SMARTPHONES: Apple’s New India Love Affair Leaves China Sweating

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Bottom line: China’s sudden worries over Apple’s new love affair with India are probably overblown, but do reflect Apple’s need to find new growth engines to offset its rapidly cooling China sales.

China frets over Apple’s new dance with India

Apple (Nasdaq: AAPL) CEO Tim Cook’s surprise first trip to India 2 weeks ago may be firmly in the history books, but it’s still front page news in the Chinese headlines, revealing an unexpected angst in the world’s biggest smartphone market. China has grown accustomed to being at the center of Apple’s universe, as Cook has made numerous trips to the country over the last 3 years in a bid to curry favor with Beijing and Chinese consumers. So the sudden trip to India, a rival with China in many ways, appears to be causing some unexpected sweating by Chinese who worry they may soon lose their spot as the leading object of Apple’s affections.

The first local news item that caught my attention was a sensational Chinese headline citing Cook saying he was considering moving most of Apple’s production to India. (Chinese article) That headline refers to the fact that Apple uses third-party contract manufacturers like FIH Mobile (HKEx: 2038) to make its products, and most of those typically had huge factory complexes in China.

But it’s also no secret that costs in China have been rapidly rising in recent years as a result of the country’s economic growth and accompanying rise in living standards. Those increases have prompted contract manufacturers like FIH and Flextronics (Nasdaq: FLEX) to look elsewhere for lower cost production bases, and it should come as no surprise that India is becoming one of their favorite destinations.

In typical Chinese fashion, this new alarmist headline and article after Cook’s India visit doesn’t cite any particular source for the information, raising questions about its accuracy. The article does mention a television interview with Cook, which prompted me to find the original transcript of that interview on the NDTV website. (interview transcript). In that interview Cook is asked quite directly about manufacturing plans for India, and replies equally directly that “it’s not something that we plan to do at this point.”

India Manufacturing Migration

The second headline that caught my eye also came out this week, and has Chinese media fixating on the fact that Terry Gou, chief executive FIH Mobile’s Taiwanese parent, accompanied Cook on the trip to India. (Chinese article) That article also leads with the sensational headline questioning whether India could soon take China’s place as Apple’s main manufacturing base.

In all fairness, China’s sudden insecurity is somewhat understandable given all the latest developments. Chief among those are a sudden slide in China sales for Apple, following several years of rapid growth that saw the market become the company’s second largest accounting for about a fifth of total sales.

Apple previously only said that its total sales for all products in Greater China, which includes Hong Kong and Taiwan, slid 26 percent in the first 3 months of this year. Many said that was due to a sudden plunge in iPhone sales in China, and newly released market-specific data from IDC show that is indeed the case.  According to IDC, iPhone sales in China tumbled 19 percent in this year’s first quarter, making Apple the market’s fourth largest player. (press release)

China suffered another setback when Cook announced in India that Apple would set up an R&D center in the city of Hyderabad with up to 4,000 workers. (previous post) China has been lobbying for years for a similar center, which is highly prestigious and creates the kinds of cutting-edge high-tech jobs that developing countries crave. So the awarding of a center to India probably came as a big disappointment to China, even though Cook also announced a major $1 billion investment on his trip in Didi Chuxing, often called a homegrown Chinese equivalent of Uber.

All this brings us back to the question of whether China’s sudden worries about the new Apple love affair with India are justified, or whether Apple has enough affection for everyone. The eventual movement of iPhone manufacturing to India and other low-cost locations is almost inevitable, and some might say should even be a source of pride for China since it shows the country is past that stage of development.

At the same time, the selection of India for an R&D center will certainly hurt some feelings in Beijing, where officials are trying to show that China has become more serious about preventing intellectual property theft from such facilities. At the end of the day, China’s worries about losing out to India are probably somewhat overstated and sensational. But they do reflect the new reality that Apple will start to look to other developing markets to jump-start its growth, especially as the China market matures.

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