Apple given golden opportunity to crack India with relaxed rules

Apple has struggled to gain any sort of traction in the Indian markets to date, but new Government rules could perhaps open the door a crack.

India is a market which represents a significant opportunity for the major players in the digital economy. It has the second-largest population globally and a smartphone penetration rate of roughly 24%, but one of the few markets worldwide where smartphone shipments are increasing quickly. Thanks to certain market disruptions, India is currently under-going its own digital revolution, with the increasingly wealthy middle-class easing into the digital euphoria Western consumers have been accustomed to as the norm.

Year Smartphone penetration1 Average income (US $)2
2018 23.9% 2,020
2017 21.9% 1,830
2016 20.4% 1,690
2015 18.6% 1,600

1Statista 2World Bank Group

The evolution of India and the surge of the digital economy in the country is moving at a dramatic pace. The opportunity for profit is monstrous, but this is a tricky market to crack.

This is the conundrum which Apple is currently facing. It currently has less than 2% of market share across the country (which isn’t increasing), and premium prices are stifling any genuine ambition to increase this.

Indian consumers are gradually spending more on devices, though by the time Apple’s prices would be deemed palatable, other brands might have already developed a strong sense of loyalty; do not underestimate the power of the Android/iOS divide.

Brand Market share
Xiaomi 31%
Samsung 26%
Vivo 6%
Oppo 6%
Realme >1%
Apple >1%

Figures curtesy of Counterpoint Research – Q2 2019 shipments

However, there is a glimmer of hope. The Indian Government has this week announced it will relax rules which dictate how foreign companies can operate in the country. Fortunately for Apple, the easement will allow it to sell directly to customers through its eCommerce channels.

In by-gone years, a foreign company had to source 30% of its production locally to create a retail presence in India. This presence includes online channels. With such reliance on China for the manufacturing elements of the supply chain, Apple has always struggled to meet these requirements. As a result, Apple’s devices have been sold through local partners, who add a premium to an already premium product; it has struggled to gain a foothold in the market.

Another element tied to this is the brand story. The Apple Store is a presence in 25 countries around the world, not only presenting a direct-selling opportunity, but a chance to offer an experience to current and potential customers. This is a fundamental building block in the Apple strategy, which is all about creating a brand and an identity to cultivate customers into the loyal iLifers you see around the world today.

Thanks to new elements being considered by the Indian Government, Apple now meets the requirements and will allegedly begin selling products through its own eCommerce channels in the coming months. These new considerations take into account more iPhones will be manufactured in India, not only for Indian consumers, but for export to Europe as well. This is massive win for Apple.

In short, there are two massive benefits for Apple. Firstly, it can own the purchasing relationship with the customer, dictating the messaging and reducing the price while maintaining profit margins. Secondly, it can begin to create the Apple experience for customers to nurture the sense of loyalty which is so critical to the Apple success over the years.

Apple is an incredibly successful smartphone manufacturer because it creates excellent devices, but the work which has been done to build loyalty with its customer base should never be underestimated.

Think back to the 90s and 00s when you saw Apple adverts on TV. None of these adverts ever really discussed products in the way you would expect but talked about the Apple experience. A huge proportion of advertising today is designed around story-telling and brand experience, but Apple was arguably one of the first to do it and remains one of the best at building this experience.

The result of these campaign was an ‘us’ and ‘them’ mentality which persists today. Whether it pins iOS versus Android, or Mac versus PC, the split is very apparent, and crossover is very rare. Not only does this segmented approach maintain loyalty for the individual products, it presents significant cross-selling opportunities. How many iPhone users have an iWatch, an iPad or a Mac also? We suspect a high percentage.

Shifting people into, and keeping them in, the Apple universe can partly be attributed back to the brand marketing campaigns, the closed ecosystem and ownership of sales channels and brand experience. And now, it presents another massive opportunity moving forward; software and services revenues.

Period Net sales Software and services revenue Percentage of total
Q3 2019 53,809 11,455 21.2
Q2 2019 58,015 11,450 19.7
Q1 2019 84,310 10,875 7.7
Q4 2018 62,900 9,981 15.8
Q3 2018 53,265 10,170 19
Q2 2018 61,137 9,850 16.1
Q1 2018 88,293 9,129 10.3

Figures taken from Apple financial reports – USD ($) in millions

Apple CEO Tim Cook has made a big deal about software and services, and he is very right. It attracts recurring revenues without the R&D and manufacturing price tag. There will of course still be R&D, but smartphones are very expensive products to produce at the level Apple customers demand.

Generating revenues through AppleCare, iTunes, Apple Music, iCloud, Apple Pay, Apple Books, Siri, maps, search or TV subscription services becomes substantially more profitable once people are bought into the ecosystem. And as you can see from the table above, it is becoming an increasingly important facet of the financial spreadsheets.

With many users persisting with the OS they have become accustomed to, if Apple wants to make India a profitable market, it will have to start embedding itself in the minds and lives of Indian consumers today.

The Indian market is one which offers great prospects and profits for those who play their hands wisely. Up to now, Apple would have been written off by many industry commentators, but will changes to the rules, the door is slightly ajar. But that is all it is right now.

Apple will have to convince smartphone users it is a better alternative than the Android ecosystem, while also justifying the premium it traditionally charges for products. This will be a very difficult battle, but Apple is in a better position today than it was yesterday.

The calm before the storm – semiconductor sales plummet in Q2

Data from the Semiconductor Industry Association (SIA) show semiconductor sales are hitting depressing levels, though history suggests this might be the fast before the feast.

The SIA statistics suggest worldwide sales of semiconductors reached $98.2 billion during the second quarter of 2019, a minor increase on Q1 (0.3%), but a massive 16.8% crash on the same period of 2018. Cumulatively, year-to-date shipments during the first half of 2019 were 14.5% lower than through to the same point in 2018.

“At the midpoint of 2019, the global semiconductor market remains in a period of decreased sales, with revenues through June lagging the mid-year totals from last year by nearly 15%,” said SIA President John Neuffer.

“Year-to-year sales were down across all major regional markets and semiconductor product categories. One silver lining was that sales during the second quarter of 2019 narrowly outpaced sales during the first quarter.”

Looking at the data, there is a sense of history repeating itself.

Semiconductor Sales

Although it is not necessarily the easiest of graphs to read, there are a few peaks and troughs which can loosely be attributed to significant events.

Starting with the troughs, each can be attributed to two or three different things. Firstly, macroeconomic events which would have impacted purchasing patterns and investor confidence, and secondly, the introduction of a new ‘G’, therefore a new refreshment cycle for devices.

For the two troughs which can be seen following ’01 and ’09, these could perhaps be attributed to the burst of the dot-com bubble and the 2008 global financial crisis. Following both of these incidents, not only did consumer spending decrease, leading to fewer device shipments, business confidence in mobile technologies would have been impacted. Naturally, purchases of semiconductors would have decreased dramatically.

Another factor to consider is the prospect of a new ‘G’ on the horizon. This evolution could explain the troughs on the graph, but also the surging spikes. If we are to suggest 2G devices achieved mass market penetration in ‘00/01, 3G in ‘04/05 and 4G in ‘11/12, the spikes in semiconductor purchases could be explained by device manufacturers preparing for flagship launches.

Looking at the troughs, these could be explained by consumers delaying the purchase of new devices in anticipation of next-generation launches.

Perhaps this explains the dip which the semiconductor industry is currently navigating at the moment. Smartphone shipments have been steadily declining year-on-year, while the consumer appetite for 4G devices seems to be weakening with the prospect of 5G on the horizon. Smartphone manufacturers and the telcos are hyping up this new ‘G’ so much perhaps we should have little surprise demand for 4G devices is flagging.

Looking at the big chip manufacturers, the misery has been well spread. At Samsung, the most recent quarterly earnings demonstrated 4% decline in revenues and a 53% crash in net profit. The sluggish semiconductor business, often the profit driver for the business, has been the scapegoat this year. At Broadcom, another significant supplier in the mobile space, revenues attached to the Semiconductor solutions declined 10% year-on-year. For Qualcomm, the CDMA Technologies unit saw revenues decline by 12.7% year-on-year, while the Technology Licensing business felt a decrease of 10.5%.

Although the semiconductor industry will not be happy with declining revenues, if history has taught us anything, a spike in purchasing is not far away. 5G networks have been launched and early adopters have their hands on devices right now. It might be a year or two before mass market penetration is achieved, but the preparation for flagship launches will take place in the short- to mid-term future. This means smartphone manufacturers spending a lot more on new, and potentially more expensive, components.

The semiconductor industry is heading through a tough period at the moment, but this appears to be nothing new; a cornucopia of cash might just be around the corner.

US consumers need more than incremental gains from 5G

The last few years has seen an increasing number of consumers hold onto devices for longer, and the trend does not seem to be changing right now.

According to research from NPD, the second-half of 2018 saw the number of consumers in the US holding onto devices for longer increase yet again. The global slowdown in the handset market has been well documented, and this report demonstrates the difficulties users are having to dig deep into pockets to fork out for much the same.

“Rising price tags, extended longevity of new generation devices, and lack of innovative features beyond imaging enhancements, are a few factors reducing consumer motivation to upgrade,” said Brad Akyuz of NPD.

“The emergence of 5G could help to accelerate upgrade cycles, as consumers will look to leverage faster speeds for mobile entertainment, but despite strong consumer awareness, this is expected to be a longer-term result.”

When asked how old devices were, 29% of US consumers said at least two years old. Less than 20% of the respondents indicated they were ready to upgrade their device in the first-half of 2019.

This is perhaps not the news many in the industry were looking for. 5G is supposed to be a shiny new red ball to get the consumers excited, but NPD does not appear to believe it will be enough to turn current trends.

The issue which many in the consumer world seem to be facing is a lack of innovation. New devices are appearing each year, but there doesn’t seem to be anything new. The camera is better, the battery lasts longer, the device is lighter and shinier. But these are all incremental upgrades perhaps not justifying the price increases. Unfortunately, 5G seems to be falling into the same trap.

What does 5G offer you according to the telcos today? Faster download speeds. An improvement, but not exactly the breakthrough many were hoping for, especially when you consider the incredibly limited coverage maps. It is being sold as another incremental upgrade right now, and that clearly does not get the consumer excited anymore.

Heading back to the research, only 33% of consumers stated they would have an interest in purchasing a 5G device when it become available. Note the word ‘interest’ here; the actual figure is likely to be a lot smaller when the realities of handing over money come into play.

Although these reports are far from gospel, they do indicate market sentiment and give the industry a nudge in the right direction. 5G is being sold as an incremental upgrade on speed alone and that doesn’t seem to be good enough. Admittedly, there is little more which can be sold at the moment, but telcos and the handset manufacturers will have to dig deeper into the creativity mines if they are to turn the trends of the last few years.

Huawei holds onto number two smartphone spot… for the moment

Huawei has held onto the number two spot for smartphone shipments during the first quarter of 2019, but storm clouds are gathering on the horizon.

According to estimates from Gartner, Samsung is leading the smartphone manufacturers owning 19.2% of market share over the first three months, though Huawei is closing the gap with 15.7%. All three Chinese brands in the top five grew market share over the period, with Apple also declining to 11.9%, shrinking in the Huawei shadow.

Brand Q1 2019 market share Q1 2019 shipments Q1 2018 market share Q1 2018 shipments
Samsung 19.2% 71.6 million 20.5% 78.5 million
Huawei 15.7% 58.4 million 10.5% 40.4 million
Apple 11.9% 44.5 million 14.1% 54 million
Oppo 7.9% 29.6 million 7.3% 28.1 million
Vivo 7.3% 27.3 million 6.1% 23.2 million
Others 37.9% 141.4 million 41.5% 159 million

This might look very promising for the under-fire Chinese vendor, but it does seem the joy might be short-lived. While European and Asian governments are keen not to ban the vendor from selling smartphones or infrastructure equipment in their markets, they might not be able to stem consumer fears.

The anti-China rhetoric might not be anywhere near the same levels as in the US, but consumers will not be keen to invest in a substandard product. This might be the case moving forward, should Huawei remain on the ‘Entity List’, effectively banning it from working with any US firms, including Google.

The prospect of an Android-less Huawei device, and a home-grown operating system to replace it, has been much discussed, but soon enough the reality will hit home with consumers. Without support for popular Google-owned applications, experience will soon drop. Huawei might be able to provide a suitably effective alternative, but not being able to access Google’s apps and services will turn off some consumers.

One of the issues Huawei will face is that of the unknown. Huawei’s OS might be perfectly good, but no-one knows. It might have the supporting ecosystem, but no-one knows. It might be able to create apps to rival Google offerings, but no-one knows. Asking cash-conscious consumers to spend so much on so many unknowns will be a very difficult task.

This might not have an impact on Huawei’s biggest market, China, where the firm controls around 29% market share for smartphones, but Europeans are Google obsessed. This is Huawei’s second biggest region, representing 69% year-on-year growth for the first quarter, and one which represents more opportunity for growth. The US friction could put a severe dent in the consumer unit’s ambitions.

For Apple, it seems its traditional business is becoming increasingly competitive. There will of course be several reasons for this, namely a lack of innovation in recent years and extortionate prices, but there might be a glimmer of hope on the horizon.

As it stands, the misery is likely to continue over the next couple of months. With 5G phones hitting the shelves, early adopters may well snub their loyalties to experience the connectivity euphoria. Apple will not release a 5G-compatible device until 2020, but by missing out on the first wave it will learn the pitfalls of rival launches.

The second-wave of devices, Apple will be a front-runner in this one, will likely be where we see the greatest progress. The bugs and shortfalls will be identified and corrected, and there might well be some applications to make use of the data headroom which is created through 5G. There will also be more attractive tariffs available, with prices driven down by competition. These factors will push 5G into greater market adoption.

It might also recapture the loyalties of faltering iLifers…

Winning in the market share rankings today is certainly something to shout about, however success needs to be maintained over the next 12-18 months. Once 5G is pushed out to the mass market, there will be plenty of opportunities to sell extortionately priced devices. Apple appear to be aiming at this second-phase of 5G devices, building with the consumer hype, while Huawei will have to navigate the stormy seas.

If US tension forces Huawei devices out of consumer hands before the 5G device refreshment cycle, it might just miss out on the bigger prize.

Apple fights back in China with iPhone price cuts

Apple has taken advantage of a reduction in Value Added Tax (VAT) to cut the price of some iPhone models as it attempts to recapture the attention of distracted Chinese consumers.

What used to be a profit machine for Apple is now proving to be a difficult market. During the most recent financial results, sales in Greater China declined to $13.1 billion, 15.6% of total revenues, compared to $17.9 billion, or 20.3% in the same period of 2017. The overarching smartphone segment in struggling, but it seems to be hitting Apple harder than most.

According to Reuters, the Chinese Government is scrapping a 3% VAT on many luxury goods across the country in an effort to inspire consumer spending. As a result, Apple will be reducing prices for the iPhone XS by 5.8%, and 4.6% for the iPhone XR.

This is not the first time this year iPhone models have seen a cut, as many retailers dropped prices in January following a period of weak sales. China has not been a happy hunting ground for Apple in recent months.

At one point, the iPhone was one of the most desirable devices across the country, with the Apple brand being viewed as somewhat of a status symbol. It was rumoured all Apple had to do to boost sales was release a limited-edition device which was a different colour, and such was the desirability of the brand, sales would spike as consumers wanted to prove they were on-trend with the latest device.

Unfortunately for Apple, these days are seemingly in the past. Not only are smartphone sales plummeting across the country, but domestic brands are proving to be stiff competition.

Research from analyst firm Counterpoint suggest smartphone sales declined by 12% year-on-year during the final quarter of 2018, with Apple’s sales also dropping 12%. The reason has been put down to price, as cheaper, domestic rivals boosted sales across the period. Chinese manufacturers now account for four of the five top-selling brands in China, with Huawei firmly positioned at the top of the pile with 28% market share.

This is of course not a trend which is limited to China. Apple did decline year-on-year across the world, while Chinese brands are proving to be attractive to consumers.

Xiaomi international sales increased 118% to make up 40% of its total revenue in the fourth quarter, compared with just 28% for 2017, while Huawei is now the second most popular smartphone brand worldwide with Consumer CEO Richard Yu suggesting it could be number one by the end of 2019.

Apple CEO Tim Cook will be frustrated over recent performances, as while the supply chain guru is certainly improving processes and operations at the business, a lack of innovation is seemingly worrying consumers. Apple is often known for breaking the mould when it comes to new products, but nothing innovative has emerged over the last couple of years. Alongside this drudge of incremental gains, prices have been shooting northwards.

This seems to be the main concern for a lot of consumers; prices are increasing but there is very little to justify the vast financial outlay. As a result, refurbished devices are becoming more popular, while some consumers are simply holding onto products for longer.

While reducing the price of its products seemingly contradicts Apple’s quest to maintain its luxury and exclusive brand identity, it has started working with Alipay. The partnership here will offer Chinese customers zero-percent finance options to entice more customers back into the increasingly deserted Apple stores.

After shedding revenues, declining shipments and price cuts, Apple has shown it is not immune to global trends. It defied logic for many years, but now reality is catching up.

Having said that, Apple is sitting out the initial 5G devices surge, as is its tradition when new hype emerges around smartphones. We’ll be unlikely to see an Apple 5G device until 2020, but you can almost guarantee this will be a product which will attract the queues to the front of the Apple stores in the early hours of the morning.

Smartphone segment in for another rough year – CCS Insight

Analyst firm CCS Insight is predicting the smartphone segment could be in for another year of drudge, with year-on-year shipments forecast to decline by 3%.

With cash conscious consumers still tending to favour refurbished devices, or holding onto their current smartphones for longer, it seems the sluggish segment could evade the booming landgrabs of yesteryear, that is unless you are a Chinese brand.

“Yearly sales of 2 billion mobile phones seemed so close just a few years ago, but might become a distant dream for the industry,” said Marina Koytcheva of CCS Insight.

“It is little surprise that all big mobile phone-makers are strongly pursuing the Indian market. India is one of the few oases where a significant growth opportunity still remains. However, it is Chinese brands like Xiaomi that are achieving the most success, which is of great concern to high-profile brands such as Apple and Samsung.”

Although the 2 billion annual milestone has been predicted many times, CCS Insight believe shipments will be around 1.8 billion for 2019. A new five-year outlook is for 1.9 billion on an annual basis until 2023.

Western Europe is perhaps one of the biggest contributors to the decline, with 35% of survey respondents suggested they will be holding onto devices longer, and only 13% stating refreshments cycles would be more frequent. That said, China is also not immune from global trends, with CCS Insight forecasting sales in the country will be down 9% year-on-year. This follows a 13% decline last year.

For the smartphone segment, it is a very similar story. It seems a lack of device innovation and a sense of more of the same is discouraging consumers from prying open their wallets, especially when the prices are so steep. The launch of Huawei’s P30 Series is an example of this. Priced between £899 and £1099, it will probably be an excellent device though is demonstrating little more than feature upgrades. It’s a lot of money to pay for incremental improvements.

5G might change this perception over the coming months, but it won’t be enough to save the fortunes of the segment in 2019. CCS Insight is forecasting 220 million 5G compatible devices will be sold over the course of 2019, though considering the limited nature of coverage and limited supply, this will have little impact on the dampening trends. This number will rise to 930 million by 2023, accounting for more than half of smartphone shipments, though it will be a slow burner by the looks of things.

It should hardly come as much of a surprise, but the smartphone segment might be in for another mediocre couple of months.

India defies global trends as smartphone shipments grow 20%

IDC has released its quarterly estimates of smartphone shipments for India, claiming 33.5 million units were sold across the period, a year-on-year increase of 20%.

While this is great news for Indian telcos and smartphone manufactures, capitalising on the country’s late charge towards the digital economy, global trends are not as positive. Broader estimates from IDC put global smartphone shipments down 1.8% over the course of the second quarter, though in shipping 95 million devices, the three month period was a positive one for Huawei.

“Huawei has had a stellar quarter worldwide moving into the second position, toppling Apple,” said Upasana Joshi of IDC. “In India, with a refreshed focus it has been able to grow its share in the online space in the last two quarters, on the back of several new launches across price segments. IDC believes Huawei should be seen as a serious long-term player in India market with all the ingredients to challenge Xiaomi and Samsung.”

As the wealthier markets worldwide are no-longer looking as glorious for the smartphone manufacturers, with many hitting a glass ceiling in terms of smartphone penetration to population, India is a very attractive proposition. The young, increasingly affluent, population are ready to be sold to. Largely thanks to the Reliance Jio disruption, the digital revolution is fast taking over the country with data consumption rising healthily quarter-on-quarter. Jio consumers use on average 10.6 GB of data per month, including 15.4 hours of video. The appetite for the digital economy and more premium devices usually go hand-in-hand.

While the majority of devices are still low- to medium-end, shipments of high-end devices (those worth more than $500) doubled year-on-year, with the Samsung Galaxy S9 series and OnePlus 6 being crowned winners. OnePlus surpassed Apple to take second place in the premium market share rankings. That said, consumers are taking advantage of financing schemes in the offline channels to snap up deals, average selling price decreased from $167 to $157 for the quarter, while demand for feature phones continues to be strong, growing 29% year-on-year.

In terms of capitalising on the opportunity right now, Xiaomi took top spot for shipments over the three months, increasing its shipments by 107% year-on-year and capturing 29.7% of total market share. Samsung captured 23.9% of shipments, though with Huawei continuing to make solid progress worldwide it might not be too long before it starts making its mark on the India market.

Smartphone shipments down but Huawei has something to cheer about

Shipments of smartphones across the second quarter of 2018 were down 1.8% year-on-year, though Huawei managed to sell enough devices to leapfrog Apple into second place on the rankings table.

According to estimates from IDC, smartphone vendors shipped a total of 342 million units during the second three months of 2018, a decline of 1.8% year-on-year. This is the third consecutive period of decline, and only the fourth in history.

“The combination of market saturation, increased smartphone penetration rates, and climbing ASPs continue to dampen the growth of the overall market,” said IDC’s Anthony Scarsella. “Consumers remain willing to pay more for premium offerings in numerous markets and they now expect their device to outlast and outperform previous generations of that device which cost considerably less a few years ago.”

It might not be the positive news in the world, but IDC believe it is only a temporary dip. The decline is a result of churn in some highly penetrated markets, though with the number of high-growth markets around the world remaining high, growth should return in the near future.

One company which is not going to complain is Huawei, as estimates show it has eclipsed Apple to take the number two spot in the global market share tables. Huawei moved roughly 54 million devices across the period, claiming a 15.8% market share, though with 20.9%  Samsung is still comfortably in the lead. Samsung’s lead is particularly impressive as the numbers include a 10.4% decline in shipments from the same period last year.

Huawei’s rise can be partially by taking advantage of lacking innovation in the field. With consumers struggling to justify the huge sums for new devices which offer little in terms of new features, the slightly more cost-effective Huawei devices can look attractive. Another explanation would be continued leadership in the Chinese market.

According to Counterpoint Research, although overall sales in the Chinese market declined by 7% compared to the same period of 2017, though Huawei maintained its position as the market leader, growing market share from 20% to 26%. Huawei increased sales by 22% year-on-year.

Shipment declines can partly be blamed on a lack of innovation. Without new features, marketers will struggle to convince consumers to part with hard-earned cash, though with 5G compatible devices set to hit the shelves in 2019, there certainly will be something new to shout about.