Apple’s largest manufacturer of iPhones, Foxconn, just announced that it is making a $300 million investment in India to produce high-end iPhones there. This marks a departure from Foxconn’s focus on China for iPhone manufacturing and Apple’s history in India of producing lower-priced iPhones.

The shift seems to be as much driven by Foxconn wanting to diversify its production locations to diffuse its reliance on China as by Apple’s desire to grow—an opportunity for Foxconn to grow in lockstep.

From a manufacturing perspective, China’s labor costs have risen significantly. Plus, U.S.-China trade negotiations could end up imposing higher import taxes on goods imported to the U.S. from China. Moreover, protection of intellectual property has been a focus for U.S. companies, which Apple and other big brands have had some concern about in China.

India doesn’t come with these challenges, making it a great alternative for manufacturing. In fact, the Indian government’s “Make in India” campaign aims to foster foreign investments to build a top-notch manufacturing infrastructure and innovation, providing tax and subsidy incentives for manufacturing (and doing R&D) locally and for exporting. Plus, the country boasts tech and engineering expertise. The initiative has helped India leap from 130th to 77th place on the World Bank’s latest ranking of ‘ease of doing business.’ Foxconn’s shift presents a good opportunity for Apple to export from India, to Asian markets and beyond.

But India is also attractive from a sales perspective. It is one of the world’s fastest-growing economies—and mobile phone markets. McKinsey expects it to be the world’s fifth-largest consumer market by 2025. Compare that to China with its slowing economy, softening Apple sales, and strong competition from Huawei, Xiaomi, and others. China also has a more mature tech market than India, with a higher saturation of advanced mobile phones.

Most important, though, is the buoyancy of Indian consumers. They have felt very optimistic economically, and technology is a popular category for spending disposable income, as the charts below show.

One big caveat: Despite confident consumers, Apple’s challenge in India is its high price tags. In a price-sensitive market like India, where 75 percent of cell phones sell below $250 and basic mobile phones claim 70 percent market share, Apple’s prices seem out of reach. An increase of India’s import tax from 15 to 20 percent last year didn’t help. Apple saw its business in India impacted because of the price increase and enhanced competition, losing share in the overall market (drop from 2.4 to 1.2 percent) and in the premium segment (from 38 to 23 percent).

However, spending on luxury goods in India has grown steadily. It is expected to continue growing over the next several years, at 2.6 percent, and the premium segment of $400+ mobile phones along with it. The good news is that Foxconn’s local manufacturing helps Apple save India’s 20 percent import tax and shipping cost—a good first step to price more in line with the market.

Expanding production in India also helps Apple pass the Indian government’s 30 percent domestic sourcing minimum to be permitted to run its own stores in the country rather than relying on franchisees. This will improve Apple’s ability to enhance consumers’ experience with the brand and increase brand equity in India. This should be a powerful asset to capture more revenue with upbeat consumers as income and wealth in India rise and users of basic mobile phones want to upgrade to more sophisticated smartphones.

Overall, Foxconn’s manufacturing investment in India opens new doors for Apple as an export hub, including to the U.S., at a time when U.S. levies on imports from China remain uncertain, and makes Apple more competitive in India, even if the payoff may only occur farther down the road.

A closer look at Indian consumers’ economic confidence and tech spending

According to The Conference Board® Global Consumer Confidence Index, economic confidence in India is positive, given levels clearly over 100. And unlike China, it has been on an upward trend over the past year, with just a slight recent slowdown.

Source: The Conference Board® Global Consumer Confidence Index Survey

Over two thirds of Indian consumers have felt like it’s an excellent or good time to spend throughout the past year, and this sentiment has grown. On the other hand, spending sentiment in China has been more moderate but saw a recent uptick.

Source: The Conference Board® Global Consumer Confidence Index Survey

Indian consumers prioritize tech products over other categories when they have disposable income to spend—to a larger extent than Chinese and other countries’ consumers. Only saving and holidays rank significantly higher on Indian consumers’ priority list while in China, additional categories (out-of-home entertainment and stock/mutual fund investments) push new tech purchases lower in the ranking.

Use of disposable income for new tech and other purchases

Source: The Conference Board® Global Consumer Confidence Index Survey

While saving seems generally common for a large segment of Indian consumers, the share has been decreasing recently while it has seen a recent uptick with Chinese consumers.

Source: The Conference Board® Global Consumer Confidence Index Survey

Technology upgrades have been one of the categories—lately at increasing rates—that consumers in both China and India have cut back on if they want to save money, indicating some vulnerability for the tech sector, but more so in China than in India. 

Source: The Conference Board® Global Consumer Confidence Index Survey

In China, it’s the number-2 cut-back category, after new clothes. In contrast, for Indian consumers, delaying tech upgrades ranks only fifth, along with saving on the annual vacation and behind saving on gas and electricity, new clothes, short trips, and out-of-home entertainment. In India, a small and decreasing portion of consumers plans to cut back on technology even when economic conditions improve, which should bode well for Apple’s India strategy, while in China this share is increasing. 

What actions Indian and Chinese consumers have taken to save

Source: The Conference Board® Global Consumer Confidence Index Survey

In sum, the buoyancy of Indian consumers and their interest in tech purchases, along with the expected growth of the Indian economy, consumers’ wealth, and luxury purchases, should bode well for Apple to expand its market position in India in the longer term.

Note: A version of this blog originally appeared on "Emerging Market Views" on May 2, 2019.