Apple's McDonald's Solution
After spending $1 billion to buy long-term access to the Chinese consumer market, Apple must be wondering how much a retail presence in India will cost.
The U.S. company wants to open its own stores in the country. Doing so would allow Apple to better promote iPhones, and control the sales and service experience amid a flood of cheaper alternatives. Indian law requires such single-brand stores to procure at least 30 percent of a product's components locally.
Companies with cutting-edge technology can get a waiver, but India’s Foreign Investment Promotion Board has decided that Apple doesn't meet that benchmark, Bloomberg's Siddhartha Singh and Saritha Rai reported Tuesday.
The reasoning is straightforward. The government wants to boost the economy and limit the amount of money flowing out of the country via local shopfronts.
The size of the check Apple needs to write would therefore, in theory, be equal to the amount of money India expects to keep locally. Let's do the math.
Apple's iPhone sold for an average $671 globally last year and corporate gross margin was 40.1 percent. 1 So the manufacturing cost of an iPhone is $402. This doesn't take into account operating expenses, but it's a good a place to start.
IPhone sales in India -- now the world's second-largest smartphone market -- surpassed 2 million devices last year, according to Counterpoint Research. That gave it a 2 percent share in the country, well outside the top five.
Unit sales work out to a wholesale value of $804 million, assuming Indian average prices are in line with the global average, which isn't likely.
Based on these figures, the 30 percent requirement would be equivalent to $241 million. That number is based on a number of assumptions, and doesn't take into account future growth of the market or Apple sales, but is a starting point for how much money India should expect to reap from letting the U.S. company operate its own stores.
It also indicates how much Apple should be expected to contribute to the Indian economy. Manufacturing is the obvious route, and for some brands such as Burberry, Bulgari or Ikea, it may be the only path.
Apple, on the other hand, could argue that the cost of its products isn't just in the hardware, but the software too. Its operating system and apps, as well as books, movies and music stores, all add value to the product. By opening up development centers and accelerator programs in India, as it has done, Apple can claim that it's already procuring locally.
A different Indian government policy, separate from the retail regulations, is pushing Apple to manufacture iPhones locally. The company isn't keen, and the prospects in the near term are unlikely. To do so would require suppliers such as Taiwan's Foxconn to hire tens of thousands of workers in single locations. Foxconn executives have stated their desire to avoid having China-style mega-factories in India.
If Finance Minister Arun Jaitley decides to uphold the ban, Apple has one final option. By signing a franchise agreement with a local Indian retailer, the company could get its shop fronts without the foreign investment. The business model would look a lot like McDonald's, with Apple providing training and support while dictating layout, procurement and sales procedures.
Ceding a certain amount of control, while also giving up secrets about how it manages retail, would be a bitter pill to swallow. But if Tim Cook wants access to India, he may be forced to ask: "Would you like fries with that?"
Average price in India was probably much lower than the global average, and corporate gross margin isn't equal to iPhone gross margin. But these are good reference points.
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Tim Culpan in Taipei at firstname.lastname@example.org
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