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Apple looks to India to be its new China as iPhone sales grow 50 percent

Apple's iPhone sales in India grew by more than 50 percent in the company's fiscal year, chief executive Tim Cook said on Tuesday as the technology giant touted the potential of new growth markets. However, cracking the world's largest democracy won't be easy, analysts said.

The U.S. firm reported its first annual revenue decline since 2001 on Tuesday, as iPhone sales fell for the third straight quarter.

Apple has been looking to new countries such as China to drive growth but revenues in the world's second-largest economy fell 30 percent year-on-year in the fiscal fourth quarter, according to the company's results. Cook, nonetheless, remained bullish on China but tough competition from local players like Huawei, combined with regulatory hurdles, have held back the company's progress.

So Cook has turned to India, noting that half of Indians are aged under 25 with the population expected to boom further.

"Our iPhone sales in India were up over 50 percent in fiscal 2016 compared to the prior year, and we believe we're just beginning to scratch the surface of this large and growing market opportunity," Cook said on an investor call after earnings were released.

"The truth is there's going to be a lot of people there and a lot of people in the middle class that will really want a smartphone, and I think we can compete well for some percentage of those. And given our starting point, even though we've been growing a lot, there's a lot of headroom there in our mind. So, we're working very hard to realize that opportunity," he added in response to an analyst question.

Tim Cook, CEO of Apple introduces the new iPhone 7
Michael Neuling | CNBC
Tim Cook, CEO of Apple introduces the new iPhone 7

Cook highlighted Apple's partnership with Indian network player Reliance Jio, which is boosting the country's 4G mobile internet infrastructure coverage to 18,000 cities and 200,000 villages. They are offering a free year of service to purchasers of new iPhones, Cook said.


'Limited potential'

But like China, India will be a tough market to crack Apple, despite almost 125 million smartphones set to be sold in total this year, where iPhones are still a small player.

The company shipped around 2.5 million units between October 2015 and September 2016, according to Counterpoint research, giving Apple a 2.2 percent market share. While this is up from the 1.6 percent share in the previous year, Apple could struggle to penetrate a country that is used to buying cheaper devices.

"We think lack of affordability will likely limit the potential upside from the region," Mizuho said in a note on Tuesday, adding that "India might offer about $10 billion of incremental revenue opportunity in five years, which might not move the needle for Apple."

In a note from earlier this year, Mizuho said that over the next couple of years, India is unlikely to contribute to more than two-to-three percent of total sales.

Cheaper iPhone needed

The problem is that Apple's cheapest new generation model iPhone in India is the SE which starts at $600. That price point and above makes up around three-to-four percent of the total smartphone market, according to Neil Shah, research director of devices and ecosystems at Counterpoint Research.

"The opportunity for the market is limited," Shah told CNBC by phone.

Samsung dominates the Indian market followed by local player Micromax and China's Lenovo, according to data from IDC. All of those manufacturers have smartphones at lower price points, making it attractive for the Indian consumer. Its'

"For Apple, the total available market is just 8-10 million units per year. Apple has to align the portfolio first, maybe a cheaper mid-range iPhone. If they can have something that starts at $399 in India, that will make much more sense."