For the past three years, Yellakandula Urmila of Bhongir village, near Hyderabad, has been banking with SKS Microfinance (MFI), India’s largest lender. She first bought a loom to weave silk saris with a US$150 loan from MFI in 2007, which helped triple her family’s monthly income to US$100. Then three months ago she took out another loan for US$26 to buy a Nokia 1200 mobile phone with a prepaid Bharti Airtel connection, which she will have paid off in June. “It’s been a life-changing and time-saving experience,” says Urmila, affectionately patting her gleaming silver handset and recalling how she used to have to walk a mile to a wire-line public phone booth to call clients about orders. “Deals are now wrapped up in minutes,” she says.
Wooing rural consumers like Urmila while teaming up with local organizations have been a key part of the global strategy of the US$55 billion Finnish handset multinational since 2006. “Partnering with local stakeholders is a cool thing,” says Gireesh Shrimali, professor of information systems at the Indian School of Business in Hyderabad. “It is a neat innovation, which creates buzz and brand equity for Nokia.”
That is one of the reasons why India is the company’s second-largest market with 2009 net sales of US$3.7 billion, putting it behind China (with US$8 billion), but well ahead of the UK in third place (with US$2.5 billion). In the decade since it first set foot in India, Nokia has captured nearly 60% of the country’s US$5.6 billion handset market and has a 62% share of GSM-based phones, according to research firm IDC. India — and in particular, rural India — has been good for Nokia.
“We saw the rural opportunities ahead of competition,” states D. Shivakumar, Nokia India’s vice president and managing director. Though Samsung, LG, Sony Ericsson and Motorola have also been selling handsets in India, telecom observers say Nokia has stood out from the rest by having formally forged a company-wide “social inclusion” policy in 2006 to encompass low-income consumers in its growth strategy, essentially using India as a laboratory for that strategy.
Today, rural consumers account for 25% of Nokia phone sales in India, and the target next year is 30%. With mobile phone penetration in the rural market almost doubling to 20% over the past year — to approximately 150 million, according to the Cellular Operator Association of India (COAI), a trade association — Nokia has been aggressively pursuing an even more targeted expansion strategy in smaller towns and villages. “There’s an insatiable hunger for mobile phones permeating all layers of society,” says Pankaj Mohindroo, president of the COAI. “And Nokia has been developing the rural market with appropriate products for a long time, unlike other players.”
But now, Nokia’s first mover advantage in rural India is being chipped away. Both home-grown and foreign rivals are muscling in on Nokia’s rural territory, beating it down on price. All eyes now are on Nokia, as it rolls out innovative services that can be sold alongside its handsets through a range of partnerships.
It was a matter of time before the handset market, especially at the lower end, was beginning to commoditize just as service providers were developing the infrastructure to reach consumers in the heartland. “It was a given that the fast-growing telecom market in urban India would reach a saturation point after a decade,” says Romal Shetty, an executive director at consulting firm KPMG. “Some companies had the foresight to look at new frontiers.”
On the heels of India’s rapid economic boom, the mobile revolution had an impact on both urban and rural penetration. Urban teledensity — which refers to the number of phone connections per 100 people — has exploded from 65% in 2008 to more than 90% today (with cities like Mumbai and Delhi at more than 100%), while teledensity in rural areas grew from 14% to 30% over the same period.
Nokia has been in the thick of this growth. A year after setting up a manufacturing facility in Sriperumbudur, near Chennai, in 2006, Nokia rolled out seven phones in India. Its goal was to target emerging markets at prices ranging between US$45 and US$120. Nokia manufactured 300 million devices between then and October 2009, half of which were exported to 60 countries. “Nokia has been proactive as the market leader,” says Anshul Gupta, principal analyst for handsets at research firm Gartner in Mumbai.
Nokia was the first mobile phone maker to set up a satellite R&D center in India as it began tailoring products for the rural terrain. The phones look as sleek as high-end models, but are also sturdy to withstand rough usage. They have seamless keypads to protect them from dust and special grips to make them easier to hold in India’s humidity. Some phones — Nokia 1200 and Nokia 1208 — also double up as flashlights because of rural India’s frequent power outages. Nokia has also embraced the country’s plethora of languages, with interfaces in Hindi, Marathi, Kannada, Telugu and Tamil.
Along the way, Nokia has learned important lessons that are crucial to any MNC’s survival in the hinterland. One of them relates to customer service. Its after-sales service includes some 700 care centers in urban India. But it’s a different matter in rural India. Nokia has more than 300 vans staffed with sales representatives who regularly criss-cross the countryside. It also set up low-cost collection points like chemist shops, where distributors and micro-distributors collect the phones and take them to the nearest care center.
But according to Nokia, customer service in rural markets such as India’s can be just as — if not more — important before rather than after a sale. “Consumers always worry about anything going wrong with digital products and must always be assured that care or service is just a call away,” says Shivakumar. “We needed to build care ahead of sales to provide a sense of trust and peace of mind.” Now the vans are divided into two groups — one to provide support and repairs and others to travel around with Nokia partners, ranging from Idea Cellular to SKS Microfinance, to promote their products and services while catering to novice mobile customers. “The rural market is still an area for a first-time user,” says Shivakumar.
As all this happens, service providers have been slashing call rates and expanding their networks. That has had a cascading effect on the overall affordability of mobile telephony. Rates have plummeted from 32 cents a minute in 1998 to less than a cent today, cutting the average revenue per user from US$60 to US$4, one of the lowest in the world.
Equipment makers have also felt the squeeze. “It was evident four years ago that revenues would decline for pure-play mobile device companies,” says Aditya Sood, CEO of the Center for Knowledge Societies, an innovation-focused consulting firm in India. “The downward pressure on markets and handset costs crashing to less than US$25 were expected.”
Nokia is now facing competition across all its product segments, says KPMG’s Shetty. The big confrontation is at the low end, where a number of players are wooing entry-level users. Chinese phones costing US$20 have flooded the market, and a slew of local and foreign competitors — like Simoco, Kyocera, Intex and Karbonn — are aiming to do the same. Micromax Mobile, too, is a challenger. Since it launched two years ago, it has become the third-largest GSM phone vendor, with 6% market share, after Nokia (62%) and Samsung (8%).
These changes offer Nokia another big lesson — competing on price isn’t the only avenue it can take as pressure intensifies in its rural markets. So rather than discounting prices on existing products, Nokia says it prefers to focus on providing additional services. “Just [selling] a device will not take you into the future,” says Vipul Sabharwal, Nokia’s national sales director.
This is where Nokia Life Tools comes in. Launched last autumn in India, it bundles a handset with a service for farmers so that they can get access to crop prices and weather forecasts as well as English lessons for a monthly fee beginning at 65 cents. Nokia claims Life Tools has attracted nearly one million users using just one service provider — Idea Cellular, the telecom arm of conglomerate Aditya Birla Group. It expects faster growth as it expands the tool using other service providers.
The success of Nokia’s rural value-added services, according to Sabharwal, is based on a range of key performance indicators (KPIs) including volume, the number of outlets that sell the offering,the returns to the service provider and visibility. But he says there are greater KPIs that might not show up on its top or bottom line. As he sees it, Nokia in rural India is not just a brand, but a “vehicle for social and economic transformation.”
Yet partners like Idea Cellular are cautious. Its chief marketing officer, Pradeep Shrivastava, notes that while value-added services like texting, music and caller ring back are popular with consumers, Life Tools has yet to gain traction. “The application currently does not have the ‘ecosystem’ for consumer education, subscription or servicing,” he says. “At this juncture, these solutions are not attracting new subscribers.” Another snag came in March when wire agency Reuters called off its partnership with Nokia to provide Life Tools with real-time news feeds.
Nokia has also been caught napping and failed to move with important trends, such as the popular dual Sim-card phones, which lets users move back and forth between providers without having to change handsets. Such phones offer one reason why local player Micromax has been able to gain market share with its product portfolio: 23 of its 26 models offer dual SIM cards. Mohindroo of the COAI says around 25% of all GSM mobile phones offer a dual-SIM today, “but Nokia hasn’t yet launched one.” A Nokia spokesperson concedes it has been slow on that front, but its own version of a dual-Sim will hit stores later this year, along with a US$10 phone.
With Nokia ramping up its value-added offerings, competitors are readying for a fight. Samsung plans to roll out smart phones that allow users to download maps, games and music, and access interactive features online. LG and Sony Ericsson are expanding their music and games applications.
Perhaps the fact that competitors are being driven back to the drawing board should be looked at as a good thing at Nokia, says CKS’s Sood. “In the telecom business, success will be defined when more players start doing what Nokia is doing,” he says. That’s when Nokia will have to work even harder to find new ways to woo rural India. After all, imitation, as they say, is the best form of flattery.