{"id":24090,"date":"2017-11-15T16:49:11","date_gmt":"2017-11-15T21:49:11","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/global-protectionism-a-boon-or-a-bane\/"},"modified":"2017-11-15T16:56:08","modified_gmt":"2017-11-15T21:56:08","slug":"apple-combats-with-protectionism-in-india","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/apple-combats-with-protectionism-in-india\/","title":{"rendered":"Apple combats with Protectionism in India"},"content":{"rendered":"

Global Protectionist Trends<\/em><\/strong><\/p>\n

From fundamentally protectionist campaigns of world leaders such as President Trump\u2019s \u2018Buy American\u2019 and Prime Minister Modi\u2019s \u2018Make in India\u2019 to isolationist decisions of developed nations such as \u2018Brexit\u2019 \u2013 the global economy is becoming increasingly protectionist. Tax breaks to companies which \u201cimport jobs\u201d back, deliberate currency fluctuations to make a country more favorable as an export market are commonly becoming employed ploys by national governments.<\/p>\n

Protectionism is aimed at protecting local producers, jobs and businesses through tools such as tariffs on imports, subsidies, tax cuts etc. Protectionism proponents argue that governments should frame economic policy which caters to domestic audiences, while critics consider such policies to be short-sighted and incapable of addressing issues of growth or unemployment.<\/p>\n

The Indian Context<\/em><\/strong><\/p>\n

India has historically been protectionist, especially when it comes to its retail sector, which is 98% unorganized and a major employer of local labor. The government has feared that a surge in Foreign Direct Investment (FDI) in retail might hamper local employment. However, over the last decade, steps have been taken to gradually increase FDI across various sectors, including retail. Current FDI allowances for most sectors range from 49% up to 100% [1].<\/p>\n

The allowances for the retail sector still stand at a staggering 49%. For proposals involving FDI beyond 51%, the laws mandate at least 30% sourcing to be done domestically [2].<\/p>\n

Apple in India \u2013 a victim of protectionism<\/em><\/strong><\/p>\n

Apple entered India a decade ago primarily focused on selling its flagship product \u2013 the iPhone. As per Indian FDI laws, Apple was not allowed to set-up any retail store unless it sourced over 30% parts domestically [6]. The iPhone was almost wholly manufactured in China, due to lower costs. This forced Apple to go-to-market in India mostly through \u201cauthorized resellers\u201d.<\/p>\n

Over the last 9 years, Apple has been unable to establish a strong footing in the Indian smartphone market, which is the world\u2019s second largest smartphone market and is currently 97% Android [3]. Compared to 20%+ growth of the Indian smartphone market, Apple has witnessed single-digit growth and holds a meagre share of 2% [3]. Primary issues explaining this subpar performance are:<\/p>\n

    \n
  1. \u00a0<\/strong>High price:\u00a0<\/strong>The average iPhone is priced at ~$600, while competitor smartphones vary from $80 to $700 and provide equivalent usage features. Stripping apart the costs, we see that a huge chunk comes due to the \u201cgo-to-market\u201d model that Apple has been forced to adopt due to Indian legal restrictions. Firstly, the import taxes on fully-made phones vary from 12.5% to 28% [4]. Secondly, as Apple does not have own retail stores, their cost-to-serve increases by 15% to 20%. Due to the additional channel. Lastly, the high price also aids the creation of an active secondary market for refurbished iPhones, further hampering sales<\/li>\n
  2. Competitive intensity:\u00a0<\/strong>With 100+ smartphone players in the market, the competition to provide the most value-added smartphones at cheapest prices is fierce. 4 out of top 5 players are manufacturing in India enabling them to have lower cost structures and consequently, charge lower prices.<\/li>\n<\/ol>\n

    Apple\u2019s Response<\/em><\/strong><\/p>\n

    In the last decade, Apple made several petitions to the Indian government to relax regulations for FDI and\/or permit them to open retail stores [5]. However, the protectionist Indian government has time and again, disallowed it. Apple also petiti\"\"<\/a>oned to sell refurbished iPhones in the Indian market themselves. That was also denied on grounds that it could make India a \u201cdumping ground\u201d for old technologies.<\/p>\n

    Finally, in May 2016, Apple CEO Tim Cook had a series of meetings with the Indian government on how Apple\u2019s relationship with India can be best taken forward. The outcome of those negotiations has resulted in Apple initiating the assembly of iPhones locally in Bangalore, India in May 2017 [7], with further expectation of setting-up full-fledged manufacturing soon. In lieu of this commitment to \u201cMake in India\u201d, Apple anticipates a potential exemption from FDI regulations and\/or reduction in prohibitive import duties.<\/p>\n


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