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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 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

We wanted to create and become leaders in a new vertical. a professor of marketing at Wharton." For instance. a low-end smartphone. not the price." he states.FM radio. caters specifically to the price-conscious segment with phones that cost as little as US$35. Nokia recently launched a smart phone priced below US$130 (with plans to go even lower) and Vodafone intends to begin selling a handset for US$16." states Vikas Jain. for example. director of Byond Tech. "If a price war was my approach. according to the Cellular Operators Association of India (COAI). it was a virgin market dominated by 'Tier A' brands. "When we entered this space. "More than 85% of handset sales in India are in the price range US$35-$75. But the big boys aren't too far behind. Gandhi's BY888 model. numbers the company attributes to better pricing." Solar Power. Micromax. camera. MP3. That's a big gap. established players offered phones with the six key features -. Samsung's Guru series. costs about US$100 whereas "any of Nokia's E-series phones with similar features will cost more than US$300". The increase in India's value-added tax has compelled players to further cut prices in some states." Jagmohan Singh Raju. Broadening your product line is not a price war. Now new players are offering similar products for US$25. "The real challenge here will be the innovation. and is developing phones that also function as . Pune (Maharashtra)-based Byond Tech derives as much as 75% of its sales from rural markets. they will feel the pinch. However." notes Sunil Dutt. offering phones that are priced at no more than US$300. 70% of our sales come from rural areas. it's not surprising that most brands old and new report a substantial percentage of sales from those regions." he says. offers a lower-priced device priced for non-urban markets that can also be used as a universal remote or a gaming device. "Earlier. Today. "Prices of phones fall quite rapidly anyway. but we want to draw the customer by highlighting the product. Bluetooth. video and expandable memory -. president of HP India's personal systems group. But price is exactly the kind of differentiation that Micromax's Jain tries hard to avoid. "There have been some Indian brands that function purely on a price play. Many emerging vendors are attracting rural customers like Menaria by keeping their devices affordable. which accounts for approximately 35% of its sales in India. With mobile penetration in rural areas doubling to 20% in 2009. "between the established players and the new ones there is still a 30% gap in the price on a feature-to-feature comparison. The fact that [multinational corporations] can offer cheaper models doesn't mean they are going to lower the prices of their other phones. I would address the 35% of the market segment where Nokia adds most of its customers with lower-priced handsets. points out that brands will not win additional market share purely based on the cost of their products. co-founder and business director of Micromax.62% market share and Samsung is second at 8%.for US$75 to $100. 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." says Shripal Gandhi. So even if the big players lower their prices.

" notes Sudhir Kumar. innovation cannot be restricted simply to the product. they are very 8-10% increase in spending over last year. Other features include multiple address books (for shared users). built-in flashlights (a lifesaver during frequent power outages). mobile service providers in India do not offer handsets as part of calling plans." Large sales volumes make it easier to negotiate with insurance providers. contains only dual-SIM phones. It has more awareness and customer trust and that is primarily why . larger displays. national sales manager for telecommunications at Intex Technologies.including traveling road shows that offer phone demonstrations.are the most effective way to raise brand awareness and build equity. "In rural areas. The intense competition among service providers has resulted in increasingly lower call rates and. according to Ranjit Yadav. barring one. with the changing demographics of the market for mobile phones. regional language interfaces and pictorially clear icons to simplify use for consumers who can't read or write well. Companies also must alter their traditional marketing methods. 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. "Our entire [product line]. 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. The Indian market has been a unique learning ground for vendors of all sizes. but if it is available free of cost. "Nokia's USP [unique selling point] is simply that it has been in the market for the past 10 years. Samsung India will this year spend more than half its total marketing budget on BTL activities -. Nokia's Life Tools gives farmers crop prices and weather predictions for a nominal monthly fee. which also includes a "mobile prayer" feature that provides hymns and wallpapers for different religions. and expandable memory. And with Nokia not having dual-SIM models. based on] lowering call rates. people are not inclined to insure themselves. With the increased focus on regional and smaller markets. Samsung has launched the world's first solar-powered phone.mosquito repellants. Companies developed their product lines knowing that the phones would be used for a lot more than just talking. "We are developing a concept where. dust and dirt-resistant keypads. he can get insurance for the handset and for himself. Emerging vendors are also discovering that BTL promotions -. Additionally. unlike in the United States. Mobile devices came equipped with long battery life (as much as 30 days). "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. the company is planning to bundle insurance services with handsets.which allow the use of two services in the same device -. Those two factors have made phones that can hold two subscriber identity module (SIM) cards -." However. there is not much competition there from them. performances by local singers and opportunities for face-to-face interaction with potential customers -.a major volume-generator for emerging vendors. the company's director of IT and telecommunications. once a person buys a handset. he adds." Jain states. loud audio and video players (because of noisy environments).

" Wharton's Raju notes." Customer retention. But backend support. these sums represent a significant investment. lower costs involved and healthy inventory turns and returns on capital. "the brands need to focus on the return on investment they are ensuring them.Nokia sells.000 outlets and is already selling more than a million units a month." Even established players are rethinking their strategy. is also a critical part of distribution. emphasis on research and development.000. "Good service is how [companies] can build their brand. While most companies are using conventional models to bring their phones to the market. for him the new brands are all "China ka" (from China). could not specifically identify Micromax as his cell phone brand. for example. with sales of 150. For companies that did not exist two years ago. Jain says his firm bills its main distributors every three days. Micromax and Karbonn advertised heavily during the recently concluded Indian Premier cricket league. But Dutt believes that. they should upgrade to the next version of the same brand. It will be more of assembling as a way of getting certain tax advantages. But he could differentiate the device from others based on the company's popular television commercial featuring leading Hindi film actor Akshay Kumar. Many companies plan to set up their own plants by the end of this year. That's a bigger game changer. Some companies are using famous faces to help build that kind of visibility. and leaner supply chains. "This means [the distributor] can rotate his [or her] capital many times each month. there is also a significant amount of experimentation within that framework. Building awareness requires deep pockets." states Deepesh Gupta. Even a smaller player like Intex. In addition. Micromax has 55. Videocon features prominent cricket players in its advertisements. experts say it makes sense for new vendors to establish their own manufacturing centers.000 units a month. they shouldn't [want to] switch to Nokia. including after-sale customer service. most brands are currently launching at least two new models each month. managing director of Zen Mobile. Against that backdrop. Menaria. These people are not actually going to be manufacturing." he explains.000-16. where 10-second advertising spots cost as much as US$11. The volumes don't make it viable to manufacture here. has 425 service centers and invests continually to maintain healthy sales to service center ratios. But Zen's Gupta warns that "such claims are easy to make. will also involve greater customization. "When people are buying their second phone. the new players are enjoying healthy gross margins not only because of their volumes but because of their sourcing benefits. instead of focusing on the percentage of gross margin paid to distributors. whether it's Nokia's sales vans that drive through rural towns or Samsung's e-kiosk sales outlets. however. Marketing budgets for the current year are at US$20 million at Micromax." With ." Margins Still Comfortable But distribution is perhaps the most consequential variable in a fiercely competitive market. however. enabling them to replenish their inventory twice a week. US$10 million at Byond Tech and US$7 million at Zen Mobile. Dutt notes that the companies can afford to invest heavily in marketing because "at this point. Commissions vary from 2% to 10%.

" notes Samsung's Yadav. it's not like we're selling at a loss." It will be interesting but certainly not easy. "The boys are playing these days. your overall figures are comfortable enough for you to move forward. when the portfolio is as balanced as ours. As Intex's Kumar says." Observers say the longer-term outlook for India's handset industry in India however is intense competition and further consolidation. "We work on a margin of about 10%. the men have yet to come. our volumes have increased. Even Jain defends Micromax's healthy margins.increasing competition and thinning margins. But company officials downplay any pressure they face in this area." . second. yet "garnering a cumulative market share of 50% in a year. volumes will be crucial for mobile handset manufacturers to survive. "First. Videocon D2H CEO Anil Khera envisions only a few Indian players emerging as strong brands." he stresses. citing private equity firm TA Associates' recent purchase of a 20% stake in his company. "Margins are not being squeezed. and third.