Apple iPhone production could increase sharply in India

While most of Apple's iPhone production comes from contract manufacturers out of China, the company does produce some models in India. The iPhone 7, iPhone X, and iPhone XR are manufactured in the country so that Apple avoids a $100 import tax on each of those models that are sold in India. And it enables Apple to comply with Indian Prime Minister Narendra Modi's "Make in India" initiative. While India is the second-largest smartphone market in the world, it is a developing market which means that consumers are limited financially. That is why value for money manufacturer Xiaomi is doing well in the country and why Apple only produces older models in India.

But India has made a rule change that could lead to the production of more handsets in India including current models. Today, The Economic Times reported (via AppleInsider) that the government in India has adjusted its production-linked incentive (PLI) scheme. A clause that was part of the scheme had valued plants and machinery imported from South Korea and China at a 40% discount; for Apple to meet certain levels of spending in India, it would have to buy the same equipment in India or import more than twice the machinery needed. An official told the Economic Times that the removal of the clause combined with a few other changes could lead manufacturers to "shift to India in a big way." The clause was opposed by Apple and one report said that the company hopes to move 20% of iPhone production to India in five years.

Besides Apple, other phone manufacturers looking to expand production thanks to the PLI change include Samsung, Foxconn, Oppo, Vivo, and Flextronics. The clause that valued imported plants and machinery at only 40% was said to be keeping Apple from moving production equipment from Foxconn and Wistron to India. Pegatron also could end up moving a significant portion of its iPhone production line to India. One official noted that "The irritants have been resolved."

The government also agreed to include the smartphone industry in any discussions before making changes to the PLI. Companies allowed to take part in these talks must have already invested and started production in India. It's all part of a plan to attract major smartphone manufacturers to India as the country hopes to expand the amount of exports out of India from under $3 billion now to $100 billion by 2025.

Foreign phone manufacturers over the five-year life of the PLI will receive incentives valued at 4% to 6% if they continue to produce high-end handsets (with freight on board over $200) valued at ever-increasing amounts over the life of the scheme. For example, in the base year, these companies will have to produce phones valued at $530 million over the amount manufactured in the base year. That increases to $1.06 billion over the base year production figure in year two, $1.99 billion in year three, $2.65 billion in the fourth year, and $3.31 billion in the fifth and final year.

And it is important to note that another change to the PLI scheme removes a clause that would have allowed the government to back out of paying the incentives (even if the companies met their targets) if the Indian government didn't have the money for the payouts. Instead, a clause on Force Majeure has been added. This would allow the companies to back away from having to meet their targets during times of natural disasters such as the COVID-19 pandemic.

The incentives will be paid to both domestic and foreign phone manufacturers and $5.42 billion has been set aside for companies that will receive the incentives over the five-year period. Will Apple move a significant amount of its iPhone production out of China to India? It still will have to find a supply chain that delivers parts in the quantity and quality that Apple needs. Chinese companies that want to participate might need approval from India's Ministry of Home Affairs.