- A report that Apple is on course to receive regulatory approval to open its first stores in India has the investing world drawing parallels between the country and China.
- China has become Apple's second largest market, one where the company is still seeing the fastest growth.
- But the big question is: Can India match up to China in terms of its potential as a market for Apple products?
News that Apple (NASDAQ:AAPL) is on track to receive regulatory approval to open its first retail stores in India has revived chatter amongst investor circles about India becoming the next major growth frontier for Apple the way China has been for years now. According to the Bloomberg report, Apple is likely to be classified as a provider of cutting-edge technology by the Indian authorities and will thus be exempted from a rule that requires foreign companies that retail a single brand in the country to procure at least 30% of the product’s inputs locally. Most of Apple devices are currently manufactured in China.
Although Apple was able to almost miraculously avoid posting its first quarter of revenue decline in the post Dotcom era during its recent Q1 2016 earnings release, the company’s Q1 2016 revenue of $75.9B was a mere 2% YoY improvement over the previous year’s blockbuster quarter and marked Apple’s slowest growth in more than a decade. The amazing thing about China is that it has tended to perform well for Apple through both boom and bust cycles, and did not disappoint this time either.
During the last quarter, Apple once again witnessed impressive growth in its China market, after posting revenue of $18.4B, or 24.2% of the company’s total revenue, good for 47% QoQ and 18%YoY growth. Mind you this happened against a backdrop of piling worries about a slowing Chinese market. Apple had this to say about China during its earnings call:
We know the conditions in China have been a source of concern for many investors. Last summer, while many companies were experiencing weakness in their China-based results, we were seeing just the opposite, with incredible momentum for iPhone, Mac and the App Store, in particular.
Apple admitted seeing some weakness in the Chinese market but reiterated that this was a short-term headwind:
Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong. Beyond the short-term volatility, we remain very confident about the long-term potential of the China market and the large opportunities ahead of us and we are maintaining our investment plans.
China has consistently put forth remarkable results for Apple and remains a bigger market than the whole of Europe as well as Japan and Asia-Pacific (where India belongs) markets combined.
So where does India currently stand in the scheme of things? Many investors draw parallels between India and China based on their enormous populations--India has a population of ~1.2B people compared to China’s 1.3B. But perhaps that’s where the similarity between the two countries ends.
For starters, India currently contributes only about 2% to Apple’s top line. In other words, the Indian market for Apple products is less than one-twelfth the Chinese market.
India launched its first economic reforms in the 1990s, about a decade late compared to China. A quarter of a century later China’s economy has grown to almost super-power level while India’s economy continues to languish. China has been the beneficiary of massive infrastructural and manufacturing investments from the Beijing government. China currently invests about 50% of its GDP compared to 30% by India. Manufacturing contributes 30% to the Chinese economy compared to 20% for the Indian economy. Infrastructure-wise, the difference between the two could not be more stark with China boasting some of the best infrastructure outside the western world whereas India’s infrastructure is mostly at the level of a developing economy.
Indian IT firms remain among the most competitive in the world with home-grown IT firms such as Tata Consulting Services, Wipro, and Infosys recognized among the best IT companies in the world. According to an NASSCOM report, India’s IT-BPO will contribute as much as 18%-20% of India’s exports by 2020.
But ultimately the consensus amongst economic experts is that for India’s economic resurgence to truly take off, it will have to do it the old-fashioned way like China--by improving its manufacturing capabilities and developing its infrastructure. India has all the raw materials it needs to power an economic charge a la China. India might very well catch up with China in due time. But right now Apple investors cannot count on India becoming Apple’s new major growth frontier the way China has done.
Apple has set an ambitious target to sell as much as 50% of its products through its own stores. Currently only about 18% of Apple’s products are sold through its stores with more than 80% of sales taking place in carrier stores. Opening retail stores in India will no doubt accelerate Apple’s sales in the country. But investors should not count on this new development to become the silver bullet that will solve the problem of slowing sales at Apple.