Top Stocks to Watch Out as iPhone Maker Foxconn Plans Massive Expansion in India

Apple Inc.

What's the first thing that came to your mind?

Quality? Premium pricing?

What about 'Made in India'?

Well until recently no one associated Apple with India. But now...this is changing.

Apple is one of the largest technology companies in the world. It has a great history of innovation, quality, and success.

For a long time, it's presence in India was nothing to write home about.

In recent years though, Apple has been focused on expanding its presence in India. The reasons are not hard to find. India is a rapidly growing market with a large and growing middle class.

Apple in India

Apple's history in India dates back to the early 1990s, when the company began selling its products in the country through third-party retailers.

However, the company faced challenges in the Indian market due to high import duties and complex regulations. This made it difficult for the company to compete. It also didn't help that the company's products very expensive. Most Indians couldn't afford them.

This is the case today as well but India is no longer the poor country in was in the 1990s. The country's increasingly affluent middle class is eager to spend their incomes on gadgets of all kinds.

Despite the early challenges, Apple soldiered on. It continued to invest in its store network. The company has also made significant investments in the Indian technology industry, including a US$ 1 billion investment in Indian startup Ola in 2019.

Eventually, Apple began stepping in to the manufacturing segment in India. This allowed the company to avoid import duties and other regulatory hurdles.

In 2017, the company began assembling some of its products in India through a partnership with Taiwanese manufacturer Wistron.

Then in 2020, Apple announced that it would be shifting more of its manufacturing operations to India. It began by manufacturing the iPhone 12 in the country.

It was a small start and it wasn't the latest iPhone either at the time...but it was still a big deal. This was because in the first two decades of the 21st century, Apple had moved most of it's production to just one county: China.

A Change in Strategy

The move was part of a broader effort by Apple to reduce its dependence on China. The company has been at the receiving end of rising political pressure and trade tensions in recent years.

There's another risk of being too heavily dependant on China. Apple concerned about its supply chains. It's a huge company and thus can't have too much of its production/inventory in one country.

This came to light during China's zero covid policy. Supply chains were interrupted, manufacturing operations were hampered, and the smooth supply of Apple's big new launch, the iPhone 14 Pro, was affected.

Thus Apple wants to avoid having all its manufacturing eggs in one basket. It has jumped on to the China Plus One bandwagon.

It will move about half the production of the AirPod to Vietnam and is also in talks to produce MacBook laptops in Thailand.

But the big announcement was the shifting of the iPhone 14 production line to India in September 2022. It was the first time a big MNC was manufacturing the latest electronic version of its product in India. It was a turning point for Apple and Indian manufacturing.

The government too deserves credit. It has rolled out a production linked incentive scheme for manufacturing cell phones in India, along with other measures. These are now beginning to bear fruit.

But this was just the start...

In addition to manufacturing, Apple has also been working to expand its retail operations in India. Even during covid, the company negotiated with Indian mall operators to open more retail stores in the country. It has plans to open several new stores in the coming years.

Then came the big event.

A Day to Remember

On 18 April, 2023, Apple CEO, Tim Cook, opened the doors to the first Apple Store in Mumbai, India. Two days later he opened another in Delhi.

Despite these efforts, Apple still faces significant challenges in the Indian market, including competition from cheaper phone makers and the high cost of its products relative to the average Indian consumer's income.

However, the company's continued investments in the Indian market suggest that it sees significant potential for growth in the country.

Apple is moving towards a fully integrated technology company in India. It will do everything from manufacturing/assembly, to distribution, and retail. This is a long-term goal for Apple but it's well on its way.

The company looking for local suppliers for its components, much of which is still imported. It's also tying up with many Indian companies and start-ups for all kinds of products and services to fill up the Apple eco-system. These will include services firms like app developers for its App Store.

Overall, Apple's history in India is a testament to the company's ability to adapt to new markets and invest in new technologies.

While the challenges of the Indian market are significant, the company's continued investment in the country suggests that it sees significant potential for growth in the years to come.

Foxconn's Massive Investment in India

On 27 November 2023, iPhone maker Foxconn said in an exchange filing that it plans to expand footprint in India with a massive investment of US$1.6 billion for construction projects.

Around 50% of Foxconn's revenue comes from business with Apple Inc.

The company has been making iPhones and other products in India for several years, including the latest iPhone 15.

Foxconn has time and again said about expanding its presence in India. In August this year, the Karnataka government had announced that Foxconn will invest US$600 million in two component factories in the state.

One factory would be to make mechanical enclosures for iPhones and the other one would be a semiconductor equipment manufacturing plant.

So far, the company has invested nearly US$8 bn in India and it plans to seriously ramp up its investment as the tensions between the US and Beijing escalate.

Foxconn is also in talks to make India's first semicon fabrication unit. Earlier, it teamed up with Vedanta but the partnership didn't go through.

Indian Companies to Benefit?

With Apple's main supplier setting up a mega factory in India to reduce its dependence on China, the India growth story has just begun.

First, we should clarify a common misconception.

The company, Dixon Technologies, is not a part of the Apple ecosystem in India. It does make cell phones but not for Apple.

If this were to change in the future, it would be huge for the company. It makes sense to keep the stock on your watchlist.

Then there is Redington India. The company is a leading distributor of Apple's products in India.

It's possible that the company's business with Apple will grow steadily. Nearly 30% of revenues come from Apple at the moment.

With only 2 distributors in India which distribute Apple products - Redington and Ingram, it's is a near duopoly.

Also, Redington is one of the leading distributors globally with 45% of revenues and profitability coming from the export market.

While, the growth trigger is India, other markets too offer a strong diversification.

Besides, it's not only mobile phones but Redington is also the distributor of other IT products of companies like Dell and HP.

The company is also focussing in to cloud services distribution and management which is a high margin business.

Other than these two, there's TCPL Packaging. It's one of India's largest folding carton manufacturers as well as a standalone paperboard converter.

To diversify and tap the growth opportunity in the expanding smartphone and electronics sector, it acquired an 89% stake in Creative Offset Printers Pvt (COPPL).

This firm has a presence in the high-margin rigid box space. COPPL supplies boxes to leading mobile companies such as Samsung.

With Apple shifting some of its manufacturing base in India, making packaging boxes for Apple could be the game changer.

Currently, Apple sources its packaging requirement from its global vendors in India. However, the company is hopeful it will increase localisation.

Apart from these three listed companies, Apple is tying up with various start-ups in India. None of them are listed unfortunately.

However, some of them will ride the coattails of Apple's rise in the Indian market and grow to become large companies. If they hit the market someday, these companies could become wealth creators for Indian investors.

As investors, it's important to keep a close eye on Apple's growth in the country. It will not only create wealth within its ecosystem but it could also hurt the competition.

Here's Equitymaster's co-head of research, Tanushree Banerjee, on this big opportunity...

• India may account for less than 5% of Apple's revenues today. But Taiwanese contract manufacturers Foxconn Technology Group and Wistron Corp have, in recent years, set up factories in India.
  
  Their plan is to produce iPhones for India's domestic market as well as for exports. Both companies will produce the latest model, iPhone 14.
  
  Moreover, India's demographic advantages are second only to China. It has the world's second-largest smartphone market. Device sales are increasing as more people get online for the first time.
  
  Getting a stronger foothold in India will be time consuming for Apple. Indian smartphone market is dominated by the likes of China's Xiaomi and South Korea's Samsung Electronics.
  
  Apple will also have to contend with competition from Indian smartphone makers like Lava, Micromax and Karbonn, among others.
  
  If you thought Apple's case is a one off, think again. Google too has joined the fray. It plans to produce a million Pixel smartphones in India.
  
  With the Pied Pipers of global smartphone industry heading to India, it's only a matter of time before others join the fray.
  
  So, will only the Taiwanese contract manufacturers benefit from this shift? Well, the companies need to build an entire ecosystem for the smartphone supply chain to flourish. So quite a few Indian vendors, will get a significant share of the pie.

You can read Tanushree's full editorial here.

And keep this opportunity is mind when you're looking for stocks that could benefit from the Apple story in India.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...