Has Apple Found the Right Formula to Crack This Emerging Market?

Apple(NASDAQ: AAPL)is moving at a fast pace to realize its dream of making a dent in the Indian smartphone industry. The company was reportedly in discussions in late January with the government to set up manufacturing operations in the country. Apple executives reportedly had metIndian government officials to discuss potentialconcessionssuch as a 15-year customs duty exemption and a relaxation in the 30% local sourcing norm for components.

The Financial Express is now reporting that India's commerce and industry ministry is viewing Apple's proposal favorably. Though we don't know how these purported negotiations, will turn out, Reuters is reporting that Apple is already moving forward with setting up iPhone assembly in the country.

Image source: Apple.

Apple to start assembling iPhone SE in India

Reuters recently reported that Apple will start assembling the 4-inch iPhone SE in India in April this year with Taiwan's Wistron Corp as its assembling partner. It cited unnamed sources. This would be a logical move as Wistron has been busy setting up a plant near the city of Bengaluru for assembling iPhones.

Additionally, The Economic Times reports that Apple's initial production of a made in India iPhone SE will be somewhere between 300,000 and 400,000 units. Though this is a very small number when stacked against the 2.5 million iPhones Apple sold in India last year, it is likely that the company would ramp up its output once it receives clarity from the Indian government regarding concessions.

However, Reuters' industry sources told it that the production of the iPhone SE in the country was not contingent on the outcome of its negotiations with the government. That indicates Apple is already willing to test the market by assembling its cheapest offering in the country, as this would allow it to lower the cost of the device.

Go low to get more customers

The iPhone SE is the cheapest iPhone from Apple and should have ideally bumped up the company's sales in India. However, Apple bungled the pricing of the device. The 16 GB version of the device started retailing for INR 39,000 (or $582 approximately at the current exchange rate) when it went on sale a year ago.

This was much higher than Apple's global price of $399 for the iPhone SE. The company made a big blunder by pricing a phone with just a 4-inch screen at such a premium, since that much money can get you a Samsung (NASDAQOTH: SSNLF) Galaxy S6 Edge, which has a larger screen and bigger storage.

Considering that Indians love big phones, Apple should have priced the iPhone SE lower given the screen size limitation. The company eventually realized its mistake and has slashed the price of the base version of the iPhone SE by around 27% to INR 28,600 (approximately $427 at the current exchange rate). This is very close to the price of an unlocked 16 GB iPhone SE in the U.S.

What's more, as Apple begins to manufacture the iPhone SE in India, it should be able to offer the device at an even lower price point to the Indian consumer as import duties would be removed and this savings could be passed onto the customer.

Price matters

Apple investors should view a move toward making iPhones in India in a good light as the company should be able to sell more phones by shedding its premium image and thus boosting awareness of its brand.

According to Katy Huberty of Morgan Stanley, in a research note reported by Business Insider, Apple's brand awareness in India was just 50% last year, while over 80% of Indians knew about Samsung. This is because Samsung has successfully captured all ends of the smartphone segment in India right from the budget category to premium phones. It holds 25% of the market, according to the latest numbers.

It's smart for Apple to begin making the lowest-priced phone in its portfolio in India as going low in this market will allow it to reach more customers. The company can gradually work its way up the value chain as the total disposable income of Indians rises.

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Harsh Chauhan has no position in any stocks mentioned. 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. The Motley Fool has a disclosure policy.