Apple, Inc. Might Move Forward With Manufacturing in India

By Evan Niu, CFA Markets

Image source: Apple.

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For years, India has been a headache for Apple (NASDAQ: AAPL). The challenges are aplenty, but one central hurdle has always been a local sourcing regulation that requires companies to source 30% of product's value from within the country's borders in order to set up retail stores. Apple previously and unsuccessfully tried to get an exemption from the requirement, which are sometimes available to "state of the art" and "cutting edge" products.

The idea of Apple manufacturing its products in India is nothing new, but Apple is seriously considering it now, according to The Wall Street Journal. The news comes about a month after Apple reportedly asked the Indian government for various types of incentivesshould it move forward with manufacturing in India.

Manufacturing products in India should allow Apple to meet the local sourcing requirement, potentially paving the way for the company to open its iconic Apple Stores. It would potentially also represent a reversal from May, when CEO Tim Cook said Apple had no intention of setting up a manufacturing facility in India.

Distribution matters

It's hard to overstate just how important Apple Stores are to the company. The retail stores have long been an important differentiator for Apple, vertically integrating distribution in a way that few competitors pursue. In doing so, Apple can exert greater control over the purchasing experience, as well as provide after-purchase support. There are also ample opportunities to cross-sell customers on complementary products. All of this strengthens the brand.

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Currently, the vast majority of smartphones in India are sold by local resellers and retailers that carry a wide range of brands. Such a fragmented distribution system simply can't provide consistent experiences across the board.

Indian manufacturing is more doable than the U.S.

Unlike the prospect of manufacturing in the U.S., which Apple dabbles in to a small degree mostly for political purposes, expanding manufacturing to India is relatively reasonable. Labor costs are low, and India is still within fairly close proximity to Apple's long list of Asia-based component suppliers. Primary manufacturing partner Foxconn has already been rumored to be exploring a $5 billion to $10 billion investment in India.

What's less clear is whether or not the Indian labor pool has the "vocational kind of skills" that Apple needs.

Other challenges remain

Even if Apple were to start manufacturing in India and subsequently open Apple Stores, there's no shortage of other issues that Apple faces in trying to crack the world's third-largest smartphone market.

For starters, Indian carriers don't subsidize smartphones. While the subsidy model has mostly died in the U.S., that transition was made possible by replacing subsidies with leasing and installment plans. Lacking subsidies and abundant financing options, combined with lower income levels, Apple's premium positioning makes it a tough sell. The average retail price of a smartphone in India was just $158 in 2014.

LTE coverage also has a long way to go. A mere 15% of India's population had LTE coverage in 2015; coverage is expected to jump to 45% over the next five years.

The Indian market will remain challenging for Apple for the foreseeable future, but given the long-term importance of India to the global smartphone market, Apple has to take it seriously.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.