Apple: Growth At What Cost
Summary
- Apple has set a target to achieve 10 million iPhone sales in India.
- It might be able to achieve this target quite soon, but there will still be a number of stumbling blocks for the company in this region.
- Recent research shows that 55 percent of the total Apple sales in this region were accounted by older lower priced models.
- This will impact the average selling price and gross margins for Apple.
- Amid saturating American and European markets and a declining Chinese market, Apple might highlight growth in India, but investors should dig deeper into the data.
Apple Inc. (NASDAQ:NASDAQ:AAPL) is putting a lot of hope in the current iPhone iteration, but it will be facing a saturated market in important regions. There is also a lot of talk of declining sales in China as local competitors release premium smartphone features at rock-bottom prices. In this scenario, Apple’s management is looking to India and other emerging markets to revive growth and provide the next catalyst for sustainable momentum.
Tim Cook has visited India a number of times, trying to convince the government to lower tariffs and allow retail stores. In 2016, Apple sold 2.6 million iPhones in India, which was a growth of over 50% from the previous year. Although this number dwarfs in respect to 212 million total iPhone sales in 2016, this region can show triple-digit growth in the next few years. But the biggest issue for Apple in this region would be the product mix. Recent data from Counterpoint Research shows that 55% of these 2.6 million iPhones were older models.
Biggest dilemma
A large part of total iPhone purchases in India are for the older models. After recent slashing of prices, an iPhone 5S (16 GB) model can be purchased for INR 17,599 or $272. Similarly, iPhone 6 (16 GB) can be purchased for INR 22,999 or $355. Although both these models are not listed on the local Apple website, they can be purchased by resellers on online platforms. These prices will be further reduced as tax rates are getting reduced on smartphones. Apple has also started production of iPhone SE in small numbers in India and would likely ramp up production to cut import tariffs.
Both these factors can allow further price cuts of 15% to 20%. This would certainly help in creating a mass-market for Apple in a price sensitive region like India.
Fig: Older models priced at $272 and $355 making a large part of total sales. These models usually receive the highest rating and achieve very high sales. Source: Flipkart (Among top 3 online platform in India)
By selling these models, Apple hopes to increase the total addressable market and also create customer base for its expanding services business. If these prices see a further reduction due to factors mentioned above, we can see a big uptick in total sales and the 10 million sales target should not be too difficult. Apple saw triple-digit sales growth in China during many quarters in 2014-15 which helped boost bullish sentiment towards the company. A similar sales growth in India, although from a lower base, could still show future growth possibility for iPhone.
But investors should also note the product mix in India and other emerging markets, besides looking at the unit sales growth number. In the recent holiday quarters, the average selling price or ASP for Apple in developed markets was $693 as more customers chose higher priced plus model. However, ASP in emerging markets like India might end up much lower as older models form a substantial percentage of total sales. Even if Apple registers over 100% sales growth in India in 2017 and 2018 which should put the sales number close to the 10 million mark in 2018, the premium latest models would still form a small fraction of total sales.
Besides ASP, lower priced models also affect gross margin for the company. In the last iPhone iteration, the bill of materials for iPhone 7 was $224.80 whereas the ASP during holiday quarter was closer to $700. This allows Apple to enjoy a gross margin unmatched in this industry and is the main reason behind its huge valuation. However, lower priced models will certainly impact the gross margin. As higher percentage of models sold are in the $250-$350 range, the ability to maintain high margins would be almost impossible in this region.
During Q1 results conference, Tim Cook mentioned a number of positive aspects for its Indian market. Apple’s management would continue to highlight the growth prospects in India in the next few quarters as lower tariffs, taxes and greater retail presence helps the company gain market share in this region. But investors should dig deeper and look at the sales of individual models, average selling price and gross margin in this region. A similar story would be repeated in other emerging markets as Apple tries to expand its market base in other price sensitive regions.
Investor Takeaway
Apple grew its revenue by 56% in 2016 in India compared to a year before. As local manufacturing facilities are opened, it will also help in reduction of import tariffs which should expand the market. Recent tax cuts have also allowed reduction in prices. But a majority of iPhones sold in this market still belong to the older and lower priced versions. This will be the most important fact for Apple in the next few years in India and other emerging markets as these regions slowly improve their per capita income.
Investors should closely watch the ASP and gross margin numbers in these regions as their contribution to total sales unit becomes more meaningful. Bullish sentiment based on strong unit sales would be ill-advised when the ASP and gross margins are taking a big hit in these regions.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (18)
Answer: The costs are very small. The R&D expense for the older models is already amortized. There are costs to open stores and manufacturing in India, which represents about 1/7 of the world's population. Seems like a wise investment.
Of course, the author worries that the "cost" is slightly lower overall GM. The impact on GM will be minimal unless, and until, unit sales in India triple or quadruple or more. No worry.
Old models are of course lower in price but not necessarily lower in margins initial costs have been written off.
Also,with more local content in India planned for old models and for the SE,this will drive costs lower.
An an investor, I'm delighted to see Apple chase unit growth in markets that cannot afford higher priced models. Lower margin % but higher EPS, which is all that matters in the long run.
2) network. India still needs a widespread reliable 4g/5g infrastructure
3) middle class. The middle class in India is not as widespread as in china, limiting potential sales.
4) stores. Until Apple can open its own stores in major metropolitan areas its retail prospects are limited.
Kapla!