Why Apple Inc. Can Benefit from Key Provision Change in India

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Apple Inc. (AAPL) has the potential to benefit greatly from a newly dropped provision in India. The dropped provision will allow Apple to enter the country’s smartphone market, leading to a higher potential for Apple iPhone sales in the future.

Apple has been working tirelessly to enter into India’s smartphone market, and has faced several setbacks along the way.

Earlier in the week, India announced that the country will loosen a policy on foreign direct investment (FDI) on multinational companies. Foreign companies that aimed to expand operations in India were required to source 30% of their raw materials from inside India.

The restriction made it difficult for companies to source materials and led many companies abandoning expansion plans into the country.

Following the announcement this week, India will offer a three-year grace period before companies need to comply with the measure. The grace period can be expanded up to five years when a brand is deemed as selling a “state of the art” technology.

The loosening of the stringent sourcing rules will allow Apple and several companies to get a foothold in India and test the market. At the same time, they will also be able to find suppliers for the raw materials they need to build their products.

Apple will be a major benefactor in India’s market, which has year-over-year growth of 28.8% and ships 103.6 million smartphones. Apple has 20.2% year-over-year growth and ships 231.5 million units.

China’s global smartphone growth has stalled in recent months, causing concern for Apple. India’s growth rate is high enough that it can make a big difference in Apple’s bottom line.

Loosening of FDI provisions will allow Apple to open their first, wholly-owned store in the country, build up internal operations, and familiarize itself with the country’s supply base, making expansion easier and faster.

China recorded 438 million smartphone shipments in 2015, making it a major driver in Apple’s bottom line. Apple forecasts point to revenue contracting for the fiscal year, with concerns that iPhone 7 sales will not be a big enough improvement over the 6s to improve revenue outlooks.  The company’s expansion into India may be the last market the company can move into that has major growth.

A concern for investors is that India’s market is comprised of 75% of smartphones that cost $150 or less.

Per-capita incomes in the country are up to one-tenth of the United States. Apple introduced a “cheaper” phone earlier in the year: the iPhone SE, which still cost $580. Concerns of the company’s high prices not being able to penetrate India’s market are valid.

Apple iPhones are considered to be too expensive for much of India.

Plans to develop a cheaper phone for the market have not been announced as of yet. Apple is expected to open a store to increase brand exposure in India, but investors are justifiably skeptical of a move into a market that cannot afford high-priced smartphones.

Apple stock is down nearly 25% over the trailing 12 months and 9.72% over a 90-day period. India’s market may be thriving, and if the company is able to offer lower cost phones, there is potential in India to bolster sales.

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