Micromax : Nothing micro about it

ALTHOUGH he’s never driven a truck in his life, Rahul Sharma’s past,
present and
future is memorably connected to a truck battery. In August 2007, in
the powerless
village of Behrampur in West Bengal, Mr Sharma saw an Airtel PCO
being powered
by a truck battery. Every night, the PCO owner would lug the battery
12 km to an
adjoining village on his cycle, charge it there overnight, and lug it
back to Behrampur
in the morning.

In late 2007, when Micromax decided to

diversify from PCO devices into the
business of mobile handsets, the PCO owner
of Behrampur was the inspiration for its
first product. The company designed a battery
that could last 30 days on a single
charge and give 17 hours of talk-time.
Micromax asked vendors in China and Taiwan
to manufacture 10,000 handsets with these
battery specs. The X1i, priced at Rs
2,249, was an instant hit in rural India, and
Micromax’s handset business was on its
way.
 In just 30 months, by staying with this
philosophy of making handsets that
address specific user needs and are also
affordable, it’s come a long way. Says
Rajesh Agarwal, one of the four promoters:
“We sell a million handsets a month now.
With a market share of about 10%, we are a
close second to Samsung.” There are
many views on that 10% figure. Citigroup put
it at 10% in February, a top executive
of a rival says it’s 8%, IDC India says it was
4.8% in 2009. According to IDC, Nokia
had a market share of 54.1%, Samsung 9.7%
and LG 6.4%.
Never mind the quibbling over numbers. Fact
is, the company is mounting a
serious challenge to the slippery No. 2 spot in
the mobile handset business. In the
past four years, the second spot has been lost
by Motorola, Sony Ericsson and LG.
Samsung has held it for the past 24 months,
but Micromax is catching up. “We will
be No. 2 by the end of this fiscal,” says
copromoter Vikas Jain.
PHONY JOURNEY
 30-DAY BATTERY PHONES

April 2008: Rs 2,249; Now: Rs 1,999 The

X1i, Micromax’s first phone, had a battery
that could give 17 hours of talk time and go 30
days on a single charge.

DUAL-SIM PHONES

July 2008: Rs 1,999-12,999 For those who

want two numbers but one handset

PHONE-CUM-REMOTE

May 2010: Rs 2,999 A mobile that can switch

TV channels and even change the AC
temperature
PHONE-CUM-STEREO

Feb 2010: Rs 4,999 With 3D surround sound,

fed by Yamaha and Wolfson
BLING
Feb 2010: Rs 5,500 A big hit with women,
comes with Swarovski embellishments
 IN THE WORKS
A mosquito-repellent phone. A phone that can
be used as a computer mouse
Micromax focuses on being different
MICROMAX, its promoters say, posted
revenues of Rs 1,600 crore and a net profit of
Rs 150 crore in 2009-10. Early on, they
decided there was no point in aping the
leaders. “We had two options — compete on
price or be different,” says Mr Jain. “We
decided to be different.” In its case, different
meant a longer battery life or a phone
that had two SIMs.
Micromax has taken the utilitarian
philosophy to the mid- and high-end also, with
a
reasonable degree of success. But here’s
where it gets tougher. Says Romal Shetty,
national telecom head, KPMG: “In the mid-
and high-end, customers expect certain
service quality. Micromax’s challenge will be
to achieve such quality standards, and
convey the same through branding and
positioning.” Asks Ajay Parmar, head
(institutional research), Emkay Global
Financial Services: “Their biggest challenge
will be brand stickiness. Will their existing
customers buy Micromax again?”
Before it found its centre, Micromax dabbled
on the fringes, changing its identity
repeatedly. Rajesh Agarwal started Micromax
in 1991 to distribute IT peripherals.
One of his neighbours in Pitampura, in West
Delhi, was Rahul Sharma. In Delhi’s
Jamia Millia University, Mr Sharma was
friends with Sumeet Arora, a junior. And one
of Mr Arora’s friends was Vikas Jain.
It would be eight years before they would
come together to do business. After
college, Mr Jain moved to the US and joined
GE, Mr Arora joined Blue Star and Mr
Sharma worked with an auto components
company called Bundy Engineering. In
1999, all three quit their jobs to join Mr
Agarwal. They set up Micromax
Technologies, an IT education company
dealing in e-commerce and embedded
technologies.
The four divided responsibilities on
functional lines, which hasn’t changed since.
Mr
Jain, 35, is the business director; Mr Agarwal,
45, managing director, handles
finance; Mr Sharma, 34, executive director,
oversees marketing; and Mr Kumar, 35,
is the chief technology officer. While they
don’t say how the equity is divided among
the four, they do say theirs is an easy
relationship.
Their big break came in 1999, when Nokia
signed them up as an all-India
distributor for machine-to-machine devices —
essentially landlines that were
customised to run on a mobile network. They
were used by call centres and PCOs. By
2004, Micromax had revenues of Rs 10 crore
and employed about 80 people. It was
installing about 10,000 Nokia 32s a year in
India, making it the largest Nokia
distributor worldwide for these products. But,
overnight, it all threatened to come
apart.
The same year, Nokia decided to exit this
segment. “As much as we were shocked,we
decided to turn this into an opportunity,” says
Mr Agarwal. So far, they had beencustomising
a Nokia instrument. Now, they decided to
build and sell the whole thingthemselves —
that too 40% cheaper than the Nokia 32.
Airtel was its first client. Against the 10,000
devices it sold for Nokia in a year,
Micromax was selling 35,000 of its own
within a year. Business peaked in 2007, with
sales of 250,000 devices. Then, the mobile
revolution took over. Overnight, again,
Micromax faced extinction. Again, Micromax
converted the threat into an
opportunity.
Six months on, it too hopped on to the
mobile bandwagon. But it went about the
business differently. It stressed on product
innovation for the low-end, price-
conscious user. So, it went rural. It worked.
Says Mr Sharma: “Customers were
willing to pay a premium of Rs 200 for the
X1i.”
Then, instead of manufacturing itself,
Micromax sourced its handsets from 12
factories in China, South Korea and Taiwan. It
was model-based sourcing: Micromax
would come up with an idea and give it to the
factory best placed to deliver it. This is
different from, say, Nokia, which would be
compelled to stay in-house or go to a
vendor-partner, even if another vendor had
better capabilities to execute a particular
model.
Micromax also looked at distribution in a
new way, standing by its cash-only
model. While rivals offered a 60-day credit
line, Micromax refused to give credit. “If
the distributor does not buy your handsets,
there is no pressure on him to sell
them,” explains Mr Agarwal. At the same
time, Micromax offered to supply
distributors regularly to keep inventories
down. So, distributors didn’t have to shell
out large amounts upfront or have a lot of
money locked in. “If we give a distributor
1,000 handsets and ask him to sell them over a
month, he will worry about his daily
sales,” says Mr Agarwal. “But if we supply
less, demand will be close to equal or
more than supply.”
 Micromax has 34 super-distributors across
India. Unlike a Nokia or a Samsung, it
doesn’t interact with the 500-plus sub-
distributors. Neither does it intervene in how
the super-distributors sell or place the
products. “We offer our super-distributors a
15% margin, which is higher than the industry
average of 6-10%,” claims Mr Jain.
Some of Micromax’s competitors, who do not
want to be named, say the company
fares poorly on after-sales. “It addresses a
segment that is comfortable with the use-
and-throw philosophy. Also, the company’s
claim of 450 service/care centres are
inflated,” says an executive with a rival
telecom firm. Nokia and Samsung have 900
and 800 service outlets, respectively.
The Micromax promoters refute these charges.
On product quality, Mr Agarwal
says: “The plants we are associated with also
manufacture handsets for all global
majors. They don’t apply different standards
while manufacturing for us.” He also
points out that their phones sell well in rural
India, where users demand longevity.
Micromax is investing Rs 100 crore to set up a
manufacturing plant in Baddi,
Himachal Pradesh, to ensure its outsourcing
model does not cause supply-side
uncertainties. Production is being scaled up
from 50,000 units per month to 500,000
units a month by March 2011.
In December 2009, US-based private equity
firm TA Associates invested $45
million (about Rs 200 crore) in Micromax for
a minority stake. While Micromax has
not specified the exact holding, ET has
reliably learnt that TA picked up 15-20%.
That would value Micromax at Rs 1,000-1,200
crore. It has also learnt that the
company is looking at an IPO, at a valuation
of Rs 3,000-3,500 crore. While industry
and banking executives indicate a mop-up of
around Rs 600-800 crore, company
executives refused to comment.
Micromax has already used the TA funding
to expand to neighbouring countriessuch as Sri
Lanka, Bangladesh and Nepal. The company
now plans to expand toMiddle East, Africa
and Latin America.
 Over the next six months, Micromax plans to
launch four handsets a month.
There’s a mosquito-repellent phone, which is
designed to emit frequencies to repel
mosquitoes, a phone that doubles up as a
computer mouse, and a waterproof one.
The truck-battery philosophy still rules at
Micromax.