As the pandemic pushes the tech giant to diversify its supply chain, India is eager to take up the mantle
An interesting thought experiment emerged when Trump hastily banned TikTok in the United States and sent it on a hunt for an American buyer: What would happen if President Xi Jinping cited similar security reasons and forced Apple to sell its China operations?
Apple’s soaring share price would come crashing down, and its future would be thrown into disarray, because China is not just Apple’s largest revenue source after the United States and Europe; it’s also home to a huge portion of Apple’s supply chain. Lucky for Apple, Xi Jinping is unlikely to impose any such ban because of the extent to which the Chinese economy depends on this robust supply chain to sustain jobs and exports.
Apple’s relationship with China stretches all the way back to 2001, when Taiwanese electronics manufacturer Foxconn first started manufacturing iPods in China. Over time, China’s growing network of suppliers, infrastructure, low-cost manufacturing, and trained, cheap workforce made it inseparable from Apple’s production processes.
In 2017, concerned by its overdependence on China, Apple started shifting a small part of its production to Vietnam and India. However, the lion’s share of its products continued to be made in China, because there was no reason for Apple to disturb this relatively inexpensive, well-oiled supply chain. In addition to serving as the location for 90% of the factories that assemble Apple’s products, nearly 48% of Apple’s component suppliers for circuit boards, glass, chargers, cables, batteries, and more were concentrated in China as of 2019.
But when the U.S.-China trade war escalated under the Trump administration last year, Apple began facing the possibility of tariffs on its iPhones and MacBooks. Then the Covid-19 pandemic hit China, kneecapping Apple’s entire supply chain. Apple’s assemblers and component suppliers had to shut down their factories for months, resulting in a production delay and a shortage of Apple products around the world. For the first time in its history, Apple revised its financial guidelines, warning investors that it wouldn’t be able to meet its sales estimates.
In February 2020, Apple CEO Tim Cook maintained that these setbacks would not significantly hinder Apple’s production: “We’ve worked through earthquakes, tornados, fires, floods, tsunamis, and SARS,” he said. “If there are changes, you’re talking about adjusting some knobs, not some sort of wholesale fundamental change.”
Yet, behind the scenes, Apple’s vendors have ramped up their investments outside of China, targeting the only other country with a population of more than 1 billion: India.
In late 2019, Apple’s largest contract manufacturer, Foxconn, started producing the iPhone XR in a plant outside the southern Indian city of Chennai. Another Apple supplier, Salcomp, which makes iPhone chargers, also set up a manufacturing facility in the same region.
Then, in July 2020, during the peak of the pandemic, Apple’s production in India picked up pace. Foxconn announced that it plans to invest more than $1 billion to expand its iPhone manufacturing operations in India. A few days after this announcement, Apple’s second-largest contract manufacturer, Pegatron, also based in Taiwan, registered a subsidiary in India. The Times of India also reported that an unnamed Apple vendor was looking to shift at least six production lines from China to India, which could contribute to $5 billion worth of iPhone exports.
During the peak of the pandemic, Apple’s production in India picked up pace.
Foxconn began manufacturing the iPhone 11 in India in July 2020. This was the first time a current, top-of-the-line iPhone was made in India. Previously, Apple manufactured only its older, cheaper models there. In August 2020, in yet another major milestone, Wistron—another Tawainese electronics manufacturer, which opened its third iPhone manufacturing facility in India earlier this year—began assembling Apple’s latest iPhone SE and started trial production for the yet-to-launch iPhone 12.
Apple initially set its eyes on India back in 2015, long before the pandemic. But it wasn’t impressed with what it saw.
The Information recently published a report revealing that in its hunt for suppliers, Apple was unable to find Indian manufacturers for many key components because they didn’t exist or did not meet Apple’s strict environmental, health, and safety standards (or were unwilling to put in the effort to do so). Apple’s longtime partners, like Foxconn and Pegatron, were equally unwilling to invest in India in 2015. Among the reasons cited were the high costs of setting up factories and training workers, inadequate infrastructure, lack of government support, and the absence of economies of scale (the savings in cost arising from large-scale production).
Nevertheless, India remained alluring, particularly for its substantial market size. Back in 2016, less than 25% of India’s population owned a smartphone. But smartphone shipments in the country were growing at 16%, while shipments around the world grew at 3%.
The promising future tempted Apple to set foot in India in 2017 through its contract manufacturer Wistron, which set up an assembling unit near Bangalore for Apple’s cheapest phone at the time, the iPhone SE. By setting up this facility, Apple was able to avoid the 20% tariffs that were levied on imported smartphones in India. This made the iPhone SE one of the least-expensive iPhones to hit the Indian market.
But it was not cheap enough to compete with popular smartphones coming out from Samsung, Nokia, and Xiaomi, and Apple’s market share did not see any rise from the expansion into a new, growing market. In fact, Apple’s India sales fell during this period by 40%, and the company was barely able to achieve half of its targeted revenue. Ironically, the world’s biggest untapped smartphone market became more elusive to Apple, even after setting up a factory in India.
Part of the problem was Apple’s inflexible product line, which saw at most two iPhone models released each year, both high end and expensive and neither catering specifically to the needs of Indian consumers. Meanwhile, other smartphone manufacturers released dozens of models at various price points, with features that appealed to the Indian market, like support for dual SIM cards.
Companies are looking to diversify their supply chains whether or not they find a country that currently meets their needs.
Apple also faced another hurdle: It was unable to set up its own retail stores in India because of a government regulation that requires single-brand foreign retailers to source at least 30% of their production from India. Around the world, Apple has relied on its retail stores to cultivate its brand image and retail experience.
Simply put, a few years ago, Indian manufacturing was not ready for Apple, and Apple products were not ready for India. What about now?
The Indian government has relaxed the law regarding foreign-owned retail stores, paving the way for Apple to sell its products directly to Indian consumers rather than through third-party retailers. Following this policy change, Apple is expected to open its stores in the biggest metros across India by 2021. Bloomberg reports that Apple’s online store will open to India as early as this month.
Then there’s the pandemic. Companies are looking to diversify their supply chain whether or not they find a country that currently meets their needs. Prime Minister Narendra Modi’s government is doing everything it can to take advantage of this need, luring companies to India by showering them with financial incentives, including a $6.6 billion plan to attract high-tech manufacturers.
These schemes have attracted Apple’s suppliers like Foxconn, as well as other major electronic manufacturers like Samsung that already have factories in India and are looking to expand further.
Additionally, wages in India are lower than in China. The average worker at Wistron in China earns about $700 a month, while their Indian counterpart makes only one-fourth of that. India’s workforce is also ready to be trained with the necessary skills, especially in the south of the country, where education levels are higher than the national average.
But despite these favorable developments, India is far from being a perfect choice. Many of the concerns that Apple and its vendors had a couple years ago continue to exist today. Key electronics components still have to be imported from China, and India’s relationship with China is no better than that of the United States. The ramifications of this became evident when iPhone production in India was severely disrupted in July because of increased scrutiny on goods imported from China. Foxconn’s plants in India were effectively shut because of this delay.
The tariffs levied by the Indian government on some of the imported components do not help either. Earlier in March, the import duty on printed circuit boards was increased from 10% to 20% (and from 15% to 20% on chargers). In response, Wistron and Foxconn began assembling the boards in India rather than import them. While this might be a win for the government, Apple will be unable to take advantage of the cheaper boards made in China and pass on its benefits to consumers.
The country’s infrastructure is not as well developed as China’s, and efforts to improve it are proceeding at a sluggish pace. Taxes have also been a major issue in India. In 2014, Nokia, the world’s biggest phone manufacturer at the time, vacated its factory in Chennai due to tax disputes with Indian authorities. Many of its suppliers left as well. Inventec, a Taiwanese company that assembles AirPods and EarPods, also reportedly halted work in the country due to tax disputes. While there are legal options for these companies, India’s overworked judicial system probably won’t be able to provide the quick relief they seek. Issues like these reduce the confidence in the promises made by the Indian government.
Apple still has more than 135 major suppliers operating in China, compared to seven in India.
And if Apple finds a way to work past these challenges and make India its next production hub, its biggest challenge is staring right at the company: selling its products. Apple currently lags far behind competitors in India. Chinese smartphone brands like Xiaomi, Vivo, Oppo, and South Korea’s Samsung command nearly 90% of the market share with smartphones that match Apple’s iPhones on the spec sheet but at half the price. Even Apple’s relatively cheaper models in the United States, like the iPhone 11 and iPhone SE 2020, are elusively expensive in India.
Despite the recent flurry of activities, China will continue to dominate as the world’s factory for decades to come. Despite all the recent investments in Indian production, Apple is simply diversifying its supply chains and embracing the “China Plus One” strategy, where businesses try to avoid investing solely in China by diversifying their supply chain into other countries.
Apple still has more than 135 major suppliers operating in China, compared to seven in India. And many of the key components, like displays and chipsets, that go into the iPhones assembled in India continue to be imported from China, Taiwan, the United States, and elsewhere.
No other country provides such a massive untapped market.
Rather than wondering if India is the new China for Apple, it’s better to ask why India hasn’t yet become the center of tech manufacturing, considering Apple’s desire to diversify as protection against future crises and trade wars.
One thing that remains as attractive today as it was in 2016 is the size of India’s population.
More than half the country’s population still has no access to a smartphone, but the country continues to grow at an impressive rate, indicating that hundreds of millions of people will soon be in the market for one. No other country provides such a massive untapped market. With Apple’s sales reaching a saturation point in the United States and Europe, and its sales in China declining, the company’s turn toward India seems inevitable. The iPhone maker still has a long way to go before it wins the hearts and wallets of Indian consumers. Bringing down the costs of its products by setting up factories in the country is one huge step in that direction.
Apple has a big incentive to figure it out: If India works out for Apple, the company’s enormous $2 trillion market cap will look measly in the not-so-distant future.