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Can Apple Afford to Ignore Emerging Markets?

For 32-year-old Mumbai resident Nilesh Kothari, buying an Apple iPhone is not an option.

The Indian human resources manager, who is looking to purchase a smartphone within the next two months, says the cost of the latest iPhone, which starts at nearly $850 in India, is beyond his 15,000 rupee to 20,000 rupee ($280-$372) budget.

"I don't find it [the iPhone] value for money as far as the product is concerned," Kothari told CNBC. "There are better products that will probably give me the same or comparable features to an Apple iPhone."

Kothari is among millions of major emerging-market consumers who are deciding not to buy the top-selling product of the world's most valuable company because it is too expensive.

From India and Indonesia to Brazil, the cost of an iPhone is often double, if not, triple the retail price in developed countries, due mostly to a lack of availability and subsidies from mobile network operators which makes the popular smartphone out of reach for most mobile phone users, according to analysts.

The iPhone's penetration of India's smartphone market was a dismal 3.2 percent in 2011, compared to close competitor Samsung which had over 20 percent market share, according to research firm Euromonitor. It's a similar story in Indonesia, where the iPhone had a less than 1 percent market share last year, compared to Research in Motion which dominated with over 40 percent. In Brazil, while the iPhone held a respectable 10 percent market share, it still lagged competitors RIM, Samsung and Nokia.

Analysts say while the company can afford to neglect major emerging economies for now, overlooking them going forward would be a mistake.

"In the long run, they [Apple] will definitely need to go into emerging markets," Loo Wee Teck, global head of consumer electronics research at Euromonitor said. "In the short term — the next one to two years — it will not lose out too much by ignoring emerging markets, but in the long run, they definitely need to cater and factor in the requirements for emerging markets."

Four of the world's five biggest mobile phone markets by shipments in the first half of this year were emerging economies — China, India, Indonesia and Brazil — according to research firm IDC. The four were home to 40 percent of all new mobile phones shipped globally, totaling 330 million.

As such, Apple is under pressure to create cheaper products to compete with the likes of Samsung, which has a spectrum of products catered for both the high- and low-end consumers. Yet, as most Apple watchers note, that's not a solution.

"I think it [Apple] is still lagging behind," Teck said. "I don't think it is wise for them to actually lower the price or try to make an emerging market specific model. They will not be able to win if they get into a price fight."

Rob Enderle, principal analyst of technology research firm Enderle Group, backs that sentiment, saying creating cheaper products could undermine Apple's premium branding.

"When you're a high margin vendor, chasing a low margin competitor is probably not going to end well," Enderle said.

Apple Needs to Increase Presence

Instead, analysts say Apple should focus on improving distribution in emerging markets through partnerships with mobile network carriers, to make the latest products available quickly and at a cheaper rate to consumers; and boosting its presence by opening more stores.

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Cape Town based Ian Duvenage, consulting manager for Africa at market research firm Frost & Sullivan, said Apple hasn't done much to attract customers in Africa's developing markets, where there has been a significant uptake for smartphones, compared to its rivals which are doing loads of marketing.

"Although it's underdeveloped, the competition in the market for Apple is quite high," Duvenage said. "I don't think they're aimed to be a low-end mass market product… but there is a portion of the market that will be able to afford it, I think it's just the availability to the high end customers in all the African markets — the ecosystem — is lacking."

According to Mumbai's Kothari, there are members of his family who can afford an iPhone but have chosen not to buy one.

"They had a choice between Apple, Samsung and HTC, but they chose Samsung or HTC," Kothari said.

London based Dominic Sunnebo, Global Insight Director at consumer research firm Kantar Worldpanel, says Apple should replicate the strategy used in China, where it has seen relative success. By targeting the country's affluent population, Apple has created a sense of status associated with its products, resulting in huge demand, even from consumers who can't really afford them.

"I think it's very important for Apple to build up the brand, so then when markets like Brazil potentially drop their import taxes and affluence increases, there is the desire there and the recognition of the Apple brand," Sunnebo said.

Enderle, however, argues that Apple will have a better chance getting future growth from developed markets over emerging ones, because of the stiff competition they're already facing from competitors in the latter.

"Android phones have a significant cost price advantage, because the vendors that sell them are used to operating on a much thinner margin and the carriers prefer those phones anyway from a price standpoint," Enderle said. "Apple will probably be better served in the mature markets trying to regain the market share they've lost than they would trying to buy into markets where the margins would have to be tighter."

While gaining market share has never been the top priority for Apple, which has essentially focused its revenue model on high margins, Teck Zhung Wong, senior market analyst at IDC Asia-Pacific says the company may have to reconsider its strategy eventually.

"The question is will Apple still be as desirable one or two years down the road when there's so many other alternatives now," Wong said.

- By CNBC's Rajeshni Naidu-Ghelani.

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