Apple (AAPL) stock has been hammered recently after concerns about slowing growth and heightened competition in its core smartphone market. This has led to a stock price decline of ~35% in the last few months. I had written about how Apple has become a decent buy, after its stock fell due to cheap valuation. One of the reasons for the bullish stance was that Apple is now concentrating its resources into the emerging markets such as India.
Expand into Emerging Markets - Apple has not really concentrated on increasing penetration into emerging markets like India. The company only recently increased its sales force in India where it already has a top-of-the-mind brand recall. The emerging markets such as China (deal with China Mobile (CHL)) and India present a great opportunity for Apple to keep growing through increased sales and marketing efforts.
Today, India's business newspaper Economic Times reported (citing unpublished IDC figures) that Apple's smartphone market share, in terms of value, has surged by more than 300% in the last quarter (4Q12) and the company has become the 2nd largest smartphone player. Apple has leapfrogged companies such as Nokia (NOK), Sony (SNE) and Micromax. While Apple is still 5th in terms of volume, its premium smartphone range has ensured that it packs a greater punch in terms of value. Other market research agencies have also indicated that Apple's smartphone sales increased dramatically in the last quarter.
What has led to this iPhone surge?
Apple has undertaken a number of measures to boost its sales in India. I thought these measures should have been taken a long time ago. However, with Apple finding it difficult to fulfill demand from the developed markets, India was not a priority. Some of the measures taken by Apple are:
- IT wholesalers - Apple has appointed two wholesalers: Redington India and Ingram Micro, to increase its reach into the Indian market, where distribution and logistics is a major challenge. One of the major reasons for Nokia's early success in the Indian market was its partnership with IT distributor HCL Infosystems. This successful partnership had propelled Nokia's market share in the Indian market to more than 70% in the middle of the last decade.
- Selling iPhone through "EMIs" - India is a low income country and few people can afford iPhones (however, given India's over 1 billion population even that is a significant figure). A low initial price is essential to sell products in India where people simply don't have the money or financing to buy big ticket products. Apple has now started selling iPhones with long duration payment option with a low initial down payment.
- Increasing its own marketing and sales force - Apple has increased its sales and marketing team to 150 from 30 about six months ago. While we think that this team is still quite small, the growth in numbers is an encouraging trend.
- App billing in India rupees - India did not have an Apple app store for a long time which made it difficult for users to use the iPhones. Apple has now started billing apps in local currency, which allows Indian users to get same seamless use of Apple's app store as other users.
Is the surge sustainable?
India has never been a focus market for Apple (six months ago, Tim Cook said that India does not have high potential in the intermediate term). It is hard to find Apple retail stores in India which is dotted by hundreds of exclusive Samsung (SSNLF.PK) and Nokia outlets. Even big cities have only a couple of big Apple distributors and getting the Apple products serviced is a big problem. In second tier cities, it is almost impossible to buy Apple products despite their huge popularity. The large unmet demand for iPhone means that Apple will continue to gain market share in the smartphone segment. Also iPhones are looked upon as status symbols in India, though high end Samsung phones are preferred by the younger generation. Apple has only 5% of India's smartphone market in terms of volumes (~ 250,000 out of 5 million smart phones shipped in the last quarter). This means that Apple still has huge room to grow. The only problem is that it will have to come up with lower priced products (iPhone 3 sells for around ~Rs 18,000 compared to ~Rs 45,000 for iPhone 5).
India's iPhone sales are still chickenfeed compared to the Apple's global iPhone sales (less than 1% of $30 billion). However, India remains Apple's biggest potential growth market along with China. Apple's sales in "Greater China" increased by 67% year on year in the last quarter to $6.8 billion. While India's size is still quite small, the recent surge promises that India will become Apple's main growth engine in the coming years. The stock market has concluded that Apple's growth days are at an end and it will look more like Microsoft (MSFT) in the coming years. However, while it is almost certain that Apple will not be able to grow its topline at the 40-50% rate, even a 10-15% growth would lead to a big upside in the stock price.