Apple treads on Nokia. Again


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Good Morning Dear Reader,

 

Today’s newsletter is about two smartphone companies that were in the news last week, for vastly different reasons. Apple—one of the world’s most powerful companies, is finally finding traction in India. And Nokia—the company Apple disrupted and destroyed, is finally closing the chapter on a long, troubled history in India.

 

The two stories could not be more different.

 

The two stories could not be more similar.

 

Let’s dive in.

The e-commerce store and the factory

If you followed the news last week, two things happened.

 

On the face of it, especially if you don’t own an Apple product, you’ll be forgiven for wondering why this matters.

 

Well, what if I told you that Apple has been trying to open that e-commerce storefront for nearly a decade now? And that it represents the culmination of the beginning of a new India-focused strategy for one of the most powerful smartphone companies in the world?

Before we get into that, though, let’s not forget what else happened. It concerns a factory plant.

 

Last week, The Hindu reported that a factory plant located in the small town of Sriperumbudur, Tamil Nadu, which was shut since 2014, was finally going to resume production. It wasn’t even a major story. It didn’t make it to any of the major newspapers. Only The Hindu, also headquartered in Tamil Nadu, bothered to report it. Even then, as a brief report.

 

But if you ask me, it’s quite significant, and oddly poetic.

 

You see, the Sriperumbudur plant was originally owned by Nokia, the Finnish smartphone company.

 

In many ways, it represents another culmination—of the end of an India-focused strategy for one of the most powerful smartphone companies in the world.

 

The early years : Apple dismisses India

 

Back in 2012, Apple was on the upswing. The iPhone-led expansion was in full swing, and the smartphone maker was registering high double-digit percentage growth in most markets. However, they had just had a relatively bad quarter, particularly in Europe, which was going through some economic trouble thanks to Greece and Italy. Some were calling it a crisis, but looking back at it from 2020, it actually feels more like a minor wardrobe malfunction.

 

Anyway, in the investor conference call, Tim Cook was asked about the possibility of expanding into other countries, specifically India.

 

Here’s what he said


I love India but I believe that Apple has higher potential…in some other countries. That doesn’t mean we’re not interested in India — we are. We’re going to continue putting some energies there, but in the intermediate term there will be larger opportunities elsewhere.

Tim Cook, Apple quarterly earnings investor call, 2012

 

That may sound mild, but the message essentially was, India? Really? We have more important things to worry about. In fact, a year later, Ben Thompson, who writes Stratechery, a media publication that focuses on the strategy of technology companies, believed that “cavalierly dismissing the second-most populous country, no matter the practical difficulties, seems like a mistake”.

 

Despite this, the thing was…Apple wasn’t doing too badly in India.

 

Apple’s success in India was predicated on a different strategy than the one that had brought it success globally. It sold phones directly to consumers, and chose not to bundle it with mobile operators. That’s how it worked in countries like the United States. You want to get an iPhone? Great. Get in touch with your carrier, like Verizon or Sprint, and sign up for a plan. Pay something each month that bundles both the cost of the device and the carrier charge, and replace it when the next model comes along.

 

Not in India. In India, if you wanted an iPhone, you bought an iPhone. And then you picked whichever carrier you wanted by buying a SIM card from a store. Just like any Android phone.

 

This strategy worked for Apple. In the last quarter of 2012, the company’s share of smartphone shipments to India was nearly four times what it was in the same quarter the previous year. Its Indian resellers were reporting revenues around seven or eight times more than what they were making earlier.

 

Apple was having a great time in India.

“Go, get Nokia”

 

A decade earlier, Nokia was also having a great time in India, but in a different way.

Apple’s success in India was basically a retail success. It was selling smartphones manufactured in China and other South Asian countries in India. And it was doing it as well as other premium players like Samsung.

 

But in the early days, back in 2004, the first real smartphone company that tasted success in India was Nokia, and it managed this not just through sales—but also manufacturing.

 

The logic was simple. Here it is, as per Business Today — in 2014, it published a long, well-researched story from which I’ll quote extensively in today’s newsletter.


It was all very different on December 1, 2004 when Nokia first announced its decision to set up a plant in India. Till then, it used to import all handsets sold in India from China. “India was doing about a million phones a month at the time,” says a former Nokia executive who does not want to be named.

 

“Nokia wondered how it could make this a six to seven million a month market. The answer was local manufacturing.”

 

An Indian facility meant lower logistics costs, less time to hit the market, more flexibility. No longer would executives have to get in touch with the China factories for small design changes which took nearly three weeks to be executed and products shipped.

Death of a Dream, Business Today

Nokia announced its plans of commencing manufacturing in India. It considered several states. Many lost out due to a combination of unfavourable policies, poor infrastructure, and bad locations. Finally, the winner was Tamil Nadu. The story goes that this happened because the state’s Chief Minister, J. Jayalalithaa, after seeing some news reports about Nokia scouting for a location, told her bureaucrats three simple words.

 

“Go, get Nokia.”

 

As Business Today reports — “within two days of Nokia’s announcement, Tamil Nadu officials were in Delhi, making a presentation before its executives.”

 

In less than a year, Nokia signed a memorandum of understanding with the Tamil Nadu government to set up a factory plant in the Sriperumbudur Special Economic Zone (SEZ). The factory was set up. At its peak, it employed 8,000 people—70% of whom were women.

At the time, not many people lived in Sriperumbudur. Workers were recruited from as far 50 kilometres away, travelling to and from the factory. Nokia set out on an impressive, large-scale recruitment drive to hire girls who had just completed their senior high school exams. There were advertisements, college theatres booked for interviews and campaigns to create a flurry of action and excitement. The selection criteria were clear enough, with the would-be workers put through tests for hand steadiness, hand-eye coordination, finger dexterity, and more. The women would have to fit minute screws into the more than 1000 components within the mobile phone on a constantly moving assembly line.

 

The salary was alluring. In what for many would be their first jobs, they could earn a starting wage of Rs 2500­–5000 (US$36­–72) per month, a significant income in comparison to what they would earn in agriculture. This gave women a potential for independence, emancipation and empowerment. Within a year, having someone in the family work in Nokia became something of a status symbol.

Lessons of globalisation : the vulnerable women of the Nokia factory, The Interpreter

Nokia’s initial plan was to make 4-5 million phones a month, and export these to nearby countries.

 

It ended up manufacturing 15 million phones a month and it exported phones worth $2 billion every year.

 

Nokia was having a great time in India.

 

Apple’s crunch problem

 

By 2016, Apple found itself facing a problem in India.

 

Remember, by this time, India was flooded with a bunch of Chinese brands like Oppo, Vivo, Xiaomi, OnePlus, etc. All of them were aggressively fighting a pricing war, making it cheaper than ever for millions of Indians to buy a smartphone.

 

Apple was nowhere to be found in this segment. Which makes sense, because Apple is a premium product.

 

The problem is that the premium segment in India wasn’t small. It was insignificant.

 

Here’s what Cybermedia Research found out about Apple in India in 2016

 

  • India accounted for just 1% of global iPhone sales.
     
  • Apple’s share of India’s smartphone sales was 3.4%.

 

Over 96% of all sales of mobile phones in India were for purchases of less than $400, and Apple didn’t have a single product below this price point.

 

Prasanto Roy, writing for the BBC, sums it up best.

Older iPhone models are cheaper, but their sale is low. The 5s is nearly three years old and Indian buyers, though price-conscious, have not shown much interest in buying old models.

 

Apple, therefore, has a problem. Its newer models are expensive and its cheaper models are too old to be interesting for Indian buyers.

Apple had a solution for this.

 

Refurbished phones.

 

From Apple’s standpoint, this was the situation. It couldn’t make cheaper phones. It couldn’t make older phones more palatable. So the best option was to try to create a new category. It would take pre-owned phones, put them in new cases, polish them up, give them a one-year warranty and sell them in India, at a significantly marked down price. Its brand would be protected, and it would gain entry into the cheaper segment. Makes perfect sense.

 

In 2015, it placed a request with the Indian government to let it import and sell refurbished phones in India.

 

It was rejected by India’s environment ministry, citing e-waste concerns.

 

In May 2016, it made a second request.

 

 

Two weeks later, Tim Cook did what no Apple CEO in history had ever done.

 

He scheduled a visit to India.

 

Nokia’s crunch problem

 

As with Apple, Nokia also faced some headwinds in India.

 

There are many accounts of what happened at Nokia’s Sriperumbudur factory, but the one you should absolutely bookmark to read later is the one that was published in Livemint.

The prosperity of Nokia and its employees attracted attention. Specifically of the Labour Progressive Federation (LPF), the trade union wing of the DMK party in Tamil Nadu. In what would be the first of many, on 14 August 2009 workers went on a strike at the plant demanding better hikes. The strike lasted about 10 hours and resulted in a backlog of 300,000 mobile phones. Nokia had initially offered a raise of ₹ 1,400 per month for workers with four years’ experience and an increment of ₹ 200 per month for trainees. This was rejected by the workers.

 

A settlement was reached when Nokia offered better hikes according to people’s experience in the band of 16, 24, 36 and over 36 months of service. Two more strikes took place, in January and July 2010.

The ghost of Sriperumbudur, Livemint

There were other problems, also from local politicians. Some asked for contracts for the scrap. Others for free phones. Nokia refused and auctioned the scrap, refusing to send any freebies out as well.

 

Then came the big one.

 

In the span of a year, Nokia was hit by not one, not two, but three major blows.

 

It all concerned something that foreign companies know and fear about India.

 

The tax system.

 

 

“India for a thousand years”

 

Tim Cook’s five-day visit to India began with a visit to the Siddhivinayak Temple in Mumbai, which is the sanctum of Lord Ganesha—the remover of obstacles.

 

Five days later, Tim Cook’s India visit ended in failure.

 

To be fair, Tim Cook made all the right noises. In an interview, when asked about how Apple would approach India’s complex and difficult market, this is what he said.

We are patient people. We are not in India for a week or a quarter. We are in India for the next thousand years. Our horizon is very long. We are focused on best, not most. So it doesn’t bother me that we don’t have top market share. I don’t have the goal to have the top share next week or next quarter.

He said other things, too. He reiterated Apple’s commitment to India. He opened a development centre for maps, which he promised would ramp up to 4,000 employees. He also announced an app accelerator in Bengaluru. He even attended an IPL match in Kanpur. He probably didn’t even know the rules of cricket.

 

When asked about manufacturing smartphones in India, though, he was non-committal.

From Cook’s standpoint, this made sense. Why manufacture in a country that was responsible for just 1% of your sales? What for?

 

But that was reportedly where the visit really fell apart. Cook wanted permission to sell refurbished phones in India. India wanted him to manufacture phones here. And India was prepared to make life difficult for Apple to get what it wanted.

 

By all accounts, over the next several years, Apple tried to manufacture phones in India but failed. The Information, a subscription-based media publication from San Francisco, has done the most well-researched story about Apple’s desperate attempts to make India a part of its supply chain.

 

It failed for many reasons. From the big to the trivial.


Finding suppliers that could produce components locally proved difficult. One major issue was compliance with Apple’s supplier standards for health, safety and the environment, which are among the toughest in the consumer electronics business. Many Indian companies were unable to or unwilling to fix problems Apple’s auditors uncovered, according to people familiar with the matter.

 

For example, one Indian supplier Apple approached in 2018 was Superpacks, which operated a packaging factory in Bangalore. Apple sent auditors to assess whether its supplier responsibility practices were up to Apple’s standards. The audits revealed dozens of violations. The site had no safety measures for storing chemicals, lacked monitoring for noise and wastewater, and didn’t have several environmental and construction permits. It didn’t properly test drinking water for workers and the site lacked a fire hydrant system, according to a person close to Apple.

 

Apple spent months pushing Superpacks to fix the violations. However, the Indian company stopped giving updates and missed deadlines for fixes. Apple ultimately didn’t give it a business contract. Superpacks didn’t respond to a request for comment.

Inside Apple’s search for an Indian supply chain, The Information

By the end of 2018, The Ken reported that Apple’s sales in India would drop by as much as 25%.

Nokia’s troubles come in threes

 

In February 2013, the Income Tax department conducted a raid on Nokia’s factory in Sriperumbudur. Two blows followed soon after. And very soon, Nokia was facing three cases.

 

Here’s a quick summary.

 

First, the Income Tax Department asserted that Nokia had to pay Rs 21,153 crore, alleging that it failed to withhold tax on payments made to its parent company in Finland as ‘royalty for the software’ used in its mobile phones manufactured in India. For good measure, it backdated these claims all the way to 2006.

 

The next year, the Tamil Nadu government’s tax authorities sent another bill for Rs 2,400 crore, claiming that smartphones manufactured in India were sold in India and not exported.

 

Here’s what Nokia said.

“We find this claim surprising since we have customs documentation showing we exported more than 400 million phones in that period,” says James Etheridge, Head, Corporate Communications at Nokia, in an emailed reply to Business Today.

 

“We were also granted several export awards over those years to recognise our contribution to Tamil Nadu’s economy by way of exports. Unfortunately, local authorities have been reluctant to see this documentation and give Nokia a hearing so we can present this information.”

Then, just for fun, there was a third case. This time, it was for the charger that was shipped with every Nokia phone. The phone was taxed at 4%, said the tax department, but the charger that accompanied it was separate and had to be taxed at a higher rate. Nokia hadn’t paid that tax. Nokia owed money.

 

An argument ensued about whether the charger was a part of the phone or not. The case went all the way up to the Supreme Court.

 

In 2014, Nokia suspended manufacturing in India.

 

Shortly after, it was acquired by Microsoft, which paid $7.5 billion for all of Nokia’s assets.

 

Except the factory in Sriperumbudur.

 

 

Microsoft didn’t want anything to do with it, or its alleged tax liability.

Apple’s good news come in threes

 

By early 2019, The United States and China got into an intense trade war.

 

India sensed an opportunity.

 

And almost instantly, Apple’s troubles in India simply vanished.

 

Remember that entire problem with refurbished phones?

 

Well, in May 2019, India decided that it wasn’t a problem anymore. Apple could import refurbished phones if it wanted. All it needed were some minor approvals.

 

Two months later, India changed another rule which had prevented Apple from having its own online store in India. Until now, the rule was that if Apple, a single-brand retailer, had to do that, it needed to source 30% of its production locally. India quietly removed this requirement for Apple.

 

It’s almost as though someone had given an order to go get Apple.

 

Then, by the end of 2019, Apple found the perfect phone for India.

The Cupertino-based phonemaker had its best quarter yet in India at the end of 2019, shipping close to 925,000 iPhones, according to research firm Canalys. Its previous record in the country was in the third quarter of 2017, when it shipped 890,000 phones.

 

Apple’s success is largely owing to the iPhone 11, with its more affordable price tag and the excitement around the dual and triple cameras.

“Apple hit a home-run with its pricing strategy on the iPhone 11,” Canalys analyst Madhumita Chaudhary said in the Singapore-based firm’s Jan. 29 press release. The device starts selling at Rs64,900. A partnership with HDFC Bank made iPhones more affordable as the lender offered a Rs6,000 ($84) instant cashback.

iPhone 11 breathes life back into Apple in India, Quartz

Nokia pulls itself out

 

In 2018, just when Apple’s fortunes were about to turn in India, Nokia finally settled its case in India. The Finnish government had to get involved.

The dispute between Finnish telecom firm Nokia and the Income Tax Department – one of the biggest involving a multinational company – has finally been settled. According to The Economic Times, India and Finland have reached an accord on the dispute under the Mutual Agreement Procedure (MAP), clearing the way for the sale of Nokia’s Chennai plant, which has been shuttered since November 2014.

 

“Resolution has been reached… Nokia has agreed to make provisional tax payment,” income tax department officials told the daily, adding that the resolution covers disputes pertaining to Nokia India as well as Nokia Corp. In a similar vein, a Nokia spokesperson yesterday said “We are hopeful on resolving the issue relatively soon in cooperation with the authorities in India”. The company reportedly made a tax payment of Rs 1,600 crore to the government in March.

India, Finland settle tax dispute to pave way for sale of Chennai plant, Business Today

Only one question remained.

Who would now buy the factory?

 

Apple’s good news come in threes…continued

 

By 2020, Apple was doing other things to make some people in India very happy.

 

It had started assembling the iPhone SE, one of its major phones, in India.

Image Credit : The Indian Express

 

Then in July this year, Foxconn, one of Apple’s largest manufacturers, announced that it would spend $1 billion to set up a factory to manufacture iPhones in India.

 

A week later, Pegatron, another Apple manufacturer, announced it would also set up a plant in India.
 
As always, the third piece of news is the clincher.

 

As Bloomberg reported earlier this week:

At a cabinet meeting on Wednesday, the Indian government is expected to approve a plan aimed at bringing $150 billion in mobile-phone production over the next five years, said the people, asking not to be identified because the matter is private. Among the dozen phonemakers already cleared by a high-powered government committee are Apple’s primary supplier Foxconn Technology Group, which had submitted two applications, and peers Wistron Corp. and Pegatron Corp., the people said. The three companies make virtually every iPhone sold globally in sprawling factories currently located mainly in China.

 

Under the Production Linked Incentive program, or PLI as it’s called, manufacturing incentives will rise each year in an ongoing effort to entice the world’s biggest smartphone brands to make their products in India and export to the world.

Then, just yesterday, Apple announced it would launch its online store.

 

The story of Apple and Nokia is about two smartphone giants and their experiences with India. It’s about how the state creates incentives when it suits them, and withdraws these when it doesn’t. While Apple spent years desperately trying to get into India, Nokia was desperately trying to get out.

 

I think there are lessons here.

 

Oh, I never mentioned who eventually bought the factory at Sriperumbudur.

 

It was sold to a company called Salcomp—that’s the company that said last week that it would resume operations and get the factory functioning for the first time since Nokia shuttered it in 2014.

 

Salcomp manufactures chargers for phones.

 

 

Apple.

That’s about it from me.

 

Write back. Let me know what you thought.

 

If you liked what you read, just use the link or tap any of the buttons below and tell others about it. Remember, we have a free trial for The Nutgraf, so anyone can read this edition after giving their email address.

 

 

Take care.

 

Regards,
Praveen Gopal Krishnan

https://sg-mktg.com/MTYwMDQ5MDMzM3wteEtCUDZLRFNYYjZwUUJUR0NsVTRwWU5lOElzR2dGeGlITHQtQWJ0d1dIOVVXX0NwNXRkNlk5OWFnSHFrZERLWXhCNmtsVHVDVkRIVnJzZnBJM3pzbF9nXzYwQ0I1MUw4c19BTnVJVk5DMEUybWpBaW9lMVRKTUVvZFJsX0ZRY1RVNXJnakFCV1Z5Q05hdmV4eV9BLTFiaWF6dVI1eDAwc0hvTC1kVURpY0w2QnlyVDl0SHY3MmhPNEpsRTZXSVVuVUZwdG9yVUtYMC00UnJVcmxQeUhvcDAxNk5JSTIydUJ2SDFBMW9YWGlTeDB2V3I0VVVpb2VZS3U3WTRVazBLMkRFUnhIMD18D7IwLJ2YWNuGlVr51wTRfXNyDtxpV5LrwUp733L2mIc=

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