“There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it’s great to be there,” Apple CEO Tim Cook said in May last year.

His comments underscore one reason Apple has recently made an aggressive play to expand operations in India: the country has a huge population, with a growing middle class willing to splash out more on high-end phones.

But it’s not just about sales for Apple. The tech giant has also boosted its manufacturing footprint in India, via Foxconn, the Taiwanese firm that assembles iPhones. Apple now makes around 1 in 7, or 14%, of its iPhones in India, according to a Bloomberg report this month.

Last year, an Indian government minister said Apple was looking to eventually manufacture 25% of all of its iPhones in India.

It’s led many investors to wonder whether India can become the next China for Apple.

In the latest episode of CNBC Tech’s “Beyond the Valley” podcast — which you can listen to above — Tom Chitty and I discuss why Apple is pursuing the Indian market — and if it can live up to its promise.

If you have any thoughts on this or previous episodes, please email us at beyondthevalley@cnbc.com.

You can subscribe to “Beyond the Valley” by clicking the links below to your chosen platform:

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Here is a transcript of the episode of “Beyond the Valley” released on Apr. 11, 2024. It has been edited for clarity and brevity. 

Tom Chitty 

Before we get back to our main story, we’ve got to hear Arjun’s stat of the week, which is…

Arjun Kharpal

18.8% market share.

Tom Chitty

18.8% market share. Okay, Arjun? Why is Apple looking to reduce its reliance on China.

Arjun Kharpal

I think we have to go back to sort of the height of Covid in China. China had very intense, very strict Covid prevention measures in parts of the country. And that didn’t stop at manufacturing sites. So in 2022, there was sort of a Covid outbreak in Zhengzhou, which is a city in China where Foxconn, the Taiwanese firm, which assembles Apple’s iPhones, runs the world’s biggest iPhone plant. Any that created disruption there, there were workers who sort of had to be quarantined and things like that. And then what followed was some unrest amongst some of the workers there as well. And that caused huge disruptions to production of iPhones out of the main place where the global — the world’s supply — of iPhones are assembled. And I think that got Apple thinking, we’ve been speaking a lot about Apple’s reliance on China and Apple reducing its reliance, which hadn’t really happened at all. But I think that moment, what it did was put scrutiny on Apple’s reliance on China as a manufacturing hub. It then also, I think, for the company, accelerated plans for the company to think where else can we diversify our supply chain? Where else can we manufacture our products so if there is any kind of disruption anywhere, that at least we know, we have supplies of these products and can rely on other places to ramp up production. And so I think that’s really what happened. It was the Covid era that sparked that. Some of those intense restrictions, I think, exposed how much reliance Apple actually had on China when it comes to this. I think one estimate put, at one point, I think China was producing something like 90% of the world’s iPhones. And so that gives you the idea of the kind of reliance Apple had on the country.

Tom Chitty

From Apple’s perspective as well. So I understand they’re de-risking maybe their supply chain, but the cost to move a supply chain or at least part of a supply chain from one country to another: different languages, not necessarily the historical manufacturing infrastructure in place to be able to support, you know, what China has been doing for several years, decades even is, is that worth the de-risking of the supply chain?

Arjun Kharpal

I think if you’re Apple, a company like Apple, with that many products, it is worth the risk, because what happens when there’s another event out of your control, or as we know, there’s these huge trade tensions that still exist between the U.S. and China? It could take an escalation of that to also hamper Apple’s ability to produce in China perhaps, ability to sell in China perhaps. So the way Apple is looking at it is well, you know, they’re not going to leave China. You know, China is still the most important manufacturing hub for Apple. Yes, it has sort of slightly reduced its reliance on China. But it’s still a huge part and will be for the coming years. I think what you’re seeing though, is Apple invest more with its partners, the likes of Foxconn, as I mentioned in places like India, and Vietnam, as well. And we’ll speak a little bit about that later. But they’re looking at other areas and investing more in those areas. So that, you know, they can start to perhaps slowly reduce some of the production in China. But also, if you think about it have the ability to ramp up production elsewhere, let’s just say, there’s another issue in China, that disrupts production to the iPhone, but they’re also manufacturing in say, India, then they could potentially, if the factory has capacity, pick up that slack that was lost from China. So for Apple, you know, not being able to get the product to market will cost them billions of dollars of sales. You know, if they’re not able to get their iPhones and other things to market, no one’s gonna buy and people are going to wait, they will cost so it’s worth them spending the billions to then invest in other hubs. And I think that’s what’s what they’re doing.

Tom Chitty

For it to fully work though you would need other countries, whether it’s India, or Vietnam, we’re going to be talking about in a bit, they need to be able to do it from end to end, or at least fill those roles that China was doing, which, again, is not necessarily cost effective.

Arjun Kharpal

Yeah. And I think that’s why the ramp-up hasn’t been as aggressive or as easy as people thought. We’ve been speaking about this for years Apple’s sort of reliance on China, but not much had been done, because as you said, it’s a difficult process, you know, you can’t just shift and move away from China, as much as you know, India, and these other hubs are being spoken about, it’s not easy to just set up manufacturing, that takes a lot. Firstly, you know, it’s things like local regulations and incentives and all of that, and making sure it’s worth the return on investment. But then it’s the expertise, it’s the actual workforce, who are able to do that. That’s a huge part of it. So when we talk about, you know, Apple manufacturing elsewhere, it’s going take a long time to significantly ramp up iPhone production elsewhere. And we’ve seen that in India so far. I mean, so far, India, apparently, according to a recent Bloomberg report, now produces one in seven iPhones, or around 14% of total global iPhones. And that was double the last fiscal year, that’s aggressive. But you are you are seeing it happen. But the question is, how much can India take on and how quickly so, you know, it’s early stages yet. So you know, perhaps they’ve got the capacity. But do they have enough to scale to the level China is. And the other point here is, you know, Apple’s not going to want to recreate its reliance on any one country. Again, the whole point of trying to reduce reliance on China is to have a diversified supply chain. So, you know, they’re not going to say, oh, we want you know, 60% of iPhones to be produced in India. Now. I doubt it. One minister, last year, was suggesting that Apple had said that, ultimately, they want about 25% of iPhones, as you said in your intro, by 2030 produced in India, which, you know, you feel like a quarter of the world’s iPhones, you know, that could be important, you know, some of those are going to be sold in India, which is important, local manufacturing. We did that episode talking about India’s desire to become the sort of high-tech manufacturing hub of Asia. Apple’s efforts here are part of that and part of the government’s incentives to bring in foreign companies. So that’s also what’s happening here. And so you know, they want that manufacturing in India, those products will be sold to Indians, but also exported, as well. And so you’re starting to see, I think the early signs of what Apple can do and its partners can do in terms of setting up manufacturing in India. But as you mentioned, I don’t think this is something now that’s going to happen, or be equivalent to China, anytime soon.

Tom Chitty

A couple of weeks ago, you mentioned we talked about India as a tech hub, or a future tech hub, we had, let’s say, a fair bit of skepticism from listeners in India about whether it could legitimately step in and, you know, replace some of what China has been doing. You did say at the end of that episode, that, you know, we’re still a long way from India, being in that place. So just to give us a little bit more context to what we were talking about a couple of weeks ago.

Arjun Kharpal

As you mentioned, we did we did address some of those concerns. You know, we were talking a bit about what India is trying to do now, the groundwork is trying to lay to try to rival China in Asia as a manufacturing hub, a high-tech manufacturing hub, just to be clear, it’s nowhere near China at this point, you know, that that’s, that’s pretty clear and evident at this point. There’s a lot of challenges that remain in India, I think we’ve we’ve talked about some of them here. Those include, you know, expertise and workforce, to do some of this manufacturing, particularly in areas like semiconductors, which is highly, highly specialized, you know, also the workforce to be assembling these iPhones need to be trained, etc. in the country, you know, that takes a bit of time as well, and other electronics. There’s also complaints around still some of the red tape, bureaucracy that remains, some of the rules, all of these kinds of things at this point, are challenges for the India market, as well as of course, you know, ensuring that there is trust in the political system, to some extent, as well. So there’s all of these challenges, I think India has to deal with now, to turn itself into a serious rival to China. And not only that, I mean, India is not the only rival to China. Vietnam, Thailand, Indonesia, all of these places are vying to try to … as global electronics companies, not just Apple, but global electronics companies looking to diversify their supply chains to other parts, Southeast Asia generally, are going to be big beneficiaries. And you’ve already seen other countries also. So India is not only trying to sort of rival China in that extent. There’s other countries that are also vying for that position and competition, which are directly also competing with India. And so it’s a really interesting dynamic at play here. And so, yeah, it’s clear India is nowhere near China at this point in terms of its ability to be a manufacturing, high-tech hub yet, but what we were talking about is what kind of groundwork they’re laying the way that the Prime Minister Narendra Modi is talking to all of these foreign companies, including Tim Cook, the CEO of Apple, and many of the other electronics makers as well as semiconductor players to woo them to set up shop in India. And the promise of India, of course, is not only on the manufacturing side, it’s that massive population.

Tom Chitty

Yeah, I want to get into that, because that’s a huge part of this. In India, what are the most popular phone brands?

Arjun Kharpal

It’s Samsung, it’s Xiaomi. It’s Oppo. So it’s the Chinese brands and Samsung.

Tom Chitty

Huawei?

Arjun Kharpal

Huawei, not so much because they’ve had a lot of problems on the international market. But at one point, they were doing very, very well before U.S. sanctions, you know, crippled their, their smartphone business. But the Indian smartphone market thus far has been dominated by some low to mid-priced smartphones, right? You know, mainly Android phones. But what you’re seeing now, and this is again, why the India market in particular is becoming quite crucial, I think, to Apple and Tim Cook’s thinking about where to target is the massive population, what is it 1.4 billion or so people there, but it’s showing some of the similar dynamics to what China showed a few years ago, a growing middle class getting wealthier, willing to spend on technology, particularly in the big cities, the likes of Mumbai, the likes of New Delhi where they’ve opened actually their first Apple Stores last year. And you know, opening a physical Apple store often for Apple is a sign of a big deal. It’s a market they want to target first Apple stores in 2023 gives you a sense of what Apple is looking at when it looks in India. Yes, the manufacturing is important. Yes. It’s going to be a key hub for manufacturing for iPhones, but actually the consumer is what interests Apple a lot now. And the fact that they’re that the high-end part of the smartphone market is growing in India, that’s where Apple targets and coinciding with these stores, with the increased manufacturing, you see a lot of effort going into this market. Just to give you a sort of sense right now, I spoke earlier about the amount of iPhones being produced right now in India. Sales, so first stores last year. In the second quarter of last year, India, for the first time became one of Apple’s top five markets for sales. So, you know, it’s then competing with the U.S. and other countries now. So it’s in top five. In the market, Apple only has about 7% market share. At the moment, it’s behind Samsung, it’s behind Xiaomi is behind Oppo these big, you know, Android vendors. So it’s still very early days in terms of sales for Apple. But again, it’s part of laying the groundwork for what it hopes will become its next China.

Tom Chitty

I mean, it’s a huge area of growth, isn’t it? You know, we’ve talked for years about the sort of stagnating growth in the smartphone market in Europe in the U.S. But you know, Apple looking at India going, wow, we’ve only got 7% of market share there, we could grow huge amounts. And whilst also doing these other things with the supply chain, I mean, it’s a win-win in many respects.

Arjun Kharpal

Yeah. And that’s part of it. One of the things Apple’s done very successfully over the years is the way that it showed itself, or billed itself as a high-end premium luxury brand in the smartphone market. And when you look at the sort of Indian consumer, and like I said, sort of that growing middle class, that’s what they want premium luxury devices, premium luxury products. And this is where Apple has an opportunity now. And of course, as we know, with Apple, the hardware is the, you know, one side of the equation, but also, you know, Apple makes billions of dollars off of its services business, which includes things like its App Store fees, it’s Apple Pay, Apple TV, all of those other products and services. So when you know it’s going into these markets, it’s not just thinking about the iPhone, it’s thinking about its services business as well to the consumers there, and how it might localize some of that, but also all the other products as well as the Apple Watch, and the Mac books, etc. And so this is why I think India stands out as a market for Apple versus other countries in Southeast Asia because of some of these dynamics that are happening, which I think Apple feels, is where we can really have a significant market in the future. But again, not very soon.

Tom Chitty

So, for the likes of Vietnam, who we mentioned earlier, they’re going to be competing against that, right? That’s the problem that Vietnam faces where, you know, this market that India has is huge, a burgeoning middle class that want and can afford a premium product like an iPhone. How can Vietnam challenge that when it comes to attracting Apple to make more of the components or at least some of the components in Vietnam?

Arjun Kharpal

Vietnam is fascinating, I was writing about it today. Actually, as we’re recording this Apple CEO, Tim Cook is right now in Hanoi, Vietnam. He had an egg coffee. I’ve been to Vietnam before. Haven’t ever sampled an egg coffee. I believe, and perhaps if we have any listeners in Vietnam, they can correct me on this, but I think it’s a Hanoi specialty. And it’s sort of made with coffee, condensed milk, and like, whipped egg, sounds really good. Like that’s a breakfast in a cup. Yeah. You know?

Tom Chitty

Yeah, I was just imagining the whipped egg like an eggnog.

Arjun Kharpal

I think it’s something like that again. I haven’t had it so I can’t attest to how and I’d love to try it. Yeah, it sounds absolutely fantastic. And Vietnamese coffee is really strong and bold, nice. So I reckon it tastes amazing. But so he enjoyed one of those. Apparently, he’s meeting with content creators, developers, etc. As he goes around the country, but I think when Tim Cook goes somewhere, it’s often a sign of Apple’s commitment to that country. He’s been over the past year or two to India to China to Vietnam now. Gives you a sense I think, where the company’s focus is. Vietnam has been very impressive so far in billing itself as a key manufacturing hub, not just for Apple for other electronics manufacturers as well. But you’re now starting to see the MacBook, the Apple Watch the iPad, all beginning to be produced in and assembled there in Vietnam. And that’s been a big push from Apple. I think it’s going to be interesting to see if any of the iPhone production shifts there, you know, but it’s a similar story, you know, do you have the expertise to be able to set up factories there that know how to do this? Obviously, Foxconn is the key player here for Apple. In terms of assembly, you know, they’re based in Taiwan. They’ve got their biggest operation for the iPhones up in Zhengzhou, China, you know, how can they set up shop? All of that those questions still remain. But the other funny thing about Vietnam a very interesting thing, you know, Apple has quietly become the third biggest smartphone player in Vietnam?

Tom Chitty

Against, I imagine, a whole host of Chinese smartphones?

Arjun Kharpal

There’s two ahead of them. Guess the companies.

Tom Chitty

Oppo?

Arjun Kharpal

Yeah, that’s two. Who’s number one?

Tom Chitty

Xiaomi?

Arjun Kharpal

Not Chinese.

Tom Chitty

Samsung?

Arjun Kharpal

Yeah. But very quietly, it has just sort of accumulated a strong position in Vietnam’s smartphone market, as well. That’s fascinating.

Tom Chitty

Well let’s move the lens to China and what they must be thinking the challenges to their own smartphone brands, because it feels as much about that as it does about the shifting of manufacturing, or at least some of the manufacturing. Do you think there’ll be some concerns, the fact that on their doorstep, Apple are making serious plays?

Arjun Kharpal

The Apple shift of manufacturing outside of China is a microcosm of a bigger battle that China is facing right now, and that is investor confidence in the country since Covid. You’ve seen Beijing really try to roll out the red carpet over the last few months to foreign businesses, to get them to invest to build up confidence again. And so with a company like Apple, a global corporation, starts to diversify the supply chain, when other companies begin to reduce dependency on the market, China will be worried about that, particularly for it sort of foreign investments. In terms of the Chinese smartphone players, you know, they’re holding up pretty strong. They’re still doing very well in so many markets. Xiaomi and Oppo, in particular, have done extremely well globally. And I might take this opportunity to quickly talk about another Chinese company Transsion, probably no one’s ever heard of it. One of the top five big smartphone players in the world I think number four now. They own a brand called Tecno. One of the biggest smartphone players in the world right now. It’s a similar story to Oppo and Vivo a few years ago when these sort of brands came up, you know, oh these are sort of number three and four. Transsion has made big waves selling very aggressively priced smartphones into emerging markets around the world, actually barely sells into China. They sell outside Latin America, Africa, various other places as well. They have made big waves as well. So the Chinese smartphone players are doing pretty well. At the moment. Xiaomi in particular has seen a reviva. And of course in China, we’ve done the episode on it a few months back now, but Huawei has been sort of reviving as well and challenging Apple in China. In fact, China right now for Apple, in terms of from the sales point of view, is a difficult market. It’s a difficult market. It is facing renewed competition, like I said, from Huawei, some of the Chinese players are bringing out very strong high-end offerings. There were some figures out from IDC, just again, as we’re recording this podcast, that showed Apple’s global shipments in the first quarter down nearly 10% year on year. I think a large part of that is China here and some of the weakness in that market. So, you know, Apple is facing its own challenges in China, the Chinese smartphone players are holding up pretty well at the moment. I think for Apple, the question is, you know, it’s facing slowing global iPhone sales, and it needs some growth. And I think ultimately, when it looks at where the growth might come from, it’s going to be looking at markets like India and like Vietnam, as it sort of plans for the next few years. It’s not tomorrow, all of a sudden, India and Vietnam are going to be you know, two of the biggest markets for Apple. No way. It’s gonna take a long time to build up that brand, to build up that customer base in the hopes that you know, these are the markets that might power company’s growth going forward and unlock billions, potentially 10s of billions dollars worth of sales.

Tom Chitty

Good stuff. Alright. We’ll leave it there. But before we go, we’ve got to do of course, stat of the week. Do you want to remind us what it was?

Arjun Kharpal

18.8% market share, Tom.

Tom Chitty

I’m just gonna just say, I feel like you may have given this one away during the podcast.

Arjun Kharpal

Potentially. Might have been a red herring though.

Tom Chitty

Okay. Here we go. The market share of Apple smartphones in Vietnam.

Arjun Kharpal

I did purposefully say the Vietnam thing. But I thought maybe I’d throw you off because we were talking so much about India.

Tom Chitty

I know. But it was. I felt like I could see, you know, we’ve sat across from each other for a while and your face made a, you made a face, which suggested that there was something more to this.

Arjun Kharpal

Do I have a stat of the week face?

Tom Chitty

Yeah, you wouldn’t be great at poker. Are you any good at poker?

Arjun Kharpal

I haven’t played in a while. Yeah, I think my poker face is really bad. Yeah. I think I just sort of smile when I’ve got good cards and things like that.

Tom Chitty

You need to get some shades.

Arjun Kharpal

Yeah, I need to just wear sort of a mask.

Tom Chitty

Mask and shades. Cool. All right. Well, that’s it for this episode. I am on a bit of a run on stat of the week.

Arjun Kharpal

You are. You are doing really well? Yeah we need some prizes.  

Tom Chitty

All right, before we go, please follow and subscribe to the show. And you can rate us and remember, email us at beyondthevalley@cnbc.com. Thank you, Arjun.

Arjun Kharpal

Thank you, Tom.

Tom Chitty

We’ll be back next week for another episode of Beyond The Valley. Goodbye.