Apple (NASDAQ:AAPL) has finally kicked off production of a high-end device in India -- the iPhone XR. This marks a departure from Apple's strategy of making only older iPhones in the Asian country, where the lack of technical skill had restricted the company to making iPhone 6s and iPhone 7 models.
But a fresh $1 billion investment by Apple's manufacturing partners in India seems to have given the tech giant the expertise to make newer iPhone models. In fact, Apple plans to begin production of the highly popular iPhone 11 in India as well, according to The Economic Times.
This should ideally be great news, as the company will now be able to save the 20% import duty by manufacturing locally. A lower duty will help Apple reduce its bill of materials and price the iPhone 11 much more competitively by passing on the benefit to customers. But sadly, Apple has something else in mind.
Apple won't be reducing prices in India
Executives interviewed by The Economic Times have said that Apple does not plan to reduce prices in India despite beginning local production of the iPhone XR. That makes sense, as the iPhone XR currently retails for 44,999 rupees (roughly $630) in India, which is just 5% higher than what the device retails for in the U.S. market.
The iPhone XR had already received a big price cut earlier this year, so it probably does not make sense for Apple to lower its pricing. But following a similar strategy with the iPhone 11 could dent the impressive momentum that the device is witnessing in the Indian market.
Apple has priced the iPhone 11 competitively in India, and the strategy seems to be paying off given the initial response. The base model starts at 64,900 rupees (about $920), though bank offers during the festive sale season allowed customers to buy the device for as low as 59,900 rupees (roughly $850).
The ploy worked and iPhone 11 inventories sold out soon after the pre-orders began, all thanks to the competitive pricing of the product. And with local manufacturing now in the cards, Apple will have the opportunity to make the iPhone 11 more popular in India with a price cut.
After all, the base iPhone 11 model is still quite expensive in India compared to the $699 price it starts at in the U.S. More specifically, the 64 GB iPhone 11 is priced at a 24% premium in India compared to the U.S., and that can be attributed to the import duties.
India imposes a 20% import tariff on smartphones, which Apple won't have to pay once it starts making the iPhone 11 in the country. So the company has the opportunity to lower the price of the iPhone 11 in India once local production begins and claim more market share. But it looks like Apple management is not in a mood to do that.
Missing the forest for the trees
There's an upswing in demand for high-end smartphones in India. IDC estimates that sales of smartphones priced between $400 and $600 increased 16.3% year over year in the second quarter of 2019. OnePlus dominated this segment, with a market share of nearly 64%.
If Apple decides to pass on the benefit of lower duties to Indian consumers in the form of a price cut, it can price the iPhone 11 closer to that $600 mark and increase its chances of eating into OnePlus' share. What's more, Apple will be able to corner a greater share of the premium ($500-plus) smartphone segment, where it currently holds a share of 41.2%.
A lower price will also set Apple up for long-term growth in India. Smartphone sales over there are expected to grow at a compound annual growth rate of 14.56% through 2023, according to a third-party estimate. Also, an increase in the spending power of Indian consumers could boost demand for premium smartphones in the future and expand Apple's addressable market.
Apple reportedly holds a negligible market share of only 1%-2% in India and generated revenue of just $2 billion there last year. The Mac maker now has a great opportunity to bring more users into its ecosystem and lock them in for the long run by passing on the benefit of duty savings to Indian consumers through a price cut. But if Apple sticks to its stance of maintaining higher iPhone prices in India, it could lose out on making a bigger dent in the fast-growing Indian smartphone space.