Micromax Final[1]1

8/8/2019 Micromax Final[1]1

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India's Mobile Providers: Competing for Calls at the Bottom of the Pyramid

Six months ago, Chunnilal Menaria's wife grumbled about her husband spendingUS$45 on a mobile phone. They lived in a one-room stone house, with no toilets or

running water, only eight hours of electricity a day and earned US$60 a month withwhichthey fed their family of five. The monsoon seasons, from which India derives muchof its annual rainfall, have been poor over the past couple years and forced Menariato take up carpentry to supplement his dwindling income from farming. Each day,he walked about eight miles around his village in Chittorgarh, Rajasthan, in searchof work. With luck, he made US$2 a day. Yet, for Menaria, the Micromax X1i phoneis the best investment he has ever made. "It literally changed my life," he says."Now that everyone has access to a phone, I don't waste time walking aroundanymore. We just call each other. My monthly income has increased to US$100."

Reaching Menaria and other customers in India's rural areas is expected to be the

next frontier for expanding the country's mobile phone market. Both locally grownbrands and multinational corporations are trying to build customer awareness andmarket share in India's hinterland, offering devices at lower price points and withfeatures that address the specific challenges facing those living outside India'scities. Emerging as the victor in this race, however, will depend on innovation atevery level of the process --from product development to after-sale customer service, experts say.With 10 million to 12 million subscribers being added every month, India's 100million unit (shipped in 2009, according to IDC India) handset market is among thefastest-growing in the world.

According to the Telecom Regulatory Authority of India (TRAI), market penetrationfor wireless phones in the country is at 49.6% with approximately 584 million usersas of March 2010, up from only about 2% in 1995. "We estimate that overall mobileteledensity in the country will [reach] approximately 95% by 2014," notes NaveenMishra, lead analyst, telecoms research, at IDC India. "And with penetration in ruralareas being much lower than [in] urban [areas], the next phase of growth willundoubtedly come from there."

The expected growth provides some of the explanation for the plethora ofhomegrown mobile handset vendors -- including Karbonn, Spice, Lava, and evendomestic consumer electronics giant Videocon -- that have inundated the Indianmarket. Some started as regional vendors, but have developed into pan-Indiaplayers. The government's ban on cheaper gray market phones with no identifyingInternationalMobile Equipment Identity (IMEI) number may have been primarily responsible forthe sudden spawning of local vendors. But IDC's numbers suggest a deeper shift inindustry dynamics. The number of local players grew to 28 and registered acombined market share of 12.3% in 2009, up from five players with less than 1%combined share in 2008.In fact, two-year-old, Gurgaon-based Micromax has replaced LG of Korea as India'sthird-largest GSM handset vendor with a market share of 6%. Nokia is first with a


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62% market share and Samsung is second at 8%. "When we entered this space, itwas a virgin market dominated by 'Tier A' brands.

We wanted to create and become leaders in a new vertical. Today, 70% of our salescome from rural areas," states Vikas Jain, co-founder and business director ofMicromax. With mobile penetration in rural areas doubling to

20% in 2009, according to the Cellular Operators Association of India (COAI), it's notsurprising that most brands old and new report a substantial percentage of salesfrom those regions.

Many emerging vendors are attracting rural customers like Menaria by keeping theirdevices affordable, offering phones that are priced at no more than US$300. Pune(Maharashtra)-based Byond Tech derives as much as 75% of its sales from ruralmarkets, numbers the company attributes to better pricing. "Earlier, establishedplayers offered phones with the six key features -- FM radio, Bluetooth, camera,MP3, video and expandable memory -- for US$75 to $100. Now new players areoffering similar products for US$25," says Shripal Gandhi, director of Byond Tech."More than 85% of handset sales in India are in the price range US$35-$75." For

instance, Gandhi's BY888 model, a low-end smartphone, costs about US$100whereas "any of Nokia's E-series phones with similar features will cost more thanUS$300".

But the big boys aren't too far behind. Samsung's Guru series, which accounts forapproximately 35% of its sales in India, caters specifically to the price-conscioussegment with phones that cost as little as US$35. Nokia recently launched a smartphone priced below US$130 (with plans to go even lower) and Vodafone intends tobegin selling a handset for US$16. The increase in India's value-added tax hascompelled players to further cut prices in some states. However, "between theestablished players and the new ones there is still a 30% gap in the price on afeature-to-feature comparison. That's a big gap. So even if the big players lower

their prices, they will feel the pinch," notes Sunil Dutt, president of HP India'spersonal systems group.

But price is exactly the kind of differentiation that Micromax's Jain tries hard toavoid. "If a price war was my approach, I would address the 35% of the marketsegment where Nokia adds most of its customers with lower-priced handsets," hestates. "There have been some Indian brands that function purely on a price play,but we want to draw the customer by highlighting the product, not the price."

Jagmohan Singh Raju, a professor of marketing at Wharton, points out that brandswill not win additional market share purely based on the cost of their products."Prices of phones fall quite rapidly anyway. Broadening your product line is not aprice war. The fact that [multinational corporations] can offer cheaper modelsdoesn't mean they are going to lower the prices of their other phones," he says."The real challenge here will be the innovation."

Solar Power, Mosquito Repellants and Other Value-AddsIndustry observers believe value-added services might be the tipping point forattracting new handset customers in rural areas. Micromax, for example, offers alower-priced device priced for non-urban markets that can also be used as auniversal remote or a gaming device, and is developing phones that also function as


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mosquito repellants. Additionally, the company is planning to bundle insuranceservices with handsets. "We are developing a concept where, once a person buys ahandset, he can get insurance for the handset and for himself," Jain states. "In ruralareas, people are not inclined to insure themselves, but if it is available free of cost,they are very interested." Large sales volumes make it easier to negotiate withinsurance providers, he adds. Samsung has launched the world's first solar-powered

phone, which also includes a "mobile prayer" feature that provides hymns andwallpapers for different religions. Nokia's Life Tools gives farmers crop prices andweather predictions for a nominal monthly fee.

The Indian market has been a unique learning ground for vendors of all sizes.Companies developed their product lines knowing that the phones would be usedfor a lot more than just talking, with features that would combat some of thebarriers to bringing technology to consumers in rural areas and those at the bottomof the economic pyramid. Mobile devices came equipped with long battery life (asmuch as 30days); built-in flashlights (a lifesaver during frequent power outages); loud audioand video players (because of noisy environments); larger displays, and expandablememory. Other features include multiple address books (for shared users), dust and

dirt-resistant keypads, regional language interfaces and pictorially clear icons tosimplify use for consumers who can't read or write well.

The intense competition among service providers has resulted in increasingly lowercall rates and, unlike in the United States, mobile service providers in India do notoffer handsets as part of calling plans. Those two factors have made phones thatcan hold two subscriber identity module (SIM) cards -- which allow the use of twoservices in the same device -- a major volume-generator for emerging vendors. "Ourentire[product line], barring one, contains only dual-SIM phones," notes Sudhir Kumar,national sales manager for telecommunications at Intex Technologies. "Customerskeep the SIM for incoming calls constant [because in India they are not charged for

those calls] and keep changing to the second SIM [for outgoing calls, based on]lowering call rates. And with Nokia not having dual-SIM models, there is not muchcompetition there from them."

However, with the changing demographics of the market for mobile phones,innovation cannot be restricted simply to the product. Companies also must altertheir traditional marketing methods. Many brands are adopting regional languageadvertising and using below-the-line (BTL) sales promotions to break throughadvertising clutter and reach populations with little or no access to television ornewspapers.With the increased focus on regional and smaller markets, Samsung India will thisyear spend more than half its total marketing budget on BTL activities -- an 8-10%increase in spending over last year, according to Ranjit Yadav, the company'sdirector of IT and telecommunications. Emerging vendors are also discovering thatBTL promotions -- including traveling road shows that offer phone demonstrations,performances by local singers and opportunities for face-to-face interaction withpotential customers -- arethe most effective way to raise brand awareness and build equity."Nokia's USP [unique selling point] is simply that it has been in the market for thepast 10 years. It has more awareness and customer trust and that is primarily why


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Nokia sells," states Deepesh Gupta, managing director of Zen Mobile. Somecompanies are using famous faces to help build that kind of visibility. Menaria, forexample, could not specifically identify Micromax as his cell phone brand; for himthe new brands are all "China ka" (from China). But he could differentiate the devicefrom others basedon the company's popular television commercial featuring leading Hindi film actor

Akshay Kumar. Videocon features prominent cricket players in its advertisements.Micromax and Karbonn advertised heavily during the recently concluded IndianPremier cricket league, where 10-second advertising spots cost as much asUS$11,000-16,000.Building awareness requires deep pockets, however. Marketing budgets for thecurrent year are at US$20 million at Micromax, US$10 million at Byond Tech andUS$7 million at Zen Mobile. For companies that did not exist two years ago, thesesums represent a significant investment. Dutt notes that the companies can affordto invest heavily in marketing because "at this point, the new players are enjoyinghealthy gross margins not only because of their volumes but because of theirsourcing benefits, lower costsinvolved and healthy inventory turns and returns on capital."

Margins Still ComfortableBut distribution is perhaps the most consequential variable in a fiercely competitivemarket. While most companies are using conventional models to bring their phonesto the market, there is also a significant amount of experimentation within thatframework. Micromax has 55,000 outlets and is already selling more than a millionunits a month. Jain says his firm bills its main distributors every three days, enablingthem to replenish their inventory twice a week. "This means [the distributor] canrotate his [or her] capitalmany times each month," he explains. Commissions vary from 2% to 10%. But Duttbelieves that, instead of focusing on the percentage of gross margin paid todistributors, "the brands need to focus on the return on investment they are

ensuring them. That's a bigger game changer."Even established players are rethinking their strategy, whether it's Nokia's salesvans that drive through rural towns or Samsung's e-kiosk sales outlets. But back-end support, including after-sale customer service, is also a critical part ofdistribution. Even a smaller player like Intex, with sales of 150,000 units a month,has 425 service centers and invests continually to maintain healthy sales to servicecenter ratios."Good service is how [companies] can build their brand," Wharton's Raju notes."When people are buying their second phone, they shouldn't [want to] switch toNokia, they should upgrade to the next version of the same brand."

Customer retention, however, will also involve greater customization, emphasis onresearch and development, and leaner supply chains. In addition, most brands arecurrently launching at least two new models each month. Against that backdrop,experts say it makes sense for new vendors to establish their own manufacturingcenters. Many companies plan to set up their own plants by the end of this year. ButZen's Gupta warns that "such claims are easy to make. These people are notactually going to bemanufacturing. It will be more of assembling as a way of getting certain taxadvantages. The volumes don't make it viable to manufacture here." With


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increasing competition and thinning margins, volumes will be crucial for mobilehandset manufacturers to survive. But company officials downplay any pressurethey face in this area. "First, it's not like we're selling at a loss; second, our volumeshave increased, and third, when the portfolio is as balanced as ours, your overallfigures are comfortable enough for you to move forward," notes Samsung's Yadav.Even Jain defends Micromax's healthy margins, citing private equity firm TA

Associates' recent purchase of a 20% stake in his company. "Margins are not beingsqueezed," he stresses. "We work on a margin of about 10%."

Observers say the longer-term outlook for India's handset industry in India howeveris intense competition and further consolidation. Videocon D2H CEO Anil Kheraenvisions only a few Indian players emerging as strong brands, yet "garnering acumulative market share of 50% in a year." It will be interesting but certainly noteasy. As Intex's Kumar says, "The boys are playing these days; the men have yet tocome."

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Micromax Final[1]1