How Chinese mobile phones took over the Indian market9 min read . Updated: 02 Nov 2018, 08:47 AM IST
Home-grown smartphone brands like Micromax and Intex once cornered 54% of market share. That is down to less than 10% today
Four years ago, Micromax’s office in Gurugram was at par with the likes of Google. The multi-storeyed building had open spaces, rooms aplenty, and even balconies and terraces where parties could be thrown.
Today, the company operates out of a single floor in a common office complex in Gurugram. The once-swanky office now has only a few cabins, far fewer employees, and is quite cramped. Incidentally, in 2014, Counterpoint Research put Micromax at the helm of the booming Indian smartphone market. It even surpassed Samsung, and shipped more phones than any other brand in India. In fact, home-grown smartphone brands such as Micromax, Lava, and Intex once cornered nearly 54% of the market share. The same brands have a less than 10% market share today. What really happened?
A look back at the last few years shows home-grown smartphone brands losing their dominance to a gradual Chinese onslaught. Today, the top player in India is Xiaomi, accounting for 29.7% of all smartphone shipments (IDC data). The company—which introduced itself with competitively priced devices—has slowly built its base in the country over the past five years, and is now reaping the benefits.
In fact, according to data from IDC, four of the top five smartphone brands in India are from China—Xiaomi, Vivo, Oppo and Transsion hold the 1st, 3rd, 4th and 5th positions, respectively. Samsung, which ousted Nokia from the Indian market, remains at number two, but is feeling the heat as well.
Meanwhile, Intex (which did not offer comment for this story) and Micromax have both been selling consumer appliances. Micromax says it sells nearly a million TVs every year, while Intex’s website proudly declares itself to be the number one Indian LED TV brand. Intex has also dabbled with air-conditioners and speakers.
The offline story
Chinese brands have always offered low prices, and they continue to do so. However, the market has also changed. Now, the low pricing of devices has become the bar that others have to compete against.
In one of its launch events in China some months ago, Lei Jun, CEO of Xiaomi, had said that if his company makes more than 5% net profit from its hardware business, it would aim to pass that benefit on to its customers.
According to an industry source closely involved with smartphone sales, Oppo and Vivo sell phones in India at a margin of about 12%. These two companies have traditionally sold phones at higher prices than Xiaomi, since they plied their trade in an offline-centric model in India.
In the offline space, companies incur higher overheads, which raise the overall cost of the device, and hence, the final price too. According to a distributor who requested anonymity, when Oppo and Vivo started dominating the offline segment, they were paying lots of money to retailers and distributors to keep their brands visible. Yet, that wouldn’t reflect on the prices of the actual products. “They would even pay for redecorating a retailer’s store," the source said.
Oppo and Vivo were not just paying for Indian Premier League (IPL) advertisements and sponsoring the Indian cricket team, but also paying a lot of money to retailers who would put up their boards; give their products prime positioning; or sell their devices exclusively. “Xiaomi, Vivo, and Oppo give targets to distributors that are based on volumes. Instead, a brand like Samsung gives targets based on value," said a distributor based in Gurgaon.
This means retailers could make easy money from Chinese brands by showing the number of devices sold, while a brand like Samsung demands that they sell phones worth a particular amount. In a market that mostly buys cheaper phones, achieving value targets, like that of Samsung’s, are more difficult.
Mudit Sethia, who runs smartphone distribution and retail channels in Kishanganj, Bihar, said that some Chinese brands offer ₹ 150 per unit sold as an incentive. This could go up to above ₹ 200 per unit, depending on how expensive the phone in question is.
Furthermore, another source in Gurgaon said some distributors are wholesaling Xiaomi, Vivo and Oppo’s phones to grey markets at nearly zero margins. This allows them to fulfill the volume targets that these Chinese brands want, hence earning the incentive they offer on those sales.
Selling to the grey market doesn’t just allow them to fulfill volumes—it also gives them a much wider coverage than their current stores and networks can offer.
He also said that distributors who were doing business worth ₹ 20 lakh per month by selling Xiaomi’s phones earlier have suddenly seen a sharp increase in business transactions—up to ₹ 4 crore per month just ahead of the festive season, thanks to this strategy. Another reason for this sharp increase is because of financing plans, which allow customers to get phones today and pay for them later.
How it happened
The main reason behind the fall from grace for Indian brands, however, is the failure to gauge a fundamental shift in the market—when India suddenly moved from 3G to 4G in a matter of months and Reliance Jio changed the game completely. According to Vikas Jain, co-founder, Micromax Informatics Ltd, Micromax found itself with a huge stock of 3G smartphones across its supply chain, which it had to get rid of at a time when the market was focusing on 4G devices. “The total addressable market (TAM) went down," he said.
His inventory, which was meant for 60-75 days, was extended to 365 days. Singh agrees with this, saying that the Indian brands “had a lot of commitments" in China for 3G phones, when Xiaomi and other brands were selling 4G devices.
Jain mentions that this was something that hit all Indian players, and since the market leaders could not fulfill the consumers’ demand for 4G-enabled devices, a huge gap was left to be filled. Their Chinese counterparts duly capitalised.
The Chinese firms were already coming from a 4G-dominant market and could bring their 4G-enabled phones to India. When Reliance Jio forced telecom players to adopt 4G connectivity and voice-over LTE (VoLTE) calling, Chinese phones were already ready for it.
While these brands also offered better pricing at times, Jain says that it alone cannot be the differentiator. “If I am able to do that (undercut somebody), then somebody should be able to do that to me too. Price is not the only mantra," he added.
An industry veteran who wished to remain anonymous further added that Chinese brands have been known to even sell phones at a loss, just to gain consumer interest.
Kapal Pansari, director of Rashi Peripherals, one of India’s top five IT distributors, also said that Chinese firms gamed the distribution ecosystem well, even while treating both offline and online channels on an equal footing. He said, “Indian players did not manage distribution hygiene properly and created discontent and mistrust among its distribution stakeholders. Chinese brands, on the other hand, continued to improve on the channel front with new experiments, and introduced innovative channel finance models in order to build trust among the involved partners."
S.N. Rai, co-founder of Lava, further added that the Chinese brands also had control over the value-chain of the business – the design and manufacturing side. While Rai claims that Lava also had control over such aspects of the business in India, the Chinese were more evolved.
Hopes of possible comeback
However, as any disruptor in any industry knows, technological advantages do not last forever and cash burn is not a long-term strategy. That is why Indian brands have begun to sense the possibility of a comeback. According to Sethia, the likes of Oppo and Vivo have stopped paying for putting up their boards, and other such advertising tactics.
Rai from Lava said that distributors have been asking the company for products, “now that Oppo is struggling."
Sethia currently runs distribution for Tecno, a brand owned by Transsion—the fifth largest smartphone seller in India by shipment. He previously worked with Oppo and Vivo devices. He explains that while Xiaomi is the top brand in India, it is still quite weak in terms of distribution channels.
There are rumours floating around in industry circles that Xiaomi executives had met with Micromax to buy out its once-strong retail presence, and use that to its advantage.
The concept of “preferred" or “exclusive" retailers is also dying, said Sethia. In this, brands like Oppo, Vivo and others would prioritise shipments to retailers who chose to sell only their products, and incentives would also differ.
Lava’s Rai also said, “Today, what we can produce at $1.3 assembly cost, Foxconn can’t produce at even $2.8, despite having such huge volumes." He cited increasing costs in China as a reason, and added that China’s support program for ‘low-value add manufacturing’ is moving away, because they find it to be hindering their economy.
The company, today, thinks it’s at par with any global manufacturer, and the government’s Phased Manufacturing Programme, which has a mix of import tariffs and incentives for local assembly, will help them as well. Besides, while Indian brands have lost their dominance within India, they are still selling phones in other countries, like Mexico.
Moreover, distributors are beginning to consider other brands as options too, though none of those who spoke with Mint mentioned Indian brands, specifically, as being under their consideration.
But the unintended side-effect of the disruption unleashed by Jio, which caused the temporary downfall of the feature phone, has been the massive expansion in the market itself. Many of the first-time mobile internet users may get on board via the feature phone—the erstwhile forte of the likes of Micromax and Lava.
Feature phone is also a segment where Indian brands never really lost their presence completely. In fact, in December 2017, Micromax claimed it had sold three million handsets under its Bharat range of cheap smartphones.
The launch of the Jiophone2 and Airtel’s nascent plans to launch its own low-cost device means telcos may be on the look-out for a number of tie-ups with phone makers.
Micromax’s Jain dreams of a future where the ideal smartphone strategy is not just new product launches, but tying up with telcos, so that consumers buy a phone and get 4G plans bundled with it.
“There’s a general belief in Tier III and Tier IV towns that if you’re using a smartphone, your data gets consumed automatically," said Jain. He thinks this is why the Jiophone was a subsidised feature phone, instead of a subsidised smartphone. “Slowly and steadily, consumers started consuming data... And even 1GB becomes too less for an entire month," he added.
IDC’s Navkendar Singh agrees that Micromax and Lava “still have juice left", though he also mentioned that Intex has “almost moved out" of the market. “They’ll have to pick and choose their battles. Don’t fight Xiaomi in the ₹ 7,000- ₹ 10,000 range," said Singh. He suggested that the right government and telco tie-ups could help.
Micromax recently won a ₹ 15,00-crore deal from the Chattisgarh government to distribute 50 lakh smartphones —part of an emerging trend in politics where free phones are dangled to win over youth support.
But merely relying on such populist sops, or possible tie-ups with telcos, isn’t much of a strategy. Unless Indian phone makers can quickly figure out a way to go down the “relatively cheap premium route"—a segment OnePlus completely dominates— their hopes of a dramatic return to the dominance of 2014 may be dangling by a very tenuous thread.