India's Mobile Providers: Competing for Calls at the Bottom of the PyramidPublished: July 01, 2010 in India Knowledge@Wharton
Six months ago, Chunnilal Menaria's wife grumbled about her husband spending US$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 with which they fed their family of five. The monsoon seasons, from which India derives much of its annual rainfall, have been poor over the past couple years and forced Menaria to take up carpentry to supplement his dwindling income from farming. Each day, he walked about eight miles around his village in Chittorgarh, Rajasthan, in search of work. With luck, he made US$2 a day. Yet, for Menaria, the Micromax X1i phone is 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 around anymore. 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 grown brands and multinational corporations are trying to build customer awareness and market share in India's hinterland, offering devices at lower price points and with features that address the specific challenges facing those living outside India's cities. Emerging as the victor in this race, however, will depend on innovation at every 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 100 million unit (shipped in 2009, according to IDC India) handset market is among the fastest-growing in the world. According to the Telecom Regulatory Authority of India (TRAI), market penetration for wireless phones in the country is at 49.6% with approximately 584 million users as of March 2010, up from only about 2% in 1995. "We estimate that overall mobile teledensity in the country will [reach] approximately 95% by 2014," notes Naveen Mishra, lead analyst, telecoms research, at IDC India. "And with penetration in rural areas being much lower than [in] urban [areas], the next phase of growth will undoubtedly come from there."
The expected growth provides some of the explanation for the plethora of homegrown mobile handset vendors -- including Karbonn, Spice, Lava, and even domestic consumer electronics giant Videocon -- that have inundated the Indian market. Some started as regional vendors, but have developed into pan-India players. The government's ban on cheaper gray market phones with no identifying International Mobile Equipment Identity (IMEI) number may have been primarily responsible for the sudden spawning of local vendors. But IDC's numbers suggest a deeper shift in industry dynamics. The number of local players grew to 28 and registered a combined 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's third-largest GSM handset vendor with a market share of 6%. Nokia is first with a 62% market share and Samsung is second at 8%. "When we entered this space, it was a virgin market dominated by 'Tier A' brands. We wanted to create and become leaders in a new vertical. Today, 70% of our sales come from rural areas," states Vikas Jain, co-founder and business director of Micromax. With mobile penetration in rural areas doubling to 20% in 2009, according to the Cellular Operators Association of India (COAI), it's not surprising that most brands old and new report a substantial percentage of sales from those regions.
Many emerging vendors are attracting rural customers like Menaria by keeping their devices 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 rural markets, numbers the company attributes to better pricing. "Earlier, established players offered phones with the six key features -- FM radio, Bluetooth, camera, MP3, video and expandable memory -- for US$75 to $100. Now new players are offering 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$100 whereas "any of Nokia's E-series phones with similar features will cost more than US$300".
But the big boys aren't too far behind. Samsung's Guru series, which accounts for approximately 35% of its sales in India, caters specifically to the price-conscious segment 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 to begin selling a handset for US$16. The increase in India's value-added tax has compelled players to further cut prices in some states. However, "between the established players and the new ones there is still a 30% gap in the price on a feature-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's personal systems group.
But price is exactly the kind of differentiation that Micromax's Jain tries hard to avoid. "If a price war was my approach, I would address the 35% of the market segment where Nokia adds most of its customers with lower-priced handsets," he states. "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 brands will 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 a price war. The fact that [multinational corporations] can offer cheaper models doesn'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-Adds
Industry observers believe value-added services might be the tipping point for attracting new handset customers in rural areas. Micromax, for example, offers a lower-priced device priced for non-urban markets that can also be used as a universal remote or a gaming device, and is developing phones that also function as mosquito repellants. Additionally, the company is planning to bundle insurance services with handsets. "We are developing a concept where, once a person buys a handset, he can get insurance for the handset and for himself," Jain states. "In rural areas, 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 with insurance providers, he adds. Samsung has launched the world's first solar-powered phone, which also includes a "mobile prayer" feature that provides hymns and wallpapers for different religions. Nokia's Life Tools gives farmers crop prices and weather 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 used for a lot more than just talking, with features that would combat some of the barriers to bringing technology to consumers in rural areas and those at the bottom of the economic pyramid. Mobile devices came equipped with long battery life (as much as 30 days); built-in flashlights (a lifesaver during frequent power outages); loud audio and video players (because of noisy environments); larger displays, and expandable memory. Other features include multiple address books (for shared users), dust and dirt-resistant keypads, regional language interfaces and pictorially clear icons to simplify use for consumers who can't read or write well.
The intense competition among service providers has resulted in increasingly lower call rates and, unlike in the United States, mobile service providers in India do not offer handsets as part of calling plans. Those two factors have made phones that can hold two subscriber identity module (SIM) cards -- which allow the use of two services in the same device -- a major volume-generator for emerging vendors. "Our entire [product line], barring one, contains only dual-SIM phones," notes Sudhir Kumar, national sales manager for telecommunications at Intex Technologies. "Customers keep 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 much competition 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 alter their traditional marketing methods. Many brands are adopting regional language advertising and using below-the-line (BTL) sales promotions to break through advertising clutter and reach populations with little or no access to television or newspapers.
With the increased focus on regional and smaller markets, Samsung India will this year 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's director of IT and telecommunications. Emerging vendors are also discovering that BTL promotions -- including traveling road shows that offer phone demonstrations, performances by local singers and opportunities for face-to-face interaction with potential customers -- are the 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 the past 10 years. It has more awareness and customer trust and that is primarily why Nokia sells," states Deepesh Gupta, managing director of Zen Mobile. Some companies are using famous faces to help build that kind of visibility. Menaria, for example, could not specifically identify Micromax as his cell phone brand; for him the new brands are all "China ka" (from China). But he could differentiate the device from others based on 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 Indian Premier cricket league, where 10-second advertising spots cost as much as US$11,000-16,000.
Building awareness requires deep pockets, however. Marketing budgets for the current year are at US$20 million at Micromax, US$10 million at Byond Tech and US$7 million at Zen Mobile. For companies that did not exist two years ago, these sums represent a significant investment. Dutt notes that the companies can afford to invest heavily in marketing because "at this point, the new players are enjoying healthy gross margins not only because of their volumes but because of their sourcing benefits, lower costs involved and healthy inventory turns and returns on capital."
Margins Still Comfortable
But distribution is perhaps the most consequential variable in a fiercely competitive market. While most companies are using conventional models to bring their phones to the market, there is also a significant amount of experimentation within that framework. Micromax has 55,000 outlets and is already selling more than a million units a month. Jain says his firm bills its main distributors every three days, enabling them to replenish their inventory twice a week. "This means [the distributor] can rotate his [or her] capital many times each month," he explains. Commissions vary from 2% to 10%. But Dutt believes that, instead of focusing on the percentage of gross margin paid to distributors, "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 sales vans 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 of distribution. 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 service center 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 to Nokia, they should upgrade to the next version of the same brand."
Customer retention, however, will also involve greater customization, emphasis on research and development, and leaner supply chains. In addition, most brands are currently launching at least two new models each month. Against that backdrop, experts say it makes sense for new vendors to establish their own manufacturing centers. Many companies plan to set up their own plants by the end of this year. But Zen's Gupta warns that "such claims are easy to make. These people are not actually going to be manufacturing. It will be more of assembling as a way of getting certain tax advantages. The volumes don't make it viable to manufacture here."
With increasing competition and thinning margins, volumes will be crucial for mobile handset manufacturers to survive. But company officials downplay any pressure they face in this area. "First, it's not like we're selling at a loss; second, our volumes have increased, and third, when the portfolio is as balanced as ours, your overall figures 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 being squeezed," he stresses. "We work on a margin of about 10%."
Observers say the longer-term outlook for India's handset industry in India however is intense competition and further consolidation. Videocon D2H CEO Anil Khera envisions only a few Indian players emerging as strong brands, yet "garnering a cumulative market share of 50% in a year." It will be interesting but certainly not easy. As Intex's Kumar says, "The boys are playing these days; the men have yet to come."