By DHANYA ANN THOPPILin Bangalore, India,AMOL SHARMA in New Delhi And JESSICA E. LESSIN in San Francisco
Apple Inc. is overhauling its iPhone operations in the crucial Indian market, attempting to chip away at Samsung Electronics Co.'s dominance by adjusting to the country's retailing rules and convoluted distribution process.
But the Cupertino, Calif., company still has a long way to go.
That's no small matter as Apple's growth slows in the U.S. and other mature markets. India is poised to become the world's third-largest smartphone market this year, behind China and the U.S., according to Strategy Analytics.
Apple is sidestepping wireless carriers to seize greater control over marketing in India and offering no-interest loans to lure lower-income consumers. The company has also boosted staff in India by 30% to 170 employees in the past six months. And it is ramping up the introduction of other products, with the Apple TV video-streaming gadget expected to reach stores in coming weeks, people familiar with the matter say.
The result is that Apple shipped more than 252,000 iPhones to India in the quarter through December, more than triple the number in the previous three months, according to research firm Canalys.
Yet Apple accounts for just 5% smartphone shipments to India, compared with 40% for market leader Samsung. The South Korean company surged ahead by making India a high-priority market earlier than Apple did and offering a range of phones based on Google Inc.'s Android software that start at just over $100. An older generation iPhone sells for around $500 while the latest model starts at nearly $850.
"Apple is still very much at the premium end and out of reach of average consumers," says Neil Shah, a senior analyst with U.S. based Strategy Analytics. Most of India's 865 million wireless users still use low-cost feature phones and carriers don't subsidize smartphone purchases, as they do in the U.S.
Apple in India isn't allowed to open its own retail stores or directly sell iPhones on the Web.
India was special to Apple co-founder Steve Jobs. As a 19-year-old, he made a seven-month spiritual sojourn to the country, traveling to the River Ganges to witness a holy festival and seeking enlightenment in the Himalayas, according to the biography "Steve Jobs."
Mr. Jobs said India and Eastern thinking had a huge influence on his work at Apple. "The people in the Indian countryside don't use their intellect like we do, they use their intuition instead," he said in the book. "Intuition is a very powerful thing."
Despite his affection for India, Apple made slow progress in the country even as it invested heavily in other emerging markets. Apple's 19.6 million iPhone shipments to China and 1.4 million to Brazil last year dwarfed the 460,000 units sent to India, according to Canalys.
Chief Executive Tim Cook has blamed India's messy distribution networks. Unlike in the U.S., wireless carriers generally don't have their own stores. Mobile devices in the country typically go through several layers—carriers, national and local distributors and mom-and-pop retail shops—before getting to consumers.
"The multilayer distribution there really adds to the cost of getting products to market," Mr. Cook told analysts last summer.
Apple responded last autumn by overhauling its distribution. Instead of going through wireless carriers, Apple began working directly with two national distributors. The company now tightly controls everything about advertising, the amount of inventory entering the country and which cities are targeted and when, a person familiar with the strategy says.
ndia still erects hurdles. Apple hasn't been able to open its trademark stores because of requirements that foreign retailers purchase 30% of the value of India sales from domestic suppliers—unmanageable in a country with virtually no electronics manufacturing.
New Delhi says it wants to encourage more foreign investment in retailing and that the sourcing requirement is a reasonable condition that will help develop domestic industries.
Apple sells in India through roughly 2,000 mom-and-pop stores and 65 franchisee-owned "Apple shops" in malls and other high-end spots. Apple has spoken to government officials about changing restrictions that prevent it from selling online, a government official says.
Apple sells older versions of the iPhone at a discount in India and elsewhere, but still at a hefty premium to local rivals. But as devices from competitors such as Samsung have gained traction in emerging markets, Apple has been rethinking its one-size-fits-all approach.
The company recently started letting Indian customers pay for iPhones in interest-free installments. Apple also has been developing a less-expensive iPhone.
And the company is narrowing the gap between product introductions in the U.S. and India. It took Apple 11 months to sell the iPhone 4 in India, but the iPhone 5 arrived in Indian stores just over a month after the device's global rollout.
Apple still is sixth in smartphone shipments in India, behind Samsung, Sony Corp., Nokia Corp., LG Electronics Inc. and Research In Motion Ltd.'s BlackBerry. BlackBerry's touch-screen Z10 went on sale in the country this week.
Samsung has benefited from high brand recognition in India, thanks to the company's household appliances, such as television sets and air conditioners. The company invested heavily in India to market its Galaxy smartphones, which start at $111. Samsung also has much greater retail reach than Apple, selling its devices through 100,000 franchisee-owned and mom-and-pop stores.
Such factors "have all worked in favor of Samsung creating a niche in India," says Katyayan Gupta, an analyst with Forrester Research Inc.
Despite Apple's recent advances, it will have to broaden its portfolio of phones in India, introduce a sub-$250 iPhone and further increase marketing "to really turn a corner this year" and take market share from its South Korean rival, says Mr. Shah, of Strategy Analytics.
Write to Dhanya Ann Thoppil at dhanya.thoppil@dowjones.com, Amol Sharma at amol.sharma@wsj.com and Jessica E. Lessin at jessica.lessin@wsj.com
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