Deciphering China’s Takeover of The Indian Smartphone Market

There were days when Micromax was the market leader of the Indian smartphone market along with Intex. Together they held nearly 54% of the market share which today ironically is down to less than 10% combined. As per an article published in The Mint, Micromax’s once multi-storeyed glass office façade has now been dismally replaced by a shared office space on a single floor in a common office complex at Gurgaon.

Another story of Chinese led downfall of an Indian smartphone company is that of Lava International Limited. The company had a competitive price offering across all ranges of its smartphones luring the price-sensitive Indian consumer to its products especially in tier 2 and tier 3 cities. Today, however, the company has only an 8.5% market share in the feature phone segment of the mobile phone market in the country.

What led to the downfall of such homegrown brands?

The two pictures above sum up the entire disruption that took place in the Indian smartphone market over the last 5 years. Let’s explore these two factors and their related side effects separately. Later we shall try to understand the interplay of these two factors that together led to the downfall of Indian smartphone manufacturers over the years.

  • Demonetization: On 8th November 2016 when demonetization took place, Indian smartphone manufacturers were caught completely unaware and faced the entire wrath of the economic policy on their companies. The impact of demonetization was felt more deeply by the middle income and lower-income segments of society which are the direct target customer segments for feature phone manufacturers like Lava International limited.

Additionally, due to the sudden nature of demonetization, most feature phone companies found it difficult to shift to smartphone production as they had huge inventory pile ups of feature phones and found it difficult to cover their costs and shift to producing smartphones to meet the new demand in the market.

  • Chinese Dominance: The primary factor that lead to the downfall of home-grown smartphone manufacturers was the intervention of Chinese smartphone companies in the Indian markets. Companies like Oppo, Vivo, Xiaomi, Redmi and Realme entered into the markets positioned to cover existing gaps in the smartphone market which were not being addressed by the Indian manufacturers. Cash burning promotional efforts, lower or equal to cost price points of products and the shift to smartphones earlier than Indian markets are the main factors that led to China successfully taking over the smartphone market in a short span of time.

But what worked for China and why?

Indian markets shifted from 3G to 4G quite rapidly with the support of Reliance Jio which changed the playing field for mobile manufacturers completely. A company like Micromax found its with a large stock of 3G mobile phones which it was not able to sell off given the sudden fall in demand for 3G smartphones. As per Vikas Jain, Co-Founder of Micromax Informatics, Ltd. his company’s inventory which was meant for 65-70 days was now extended to 365 days leaving him with piled up stock of 3G smartphones unsold without a target segment.

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What really proved to be of strategic advantage to China was the fact that Indian mobile phone manufacturers had a lot of pre-determined commitments for 3G phones in China while Chinese companies like Xiaomi were themselves busy in manufacturing 4G mobile phones and selling them. So, when Indian markets faced a demand surge for 4G mobile phones and domestic brands couldn’t cater to them, China stepped in quite wittingly.

China not only took control of the market in terms of product features like 4G and VoLTE enabled phones but also burnt significant amount of cash to position its products in the eyes of the customer. Chinese companies like Oppo and Vivo used to pay retailers money to even redecorate their stores to give their products prime positioning and favoured those retailers that agreed to sell their phones exclusively.

As per a distributor based in Gurgaon, a source of The Mint, Oppo and Vivo were not only paying for IPL advertisements and sponsoring the Indian cricket team but they were also extending commissions to distributors based on the volume of mobile phones sold. This model is in direct contrast to the Samsung model which paid distributors’ commission on total value of products sold. By changing this calculation of commission, the Chinese companies incentivised distributors to sell a large number of devices irrespective of its cost. Each phone would generate a commission of Rs. 150 up to Rs. 200 depending on the model of the phone being sold.

This model gave way to grey-market mobile sales which lead to distributors selling up to 4 lakh units to the grey market dealers during peak times of Diwali, Dhanteras etc with close to zero margins. This incentivized distributors to favour selling these companies’ products over those of the domestic companies or other brands. Hence, we started losing both shelf-space, visibility and demand for our products.

This had a vicious impact on our cash flow positions as no store sales meant so no revenue, no revenue meant no payments for the companies commitments which further meant no ability to manufacture newer 4G enabled smartphones thus leaving us in the lurch. Chinese companies on the other hand due to their good control over the smartphone value chain in India, got extended lines of credit and were able to stock up much more to cater to the rising demand amongst Indian consumers for 4G smartphones.

Another reason that aided the quick growth of 4G enabled smartphone sales at the time was the easy financing models that came into the market which gave customers the option to buy now, pay later. This aided customer purchases and any customer when given the choice would prefer the latest market offering rather than an outdated one So, this propelled the sales of 4G smartphones from Chinese brands further.

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The Interplay of Demonetization and Chinese Dominance:

With demonetization came a sharp change in consumer’s buying behaviour. In India, buying a smartphone is still considered as an investment rather than a routine purchase specially in the middle income segments of the economy. These consumer segments were arguably the worst hit by demonetization leading to wave of uncertainty that influenced all purchase decisions of customers at the time.

So, China knowing that Indian consumers were highly price sensitive started pricing its products at margins as low as just 5%. For example, Xiaomi. The CEO Lei Jun said that if their company makes even 5% margin from their hardware business then he would want to pass that benefit onto the customers. Indian companies at the time could not afford to compete at these price points due to the cash crunch and operational commitments as discussed above. This left the Chinese smartphone companies an unaddressed Indian market to exploit and take over.

Currently, Chinese smartphone makers have captured approximately 73.6% of India’s smartphone market in the fourth quarter of 2019 as per data from the IDC. These companies have witnessed a total of 22% growth in market share YOY.

What Now?

The Indian companies like Micromax have been selling other electronic appliances like TV’s which have a reported sales figure of around a million units over 2019. Other companies like Lava have decided to cater to the feature phone market in tier 2 and tier 3 cities as these customer segments are devoid of Chinese dominance except for Transsion which is the market leader in that segment.

Chinese companies too have buckled up and have started to diversify their interests and are aiming to now target the automobile sector and have already showcased Chinese capabilities in the Auto Expo 2020 that took place in February earlier this year.

Do you think Indian smartphone manufacturers can get rid of Chinese dominance and re-discover their position in the Indian smartphone market?

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