Apple Scraps Like an Underdog in Second Biggest Mobile Market

By Newley Purnell and Rajesh Roy in New Delhi, and Tripp Mickle in San Francisco Features Dow Jones Newswires

Apple Inc. is broadening its attack on India, perhaps the iPhone's last great growth market.

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The company's first ever Indian-made iPhones began hitting shelves here this month with hopes that reduced prices will boost sales in the sprawling country where Apple has just 3% market share.

The Cupertino, Calif. company is considering plans to open flagship stores in India's megacities and is assisting hundreds of third-party resellers in opening new shops at an unprecedented pace. It also has set up development centers to build apps for Indians and enhance local mapping capabilities.

While Apple's strategy typically is to sell high-price handsets to telecom carriers, its effort in India reflects the realities of an emerging market where wages are low, cellular speeds are sluggish and consumers mostly buy phones from small, unaffiliated shops. The company also must overcome weak brand awareness and its relatively late arrival in a market where Samsung Electronics Co. has a head start.

"It's not a push for premium -- it's a push to sell an Apple device by any means necessary," said Lauren Guenveur, an analyst with market research firm Kantar Worldpanel.

India is already the world's second-largest mobile market after China but is expected to add more mobile subscribers -- 310 million -- than any other country in the four years through 2020, according to estimates from GSMA, a global association of mobile-service providers. Apple wants a better foothold in India so all the growth doesn't go to Samsung and rising Chinese companies such as Xiaomi Corp. and Lenovo Group Ltd.

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There is "a lot of headroom [in India] in our mind, and so we are working very hard to realize that opportunity," Chief Executive Tim Cook said on a call with investors in October.

Samsung has 24% market share in India's smartphone market and announced earlier this month it was doubling its capacity in India with a new, $760 million investment in its smartphone and refrigerator factory outside India's capital.

Chinese brands such as BBK Electronics Corp.'s Oppo and Vivo are gaining ground, doubling their smartphone market share in the first quarter to 50% from a year earlier, according to Kantar Worldpanel.

Apple may need to temper investor expectations in India where it is only likely to grow to control a 5% market share by 2020 worth about $10 billion, not much for a company with more than $215 billion in annual revenue, said Mizuho Securities analyst Abhey Lamba.

"They can't ignore it," he said "But it's not enough to move the needle."

New Delhi is using its giant domestic market to woo global manufacturers, charting a different path to development than the export-powered economies of Japan, South Korea and China. If a lower-cost iPhone became popular with a rising middle class of Indian consumers, production could be expanded, more jobs could be created, and demand could increase as living standards improve. It is comparable to what Ford's inexpensive Model-T did a century ago for the young, up-and-coming economy in the U.S.

India has worked hard to persuade Apple to produce phones locally. The government has eased foreign-investment restrictions to become more open, with an eye toward fostering an ecosystem of phone-parts manufacturers to supply international electronics makers, bolstering Prime Minister Narendra Modi's Make in India initiative.

Under investment restrictions, foreign-owned single-brand retailers like Apple were required to source around 30% of their products locally in order to open their own shops.

Apple was rejected when it pushed for that restriction to be waived. New Delhi later said companies could be given three years to reach the requirement, according to government officials. Apple was also refused permission to import used iPhones to be refurbished and sold in India, said one Trade Ministry official who asked not to be named.

"The government is eager to have the world's most-valued company have its operations here," the official said. "We hope something mutually-agreeable is worked out in near future."

When the company decided to make its own phones here, Apple picked Taiwan's Wistron Corp. to begin assembling the iPhone SE, its least expensive model, with production starting in May.

The high prices on iPhones are the biggest reason Apple can't sell more in India. Analysts estimate more than 75% of the smartphones sold in the country sell for less than $250 and 95% sell for less than $500. Now the cost of the iPhone SE -- which was introduced last year at about $600 and now sells for around $325 -- could fall to a level more Indians can afford.

If prices for the model fall below $300, they could be attractive enough to appeal to consumers now spending a similar amount for higher-end Android phones, said Faisal Kawoosa, principal analyst at research firm CMR.

The company also has been trying to expand its distribution network in India, where about 85% of smartphone sales occur across a fragmented network of small retailers, according to Mizuho Securities. Apple supports resellers with marketing materials, furniture and other assistance. It plans to back 200 new stores in the next year, according to a person familiar with the company's thinking.

As it plunges into India, Apple faces a consumer-awareness problem, with nearly half the population unfamiliar with the brand, according to a Morgan Stanley survey. To build awareness, the company has been considering opening flagship stores in New Delhi, the tech hub of Bangalore, and the financial center of Mumbai, according to a person familiar with the company's plans.

Meanwhile Apple is doubling down on content. In March it opened Apple's first-of-its-kind app-development center in Bangalore to help coders making iOS apps for India. India has nearly 3 million mobile app developers, but fewer than 15% of those make iOS products, said Jayanth Kolla, founder of research firm Convergence Catalyst. Apple has also opened an office in Hyderabad to boost mapping capabilities.

Of course, Indians don't have to buy iPhones to bond with the Apple brand. In a bid to get young users hooked, Apple this year started offering Indian college students its Apple Music service, which is also available on Android devices, for the equivalent of 93 cents a month -- less than one fifth the cost in the U.S.

--Karan Deep Singh in New Delhi contributed to this article.

Write to Newley Purnell at newley.purnell @wsj.com, Rajesh Roy at rajesh.roy@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

June 22, 2017 05:44 ET (09:44 GMT)