Companies
The Micromax trap: Why Noise, Fire-Boltt, boAt, and Boult need smart manoeuvres
Summary
- A decade ago, Micromax spotted an opportunity in the mobile handsets business and disrupted the market with affordable products. At its peak, in 2014, it briefly became the largest mobile phone player in India. What happened next has lessons for the current crop of wearables startups.
New Delhi: On a hot May afternoon, a factory that makes wearable technology products for Indian company Noise in Noida, Uttar Pradesh, hums with over 300 workers. More than half of them are women. Once in a while, a supervisor makes a round of the factory floor, like a principal in a school. But the workers, busy assembling the electronic pieces, rarely look over their shoulders. By the end of the day, they would have assembled 30,000 smartwatches and 10,000 wireless earbuds—the factory is one of India’s largest for such products.
Similar assembly units, big and small, had sprung up to meet the scorching demand, not just for smartwatches and earwear, but also for wrist bands and rings. They all do more or less the same thing—track stuff such as sleep patterns and physical activity. But beyond every utility, it is a fashion accessory millennials love to flaunt.
Outsourced manufacturing companies, the likes of Dixon Technologies and Optiemus Electronics, were talking of expanding capacities for wearable products even last year. Conversations often revolved around pushing the envelope in “local value addition".
By the end of 2019, the Indian industry had already run up to become the third largest in the world, behind the US and China. In the second quarter of that year, a record three million devices had been shipped in India, more than double the previous year. It was on steroids post the pandemic—in 2023, India clocked sales of over 134 million units, overtaking the US and China to become the largest market in the world.
Four Indian startups—boAt, Noise, Boult and Fire-Boltt—rode this explosive growth, becoming the movers and shakers in the global pecking order. During the festive season last year, boAt overtook Chinese giant Xiaomi to become the world’s second-largest wearables company behind Apple. Similarly, Noise became the world’s third-largest smartwatch company in 2023, behind Apple and Samsung.
But the wearables sector is less noisy right now. Demand has tapered off. The change was so sudden this year that the industry was caught off guard and left with a significant inventory. In the first quarter of 2024, overall demand grew only by 2.1%, the slowest since the pandemic. In the second quarter, sales declined for the first time ever by 10% compared to the year-ago quarter. The downturn is led almost entirely by smartwatches, which declined 27%, according to data from IDC, a market research firm.
“The hyper-growth of smartwatches in the India market over the past few years has been primarily driven by its appeal as a low-cost fashion accessory," said Harshit Rastogi, research analyst at market research firm Counterpoint Research. “However, this initial growth phase is now cooling down as the initial excitement of the segment is tapering off. This is also reflected in the dwindling growth rates," he added. Even with the festive season ahead, when consumer activity typically picks up, the outlook for the rest of the year is bleak, thanks to the high base from last year. “The market is forecast to witness a double-digit percentage decline in 2024," Rastogi said.
In many ways, the smartwatch segment mirrors the trend of smartphones from a decade ago. Back then, a clutch of newfound domestic companies or startups spotted an opportunity, contacted vendors in China and disrupted the market with timely affordable products. One company that mastered this strategy best was Micromax, which, at its peak in 2014, briefly became the largest mobile phone player in the domestic market. An onslaught from Chinese phone makers eventually sank the brand.
Just like smartphones in the last decade, the strong growth of wearables over the past few years has caught the attention of Chinese-origin players—the likes of Realme and OPPO—who are beginning to flex muscles. At the same time, a number of nondescript smaller white label players have emerged in the tier II and III markets in the country that are importing products from across the border and undercutting the incumbents on price.
Can the industry find a way to address the challengers and adapt to the new reality? And can the big four domestic startups avoid the fate of Micromax?
End of the bull run
Why is the Indian consumer suddenly falling out of love with smartwatches? The one-word answer is fatigue.
The focus on one’s health in the aftermath of the pandemic saw a large part of the population take to an active lifestyle. Smartwatches that helped measure your daily calorie burn, step count, heart rate monitor and sleep pattern analysis, became a much sought-after accessory.
A smartwatch can do much more than an old-fashioned analog watch but there was one major irritant—just like any other electrical gadget it needed to be charged. Even as most of these watches would last nearly a week of use, a number of customers found charging it even once a week to be tedious. The burn out is among the highest for any gadget in the industry. Around 10% of the customers stop wearing the watch within a month of purchase. It swells to nearly 22% within three months, one of the wearables companies Mint spoke to stated.“The replacement cycle in smartwatches is unlike any other electronic gadget. The number of users who quit is higher. Lot of them get bored very quickly and never come back for another watch. It was a fad whose peak is behind us and we need to adjust to the new reality," said Varun Gupta, co-founder, Boult.The industry is also facing stiff competition from numerous nondescript firms that have flooded the market in smaller towns with cheaper knock offs—for as low as ₹700—of more premium brands.The number of such unknown companies has shot up from 70 in 2021 to over 130 in 2024. Their combined share has also gone up from 3% in 2020 to over 15% last year, data from Counterpoint Research stated.
“We expect a sharp double-digit decline this year in smartwatch shipments from a high of 53 million in 2023. In the upcoming years, the growth is expected to regain but in low single digit. It is safe to assume that 2023 was the peak for smartwatches until a brand or tech innovation disrupts the industry," said Vikas Sharma, senior research analyst for smart wearable devices at IDC.
Not everybody will find the adjustment easy or painless.
Tale of two halves
Between the four big Indian players, the estimated ₹10,000 crore wearables industry is unevenly split. boAt, operated by Imagine Marketing Ltd, is the largest with revenue of ₹3,258 crore in 2022-23. Noise, operated by Nexxbase Marketing, totalled revenue of ₹1,426 crore during the year, as per data from Capitalmarket.
In the smartwatches segment, Noise and Fire-Boltt together account for 50% of industry volumes while boAt and Boult account for just 15.5%, according to IDC. In the earwear segment, however, it is the reverse. boAt and Boult account for 47% of the sales while Noise and Fire-Boult have less than 13%.
While the earwear segment is also facing a slowdown—sales declined 9.4% in the last quarter of 2023 and have grown only in single digits since then year on year—it is not as acute as in the smartwatches category.
“The decline was largely attributed to vendors taking a careful approach towards inventory management, prioritizing the clearance of older stock before the onset of the festive season. This, combined with a reduced number of new product launches, restrained consumer demand, and innovation fatigue, played a significant role in the observed decrease," said Sharma of IDC. Companies that have ridden the frenzy for smartwatches in the last four years and benefited from it have their task cut out. Facing the double whammy of not just slowing demand but rock-bottom prices—high discounting is the norm in the entry and mid-level smartwatch categories—the industry needs to find a way to get customers to buy the watches while raising prices.
“We view the current market dynamics as a natural phase of maturation. When it comes to the democratization of technology, each category undergoes its own growth cycle and evolves over time," said Amit Khatri, co-founder, Noise. “But, definitely, not the end of the golden era for smartwatches. Rather, it is a pivotal period of transformation. The industry is evolving and is poised to unlock new levels of capabilities for wearables," he hastened to add.
The fall in price of smartwatches has been dramatic, down a third from $60 in the third quarter of 2021 to $20.6 today. This has been one of the major drivers of demand in the past but in the last quarter, high inventories meant the industry had to go into a scalding price war. With everybody taking a knock, nobody has emerged a winner.“We have seen this trend playing out in China as well, where prices crashed and then the market corrected itself with some consolidation and it moved towards health and wellness play. We are expecting a similar trend in India in the coming quarters," said Sameer Mehta, co-founder and chief executive, boAt.
“More than 80% of smartwatch buyers in India are first-timers who bought it as a lifestyle product. To lure them, players flooded the market with low-cost smartwatches which led to an increase in volumes in the short run and asharp decline in average selling price. But this was unsustainable and the market had to correct," he added.
The reset
Micromax’s well documented fall underlined the perils of not having sufficient local manufacturing and engineering know-how. Indian wearable brands today are at a crossroads similar to the one Micromax found itself in 2015 when the 3G to 4G transition was about to take place. While the smartphone industry could not withstand the onslaught from Chinese-origin companies, wearables companies are scrambling to shore up local manufacturing and have developed in-house research and development (R&D) and design capabilities to stay ahead of the curve.
“We are now making printed circuit boards (PCBs) in India using surface mounting technology (SMT). We are already making 40% of PCBs in India and are aiming to reach 60% local production by this year," said Khatri of Noise. “This is just the beginning towards our component localization efforts. As we move ahead, we will be exploring the localization of more component production, including batteries. We are currently in the quality testing phase and plan to conduct beta trials in India soon."
PCBs are one of the core components of smartwatches, as it manages wireless connections which enables functionalities like WiFi and Bluetooth connectivity. Noise has so far achieved 15-20% value addition in India through SMT, assembly and local purchase of packaging. Others are roughly in the same range. Localizing even further would entail significant capital investments and time. It could, however, prove to be crucial for the sustenance of the industry.
“While the wearable manufacturing industry in India has made significant strides, the industry as a whole still needs to import certain key components including display and semiconductors," Khatri said. “Looking at the market landscape, displays will require at least a year’s timeline for the industry to initiate localization efforts, provided we have all the right support," he added.
Premium play
The other obvious but more challenging part of the strategy being pursued by all the startups is to move up the value chain, shed their mass market positioning, and offer more premium products. That will enable better profitability as well. There is still a wide gulf between the four Indian firms and Apple, Garmin or Samsung in terms of positioning.
“We have pivoted our strategy and playbook towards wearables. Unlike other players, we don’t want to play the price and heavy discount game to retain market share," said Mehta of boAt. “We are transitioning towards a consumer segment that values superior experiences over price considerations, prioritizing premium hardware and advanced algorithms to cater to their discerning preferences."Diversification into new categories in the larger audio devices segment and automotive dashcams, as well as expanding presence in offline channels, is another strategy Indian companies are keen on.“We don’t foresee the earwear category to shrink like smartwatches," Varun Gupta of Boult said. “We are expanding into the larger audio devices space where there is great potential for growth. Dashcams is another interesting prospect. It may be small today but can explodeifregulations are favourable."
