Apple is now making iPhones in India. India experts say: Good luck. – CNBC


A growing number of American companies are turning to India to recreate or replace their China experience, as profitability and grip on the Chinese market starts to slip.

Apple has completed a trial run of the first-ever iPhones assembled in India, "a small number of iPhone SE," the company told CNBC on Tuesday. The iPhone SE is one of its lower-priced models already available in India.

Armed with their massive war chests, drug manufacturers, big-box retailers and information technology behemoths are racing to expand their businesses to India. Many richly valued Silicon Valley start-ups are also beginning to crack — or even be founded within — the Indian market.

The world's fastest-growing economy, with the GDP hovering around 7 percent, India has edged ahead of China and is growing much faster than the developed world. It's also currently the world's third-largest economy, on course to eclipse the United States to become the world's second-largest economy by 2050, according to a recent PricewaterhouseCoopers report.

Close to ideal demographics puts India in a sweet spot. Nearly two-thirds of India's 1.2 billion population is under the age of 35, making it one of the largest consumer markets that foreign businesses are hungry to tap.

Apple, the world's most valuable company, is courting India in the hope of reigniting the growth story that appears to be losing steam in China.

Not just Apple, large global companies like Amazon, Starbucks, Uber and key Apple supplier Foxconn are taking their businesses to India.

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While there's little doubt about growth opportunities in India, they are scattered over an obstacle course of opaque rules, inconsistent regulations and other hurdles, including deeply rooted corruption. Foreign businesses like Apple need to contend with challenges even before, and while, dealing with some of the more commercial issues of price sensitivity, a crowded and competitive market and raw material sourcing.

India's endemic corruption is one of the biggest drags on its attractiveness as a place to do business. U.S. firms, particularly those frustrated with Chinese red tape and corruption, will find themselves in no better position in India.

"India isn't easy," said Ravin Gandhi, CEO of GMM Nonstick Coatings, which manufactures for some of the largest global kitchenware firms and who is a member of the CNBC-YPO Chief Executive Network.

Gandhi, who has set up manufacturing operations in both China and India, the latter more recently as global forces require more companies to seek out new, low-cost manufacturing locales, said there is only one option: Deal with it.

"Many American companies fail in India because they're afraid to get on a plane and get their hands dirty. If you have a bad attitude going in, you've already lost the battle," he said. "Success overseas takes persistence and unrelenting drive. … Like most aspects of business, setting up an Indian operation is messy and can be very hard."

Deeply rooted corruption

Obtaining business licenses, overcoming approval delays and sometimes subtle demands for corporate "donations" are significant challenges in India.

According to Transparency International's 2016 Corruption Perception Index, India ranks 79, tied with China, among 176 countries, behind Cuba (56) and far below the United States (18), Canada (9) and the U.K. (10).

"You have to know how to navigate these minefields," Gandhi said.

Many U.S. and global companies have failed in India due to corruption and other operational issues, said San Francisco-based Dhruv Ratra, founder and CEO at KhelNow.com, a social network for Indian sports fans, players, families and businesses.

"Wal-Mart and Amazon are the most notable examples in the recent past," said Ratra, who has extensive knowledge and experience in launching businesses in India. "Samsung, Microsoft, Google, Facebook all face the issues of endemic corruption and draconian tax laws [in a] culturally unfamiliar territory," he said, noting that they have succeeded by "changing their business model to make it India-centric and by tying up with local partners."

Graft is part and parcel of growing business in this market, said Neha Dharia, a Bangalore, India-based analyst with London technology research firm Ovum. "Foreign companies wishing to do business in India also fail to estimate the microlevel at which corruption exists. It is not just a question of corrupt officials at the higher level, but this runs right through the ranks."

Will Apple's India push work? Will Apple's India push work?

Few things have damaged India's reputation and attractiveness more than its patchwork of opaque tax laws, woefully out of step with the global norm. Accused of being inconsistent and overreaching, India's tax rules are often criticized as tax terrorism. The south Asian nation has frequently attracted bad press and sharp global scrutiny for its battles with foreign businesses, including Vodafone, Nokia, Nestlé and more recently Philip Morris International, over hefty fines and imposition of retroactive taxes. The scale of the problem has prompted OECD to urge India to reform its tax laws.

"It's a serious problem and would hold back any company," said Vivek Wadhwa, an adjunct professor at Carnegie Mellon University and a director of research at Duke University. "The type of retroactive taxation that was imposed on Vodafone would itself send a chill down the spines of any executive doing business in India."

Unless India fixes its tax laws, no company will want to do business there, said Wadhwa, who has his own views on why Apple is destined to fail in India.

Gandhi noted that Prime Minister Modi has enacted pro-growth policies, including enterprise zones with tax holidays based on job creation, to the benefit of U.S. businesses. But he said setting up in the right Indian state is important. GMM chose the state of Gujarat because it's the most pro-business and has very few labor issues.

$1 trillion needed in infrastructure investments

Tim Cook rose to prominence at Apple as a result of his logistical genius. India will test it.

India's infrastructure hasn't been able to keep pace with its economic growth. Most of its infrastructure remains outdated and any efforts to overhaul have been restricted to a few major cities.

"India is struggling in terms of infrastructure required, and though it is actively working on upgrading all aspects, there is still a long road ahead," Dharia said. "Most companies that need any kind of logistical and developmental support from the infrastructure would need to set it up themselves, which could take the form of building their own roads, setting up reliable power and water supply."

"Many American companies fail in India because they're afraid to get on a plane and get their hands dirty. If you have a bad attitude going in, you've already lost the battle. … Setting up an Indian operation is messy and can be very hard." -Ravin Gandhi, CEO of GMM Nonstick Coatings

India has only 800 miles (1,300 km) of expressway compared to 47,845 miles (77,000 km) in the United States and 81,000 miles (131,000 km) in China. It takes 12.5 hours to cover the 770-mile (1,214-km) distance between Beijing and Shanghai by road, as per Google Maps. In India it takes 19.21 hours to go from the port city of Surat to the national capital Delhi, a distance of 717 miles (1,154 km). It takes nearly seven hours more in India to cover the same distance that it does in China.

"There are only a few locations in India where land is available, transportation and electricity are reliable and it is possible for business executives to commute to from the West," Wadhwa said.

Wadhwa recommends that businesses select states such as Gujarat, where the government has focused on providing for the needs of industry, especially infrastructure. Apple's trial manufacturing run is at a facility in the state of Karnataka. Its capital, Bengaluru (formerly Bangalore), is known as a high-tech hub.

It's the same story with railroad. While China boasts the world's largest high-speed rail network, there are none in India. Most of its trains average less than 60 miles (100 km) per hour on colonial-era tracks that are long overdue for an infrastructural overhaul.

Global trade has also been putting enormous pressure on India's inefficient ports, many of which still rely on manual labor for hauling cargo. Christine Lagarde, managing director of the International Monetary Fund, said in one of her speeches that India needed $1 trillion in infrastructure investment over the medium term.

One of the world's worst at protecting IP

The nation's intellectual property laws are murky, and Apple's had a taste of that as early as 1991. To date, effectively protecting patents has been one of India's biggest weaknesses. A combination of inadequate IP laws and the glacial pace of India's legal system could mean millions in lost dollars for a company like Apple, whose success in no small measure depends on technological innovations and its ability to protect them from possible infringements damaging its brand and profits.

The fifth edition of the U.S. Chamber International IP Index shows India's intellectual property framework to be falling lamentably short of global standards. At the bottom of the index, India ranks an abysmal 43 out of 45 countries. And if Apple's China experience is anything to go by, executives at the tech giant know how getting tied up in a country's legal system could drain resources without promising a favorable outcome.

For what it's worth, Wadhwa makes a distinction between Chinese and Indian IP laws.
"Just as you have a thriving tech industry in China now — where IP laws are even worse and the government actually steals technology on behalf of its companies — India can succeed," he said. "If companies can adapt to China's lack of IP protection, they can certainly deal with India."

"There is a legal framework [in India] that is enforced by courts," he said, but the interpretation by Indian courts of what is an IP infringement could be downright dubious and the implementation of laws lax.

Lots of workers — most lacking skills

India has 500 million workers, as per the World Economic Forum, yet more than two-thirds of Indian employers are struggling to find employable workers. Contrary to popular perception, it's difficult to source job-ready workers in India who have the right mix of talent and teachability.

A study conducted by New Delhi-based employment solutions company, Aspiring Minds, found barely 7 percent of engineering students were suitable for crucial engineering jobs.

"The engineering education system [in India] is deeply flawed, but as the infotech companies learned, the graduates of the engineering colleges could be retrained," said Wadhwa. "What companies will need to do is to allow six months for education and training of new recruits."

It's little surprise that India ranks 105 out of 124 countries on the World Economic Forum's worldwide Human Capital Index, much below neighboring China (71), the United States (24) and the U.K. (19). The index quantifies how countries nurture, develop and deploy skill for economic growth.

This shortage of skill is best explained by the fact that only 2.3 percent of India's workforce has received formal skills training as compared to its counterparts in the developed world, including the U.K. (68 percent), Germany (75 percent) and the United States (52 percent).

Gandhi said hiring the right people in India is key to success, but he added that one of the reasons he moved GMM into India is because of the intellectual capital and hard work ethic of locals.

And there is one major challenge in China that is erased by moving to India: "Everyone loves that English is spoken all over India, as opposed to China, where language is a hard issue," Gandhi said.

By Vikram Barhat, special to CNBC.com

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