Apple in India: How the iPhone maker is scaling the world's second-largest smartphone market

As Apple (AAPL) expands to India for the first time with two new retail stores, the iPhone maker is trying to adopt a firm position in the second-largest smartphone market, bolstering its manufacturing presence and market share among consumers.

On the manufacturing side, Apple is looking to add a "Made in India" label to its iPhones that are predominantly made in China.

“We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear,” Apple CEO Tim Cook said in an earnings call, noting that iPhone exports from India crossed the $1 billion mark in December 2022.

Apple's Taiwanese assembly partners — Wistron, Pegatron, and Foxconn — increased production at facilities in India after coronavirus-related lockdowns began in China. Mainland China factories were assembling 95% of all iPhones, but Apple hopes to move 25% of iPhone production to India by 2025.

However, the "Made in India" label has come with its own challenges for the company.

"Rome was not built overnight and neither will Apple's broader India strategy," Wedbush analyst Dan Ives told Yahoo Finance. "However, we view this week as Apple diving into the deep end of the pool in India as this massive market slowly converts into the Apple ecosystem over the coming years with iPhone market share gains front and center."

Initial obstacles and low market share

Apple was late to tap into the Indian mobile phone market — it currently holds just a 3.9% market share in the country.

The company opened its inaugural retail stores in the country on April 18 in Mumbai and Delhi, 15 years after the release of the first iPhone. Until now, consumers in India would buy Apple products from local Apple-authorized service providers (AASPs) or partnered resellers.

Apple first filed an application with India’s Department of Industrial Policy and Promotion to set up its own stores in India in January 2016. CEO Tim Cook visited India in May 2016 and said that the company was investing "enormous energy" in its strategy in the country.

"We are here for [a] thousand years," Cook said. "It's difficult for an operator here to sell the product themselves because of the tax structure, so usually it's the retailer that does that."

The first hurdle was taxes. The Indian government was focused on increasing local manufacturing by increasing import taxes on phones but not on individual parts for phones. However, soon after Cook's visit, India relaxed some foreign investment rules, leading Apple's partner manufacturer Wistron to start assembling the iPhone SE.

But production was unstable for Apple in India. With obstacles like a strike among unpaid workers, a factory fire, and an investigation by India's antitrust watchdog, Apple's growth in India remained disruptive.

In contrast, Apple competitor Samsung first landed in India in 1995 and established the world's largest phone factory in 2018. Samsung currently holds a 15.5% market share in India, down from its peak in December 2022.

As of March 2023, Samsung holds the third-highest market share of mobile phones in India, but Apple is gaining momentum. (The top two spots are held by Chinese companies Xiaomi, with a 24.7% market share, and Vivo, with a 16.4% market share.)

"The retail strategy will be focused on getting new customers but importantly converting Samsung/Xiaomi/Vivo/Oppo customers into Apple iPhone customers over time," Ives said. "While market share in India is sub 10% today, we believe Apple through its unmatched marketing and brand presence will be able to turn India into an incremental growth catalyst as the anniversary iPhone 15 hits the market in the September timeframe."

In comparison, Apple's iOS operating systems have a strong hold on the American market with a 57% share, even though production is minimal.

Pivot from China and production scale

Apart from the pause in production from China's COVID lockdowns, multiple worker protests have added strain on Apple's supply chain, increasing wait times for customers.

Revenue in China was declining prior to the pandemic in 2019 but recovered in 2022.

"With the nightmare China iPhone manufacturing COVID lockdown situation seen during its holiday season, Foxconn and Apple are now looking at India for more production diversification on the iPhone front further expanding its presence," Ives explained.

He added that "as Foxconn/Apple put more skin in the game on the iPhone production front within India, this will go hand in hand with a bigger retail presence within India as seen this week, which mirrors the early days of the China penetration strategy going back a decade."

Last year, the total addressable market for smartphones in India was over 150 million units, with iPhones accounting for roughly 7 million units. There were also 6.5 million iPhones produced in India during that time.

According to Angelo Zino, a senior equity research analyst at CFRA Research, that could potentially grow to "280 million to 290 million in the next 10 to 15 years, which would be on par with the size of the China smartphone market," as both countries have a population of roughly 1.4 billion.

"From a manufacturing perspective, the biggest risk is that Apple’s — as well as India’s — ambitions to quickly migrate more production to the region could go slower than expected," Zino told Yahoo Finance. "Major reasons being that the infrastructure is not as reliable at the moment while getting a big enough workforce with the right skills could take longer to come to fruition."

Unlike China, which is a one-party country, India's multi-party system with 28 states could be a new challenge for Apple to navigate. The company's leadership also has worries about the Chinese market turning against Apple if it moves too quickly to other countries.

According to the Financial Times, at one of the Apple supplier factories in India, "just about one out of every two components coming off the production line is in good enough shape to eventually be sent to Foxconn," which doesn't sit well with "Apple’s goal for zero defects." The scale of production won't be exactly like China's "iPhone city," which is a factory located in Zhengzhou that employs 300,000 workers, Bain consultant Jue Wang told FT.

And while India has an expanding middle class that could aid profits for Apple, the company's prices still remain an issue, particularly since there has been no indication from Apple on whether prices will change.

Apple's prices do not currently align with affordability for the middle class, unlike Android, which already offers more price-friendly phone options. Within India, 31% of the population is middle class with a household income of $6,095-$36,570 annually, or 500,000-3,000,000 Indian rupees.

Apple introduced financing options with pay-over-time schemes, but an iPhone still remains largely unaffordable in India. In the U.S., an iPhone 14 costs $799 whereas in India it costs $974 (79,900 rupees).

Foxconn is also set to open a 300-acre facility in India, and the upcoming iPhone 15 will also be manufactured in the country. The iPhone 15 will be shipped from both China and India, according to Bloomberg.

USD-INR conversion rate as of April 25, 2023.

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Tanya is a data reporter for Yahoo Finance. Follow her on LinkedIn.

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