How will Apple crack the Indian market?

Winning over Indian consumers seems to officially have become one of the global tech industry’s Next Big Things. Some estimates indicate that there will be one billion users online in the country by 2030. Although only one-fifth of its 1.3 billion people have online access today, India has already overtaken the U.S., becoming the second largest smartphone market in the world.

The evidence continues. Forrester Research reports that online spending in India will grow to nearly $75 billion by 2020, from $12.1 billion in 2015. In 2015 alone the country attracted $9 billion in venture capital and was home to four “unicorns” — privately held ventures valued in excess of a billion dollars. In terms of a startup ecosystem, India may well be the home to the world’s most dynamic hubs: A 2015 Compass study found Bangalore to be the fastest-growing VC and seed investments destination, blowing past global favorites such as Singapore, Paris, and Tel Aviv.

India’s demographics are also in its favor. By 2020 India will have 900 million people of working age. The average age of its citizens will be a youthful 29, and many of them will be eager for digital products. Besides the pull from the demand side, the supply side of the industry is also primed for a push into India: In addition to the many involved in the tech industry worldwide, CEOs of several major players in the tech ecosystem — Microsoft, Google, Adobe, Nokia, MasterCard, and SoftBank, to name a few — are Indian. Clearly, there’s awareness and connectivity between major corporate leadership and the prospective tech market in India. The consumer opportunity is particularly attractive since the markets in the industrialized world are maturing and another big player — China — has been a difficult market to penetrate for many major tech players.

Despite all these attractions, the Indian opportunity is not for the faint of heart. The country presents the industry with an unusually complex combination of contextual challenges. To participate in this market, companies must develop a keen understanding of its myriad sociopolitical, environmental, and institutional factors, which are quite different from other markets’. And these contextual factors must be built into the market strategies and business models — a process that has profound implications for global players looking to make their move.

So while the global tech giants come up the learning curve on the nuances of the local context, indigenous players with stronger “contextual intelligence” have a chance to gain an early foothold. Having a contextually appropriate strategy may well be the true source of competitive advantage in the game of winning over the Indian consumer.

We’ve seen some creative efforts from global tech giants already — some of which were foiled. Facebook launched an initiative aimed at bringing online the vast majority of the Indian population with no internet access through a controversial but innovative initiative called Free Basics. The idea was to form a partnership with a local telco to offer a limited number of websites to consumers for free. Amazon had to overcome the regulatory barriers that prevent foreign retailers from selling from their own inventories of goods by owning no inventory and structuring its operations as a pure market maker between consumers and retailers. Apple has sought to find ways to lower the price points on its expensive products to appeal to the price-conscious Indian consumer.

I have written about Facebook’s fumble in India, in which regulators shut down its Free Basics service. Amazon is confronting its own regulatory hurdles. While Indian regulators confirmed that online marketplaces may be considered legal, they also decreed that no single seller could account for more than 25% of sales. If enforced, such a requirement would eliminate Cloudtail, the largest seller on Amazon India, effectively making its operations illegal.

Now it is Apple’s turn to discover the contextual challenges of the Indian market. It faces three serious challenges:

First, the iPhone is priced way above what the average Indian consumer can afford, and the Indian smartphone market is fragmented and heavily contested, with over 150 brands competing. Only South Korea’s Samsung and domestic supplier Micromax have market shares of more than 10%. Apple’s share accounts for only about 2%, according to Counterpoint Research. Other than at the very top end of the market, given the buyer purchase criteria for the average consumer, price and functionality will trump the brand cachet of Apple.

Second, the recent moves by Apple to compete with a lower-priced iPhone SE faced several extra hurdles in India. While the SE went on sale for $399 in the U.S., the price in India would be about a 36% premium over the U.S. price. There are several factors that contribute to the Indian price being significantly higher. For one, Apple needs to insure itself against foreign exchange fluctuations. For another, there are import tariffs to contend with. Most significant, Apple has to rely on a series of middlemen who are responsible for logistics and distribution and build in their respective profit margins. In India there may be as many as five such middlemen involved in the distribution chain.

The third challenge has arisen from Apple’s attempts to find a different route to offering a lower-priced phone by selling used iPhones in India. This move has been met with significant resistance. In an application dated December 7, 2015, Apple sought the government’s approval “to import and sell its certified pre-owned iPhones in India; and manufacture and sell its certified pre-owned iPhones in India.” Local businesses have protested, warning that it would lead to electronic waste, create a source of unfair competition for local manufacturers, and undermine the prime minister’s much publicized “Make in India” initiative to encourage local manufacturing. Apart from the potential consumer sensitivity to being offered hand-me-downs, going up against a major political priority would be bad move for Apple.

As the world’s tech giants have discovered, in markets such as India — to adapt Peter Drucker’s dictum — context eats strategy for breakfast. It helps to keep three principles in mind:

-Anticipate the heightened competitiveness of local players, who can adapt to the market much faster, thanks to their contextual intelligence.

-Develop strategies that are resilient to variations in the decisions made by regulatory and political authorities and the constituencies they attempt to please.

-Make deep investments in the market by immersing in the sociocultural milieu, employing contextual factors as part of the market evaluation process, and designing strategies to address them in advance.

For Apple this might mean investing in its own distribution and manufacturing in India — and assessing the benefits of doing so against the investments needed both in dollar terms and in understanding the complexity of the context. The other option is to not bother with the contextual elements and focus on what it does well, such as product innovation and marketing strategy for brand-sensitive consumers. This means ceding a good part of the Indian market to local and lower-cost players. But perhaps being stuck in the middle is actually the worst position in which Apple could find itself.