Cross Border Commerce

Who Blinks First In The Apple-India Tug Of War?

India Stares Down Apple

In the olden days of global expansion (re: not too long ago), news that a major foreign company was thinking about setting up shop in a new country would be greeted with round approval. It was the perfect win-win. The retailer gets a new market, and the authorities get a new and often massive stream of tax revenue, not to mention a modest bump in employment.

At least, that's how it used to be. Now, Apple is finding out that India is pushing for a new status quo in cross-border commerce.

The story starts with Tuesday's (May 24) reveal of an unnamed Indian government official telling Reuters that Apple would not be granted an exemption from the country's laws that require any company owned by at least 51 percent foreign interests to source at least 30 percent of its manufacturing materials from local origins. The announcement comes on the heels of a highly publicized visit by Apple CEO Tim Cook to the Indian subcontinent, replete with improperly worn saris and gladhanded government ministers. Still, it wasn't enough for Apple to squeeze by the regulations enforced by Prime Minister Narendra Modi's government.

Having been denied a no-strings-attached entry into a market is a rare position for the Empire of Apple to find itself in. However, that's exactly how the cookie crumbled in this case. And unless things take a drastic change, it all begs the question: Who breaks first? Apple and its legion of iPhones in waiting or an entire government?

It's an intriguing logjam, especially as retailers with the necessary range are coming to rely more and more on the benefits of cross-border commerce to their core operations. Look no further than Apple's near-accidental success with the iPhone in India. Despite having little to no ground presence in the country — not a single store to speak of and a third-party distribution network that handles all transactions — iPhone sales still jumped by 76 percent from Q1 2015 to Q1 2016. That still might not translate into a massive volume of product sold given Apple's limited reach in India (just 3 percent of its national smartphone market), but it's enough of a rise with so little help from Apple that even Cook himself had to marvel on a January earnings call about the revenue potential to be had in India.

"[India] is one of the fastest-growing economies and is also the third-largest smartphone market in the world, after China and U.S.," Cook said. "In India, the median age for the population is 27; in China, that’s nearly 36 years. I see the demographics there being incredibly great for a consumer brand and for people that really want the best product."

This is where Apple finds itself between a rock and a hard place. There is clearly massive potential for growth with the iPhone line in India and a demonstrated, organic interest by consumers in the country for the product — even if, Cook admits, it can be a little pricey for the market. Is that potential value enough to justify adjusting its supply chain to include at least 30 percent of its products manufactured with Indian-derived materials? Putting a dollar amount on the former is just about impossible without internal documents Apple would be loathe to release, but given that this is the first time Apple is being confronted with such an issue, it's safe to say that the bill is larger than Cook and Apple would care to pay.

If Apple were to find itself staring into the maw of a potential goldmine in India a few years ago, it might have been content to sit back and let the consumers build up pressure on government policies they see as keeping them from their shiny, new smartphones. However, the shoe is most certainly on the other foot in this scenario. Apple's most recent earnings report painted a grim picture for the first time, with iPhone unit sales down 16.3 percent globally and revenue down $7.4 billion. Setting up shop in India might not wipe that slate clean in one fell swoop, but Occam's razor states that the simplest solution is usually the right one. And Apple would be off its rocker to think that tapping the Indian market, at least in some way, couldn't solve its newfound revenue problems.

Time is hardly on Apple's side, and maybe the Indian government knows it. If Cupertino wants to enjoy the fruits of cross-border commerce, it's going to have to put down roots in the country it means to profit from.

It's a new age in global trade, and unlike so many other times, it might be retailers like Apple that have to swallow the bitter pill to get things moving.

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