Global Protectionist Trends
From fundamentally protectionist campaigns of world leaders such as President Trump’s ‘Buy American’ and Prime Minister Modi’s ‘Make in India’ to isolationist decisions of developed nations such as ‘Brexit’ – the global economy is becoming increasingly protectionist. Tax breaks to companies which “import jobs” back, deliberate currency fluctuations to make a country more favorable as an export market are commonly becoming employed ploys by national governments.
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.
The Indian Context
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% .
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 .
Apple in India – a victim of protectionism
Apple entered India a decade ago primarily focused on selling its flagship product – the iPhone. As per Indian FDI laws, Apple was not allowed to set-up any retail store unless it sourced over 30% parts domestically . The iPhone was almost wholly manufactured in China, due to lower costs. This forced Apple to go-to-market in India mostly through “authorized resellers”.
Over the last 9 years, Apple has been unable to establish a strong footing in the Indian smartphone market, which is the world’s second largest smartphone market and is currently 97% Android . Compared to 20%+ growth of the Indian smartphone market, Apple has witnessed single-digit growth and holds a meagre share of 2% . Primary issues explaining this subpar performance are:
- High price: 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 “go-to-market” 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% . 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
- Competitive intensity: 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.
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 . However, the protectionist Indian government has time and again, disallowed it. Apple also petitioned to sell refurbished iPhones in the Indian market themselves. That was also denied on grounds that it could make India a “dumping ground” for old technologies.
Finally, in May 2016, Apple CEO Tim Cook had a series of meetings with the Indian government on how Apple’s 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 , with further expectation of setting-up full-fledged manufacturing soon. In lieu of this commitment to “Make in India”, Apple anticipates a potential exemption from FDI regulations and/or reduction in prohibitive import duties.
- In the short term, Apple should focus on reducing its cost-to-serve and gaining share in the fast-growing Indian market, while committing to set-up manufacturing in India in the medium term
- Apple should also consider investing in customizing its phones and applications for India (for e.g. the App store, iTunes, Siri) . Most of its competitors have already done the same.
Like Apple, many multinationals have given into protectionist government policies to stay competitive in India – for e.g. Walmart, Starbucks etc. However, there are certain aspects of this “corporate-government interplay” which remain important questions:
- Should Apple commit the capital to manufacturing in India, which may not have equivalently skilled labor and technological know-how as China?
- On the other hand, should emerging countries like India, which grow through foreign capital influx to grow, mandate restrictive and protectionary regulations? Do such measures boost or harm the local economy in the long run?
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 Indian Government Website for “Make In India” http://www.makeinindia.com/policy/foreign-direct-investment, accessed November 2017
 Asit Ranjan Mishra. “Modi government mulls allowing 100% FDI in retail, with caveats”, published by Livemint, May 23, 2017 [http://www.livemint.com/Industry/6EAO7iO19zi8yoW4FlPF1M/Modi-govt-mulls-allowing-100-FDI-in-retail-with-caveats.html]
 Aaron Pressman. “Why Apple is having so much trouble in India”, published by Fortune, August 5, 2016 [http://fortune.com/2016/08/05/why-apple-needs-india]
 Indian Government Export/Import website https://www.export.gov/article?id=India-Import-Tariffs, accessed November 2017
 Joseph Waring. “LeEco joins Apple in pushing India to ease local sourcing rule”, published by MobileWorldLive, April 20, 2016 edition [https://www.mobileworldlive.com/asia/asia-news/leeco-joins-apple-in-pushing-india-to-ease-local-content-rule/]
 Joseph Waring. “Indian won’t ease 30% local sourcing rule for Apple”, published by MobileWorldLive, May 26, 2016 edition [https://www.mobileworldlive.com/asia/asia-news/india-wont-ease-30-local-content-rule-for-apple/]
 Todd Haselton. “Apple begins manufacturing iPhone SE in India”, published by CNBC, May 17, 2017 edition [https://www.cnbc.com/2017/05/17/apple-begins-manufacturing-iphone-se-in-india.html]