of Apple's total revenues.

All of these aforementioned emerging markets have been growing at double-digits and yet none of them has enough sales to be a standalone operating segment of Apple as shown below.

(Source: Apple's Q2 2016 Unaudited Summary Data)

This is why I believe that Apple will continue to grow in India but the growth rate in absolute numbers will not be enough to classify India as a major growth frontier for Apple.

GDP per capita, LTE penetration (a curse and a blessing), bigger screens and the pricing problem

India's Gross Domestic Product ("GDP") per capita is 35 times less than the GDP per capital of the United States. GDP per capital is a measure of the total output of a country divided by the total number of people in that country (Gross Domestic Product/population).

Although not perfect, GDP per capital is often used as an indicator of the standard of living in a particular country. Countries with a higher GDP per capital are seen as having a higher standard of living. For example, the United States is seen as having a higher standard of living than China ($53,041.98 vs. $6,807.43) and China than India ($6,807.43 vs. $1,498.87).

(Source: The World Bank - U.S. GDP per capita)

(Source: The World bank - China's GDP per capita)

(Source: The World Bank - India's GDP per capita)

Apple's performance expectations are already very high. There benchmarks for success were first achieved and observed in the United States and then China. Both these countries have a higher standard of living than India.

(Gross Domestic Product ("GDP") per Capital in U.S. dollars)

First, because India's GDP per capita is relatively low compared to the U.S. and China, the same success it has achieved in these countries cannot be replicated in India. This is because the total number of people that may be able to afford such a luxurious phone, even if it is the iPhone SE, is very low given that other better priced and advanced options exist. For instance, Digit's list of the best budget smartphones in India as of May 2016 are:

(Source: Authors compilation with data and images taken from Digit -Best Budget Smartphones in India for May 2016)

Second, Apple's brand power is unparalleled. Success in India is very likely. But the total number of units sold will likely be lower. This is because the pricing point of Apple's phones will only make it accessible to a small target audience compared to the U.S. or China. Because the iPhone is Apple's fastest growing segment as shown below, it is hard for India to make a significant impact on Apple's financials.

(Sources: Apple's 2013 10K, 2014 10K and 2015 10K)

Third, India's lack of Long Term Evolution ("LTE") penetration is both a blessing and a curse for Apple. It is a blessing because LTE technology represents an improved wireless broadband speed to meet increasing demand. The lack of LTE penetration could represent a huge untapped market for more smartphones in one of the world's fastest growing economies.

But LTE technology is not as much a technology as it is a path to achieving 4G speeds. And most of the time when a phone displays the "4G" or "4G LTE" symbol in the upper right corner, it does not really mean it. The actual 4G minimum requirements are mostly unreachable and thus 4G has been used to mean a substantial improvement over 3G. The "4G LTE" is mostly a marketing stunt. Implying that LTE penetration has little direct correlation to Apple's success in India.

Conclusion

To sum up, I believe that India should not be hyped as Apple's growth frontier. Apple has been growing revenues in India at an average of 68% y/y in the last three years and yet the aggregate sales are still too small. Apple's revenue base is too large for India to make a significant dent in the short-term. I still think Apple's growth frontier will come from Apple making an accretive acquisition, higher renewal rates after the iPhone 7 is released, its service segment or something new in its product pipeline. I think the aggregate growth in emerging markets such as Brazil, Russia and India will help drive growth but it will take time.

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