Maxx Mobile: The Shanzhai Warrior

by Rohin Dharmakumar Ajjay Agarwal's Maxx Mobiles is among the clutch of upstarts that used off-the-shelf technology to erode Nokia's dominance in India's mobile phone market. Will the tribe survive the perils of scale? + Comment now Email Print

Image: Vikas Khot Ajjay Agarwal I n 1992, Nokia — already a $3.4-billion company with over 26,000 employees — launched the world‘s first GSM phone and made Olli-Pekka Kallasvuo executive vice-president and chief financial officer (He become its CEO later). The same year, 6,000 kilometers away in Mumbai, the Children‘s Academy school decided to fail 14-year-old Ajay in 9th standard. His marks were too poor and Ajay‘s teachers wanted him to repeat a year in the same class. But the boy had other plans. He simply dropped out. ―I knew I was average at studies and didn‘t see the point in continuing. But I was very fast in calculations and was passionate about large volumes,‖ he says. Soon, he joined his father‘s electronics trading business, diving headlong into a world filled with cordless phones, calculators, air-conditioners and televisions on the one hand, and

collectively selling over 2 million phones every month. the Indian government banning cheaper grey market phones from China that did not have IMEI numbers and the rapid addition of new mobile connections in India brought on by the entry of newer mobile operators.and triple-SIMs. Today the 33-year-old with two Js is giving hell to the company led by the man with two Ls in the world‘s fastest growing mobile market. MediaTek‘s software is known as the platform of choice for hundreds of electronics companies that sell cheap-yet-functional knock-offs of well-known products. phones claiming 30-day standby or AAA-batteries. ―I would sell off entire consignments meant for retailers to wholesalers.‖ says Naveen Wadhera of private equity firm TA Associates that has invested $45 million in Micromax – the largest of the domestic brands. Overnight. BlackBerrys and Samsungs of the world to a commodity available to anyone with a ticket to Beijing and a cheque.5 percent. MediaTek realised quite early that the huge difference between manufacturing costs and selling prices for well-known phone brands — like Nokia — was not sustainable. Samsung and BlackBerry. these newcomers have gone from under 1 percent of the Indian mobile handset market to 17. it‘s very hard to find a feature that can‘t be replicated by the domestic guys. brand or regulatory requirements. commissions and profit margins on the other. Ajjay Agarwal‘s Maxx Mobiles is now the fifth largest mobile brand in India with a 4. And he‘s just getting started. So it cobbled together an integrated design-plus-hardware offering that allowed upstart entrepreneurs to literally dream up their own phone designs by mixing and matching off-theshelf components. My father would scold me for that.duties. just because I wanted to earn back the money quickly. Unrestricted by global supply chain. ―When we do the things we plan. GSM- . Today. they could create phones for customer needs that a big company like Nokia would consider too niche or transient. he added a second J to his name following the advice of a numerologist. people will be shocked. or Shanzhai. But an equally important factor was the growth of a Taiwanese firm MediaTek that offers a platform for these brands to create ever cheaper mobile phones crammed with features.‖ he says. Micromax. becoming ―Ajjay‖. The Band of Upstarts The rise of local brands like Maxx. Dual. Spice and Karbonn is arguably one of the fastest shake-ups the world has seen in a category that was both mature and dominated by well-entrenched brands like Nokia. In fact. Their rise was facilitated by a combination of domestic factors: The reduction in custom duties on imported phones to almost zero.‖ he says. taxes. ―We‘ve moved away from a world in which the global phone companies romanticised their technology edge over smaller or domestic competitors.7 percent market share. In about two years. the pendulum swung so far that innovation began to be led by the newer players. In 2006. mobile phone technology went from being a differentiator for the Nokias. In China.

then a second one a year later in Haridwar. ―Buying a phone today is almost like buying a disposable razor. after importing mobile phone batteries and chargers from China for seven years. earning him a post-tax profit of nearly Rs.CDMA combos.5 years it will become obsolete and something newer.‖ he says. The success of his mobile phone business is even more rapid. ―Why should I buy a higher-priced Nokia if I know in 1-1. ―The stuff I was importing from China had quality issues. founder of the $500 million private equity fund CX Partners that is now studying a few of the new Indian players. 12 megapixel cameras. sleeker and with better features will come around? Why do I make an investment in an expensive product?‖ 0-100 in 2 Seconds In 2004. 80 crore on revenues of Rs. hurt me. Today. . Agarwal bet against the trend and decided to start manufacturing them in India. He claims that this year he‘ll more than double those. which because of my warranty policy. Agarwal‘s three factories with a combined capacity of 80 million batteries and 37 million chargers have made him the largest player in that space. alphabetically-arranged full keypads… Name it and some entrepreneur has already launched it. He opened his first factory in Mumbai.‖ says Ajay Relan. followed by a third in Mumbai in 2009. 440 crore last year.

. It is a testament to the Shanzhai ecosystem around MediaTek in China that within just six months. Agarwal had put up company-owned branches in 21 states in spite of selling just 3.000 phones in April. betting on the cash flows and distribution reach provided by his accessories business as leverage for growth. He went against the advice of his team members on investing so aggressively before having the revenue to sustain it.Infographics: Hemal Seth In April 2008. By June of 2009. he started planning his move into the Indian mobile handset market. Agarwal had 11 models of ―Maxx‖ branded phones which he started selling through his accessories distributors in Mumbai.

95. Back in India many well-known private equity funds are currently evaluating Maxx. 2. according to IDC India. At one point the company had an unheard of market share of nearly 70 percent in India. The newer brands also turned one of Nokia‘s strengths — a massive distribution network driven by large volumes — on its head. with new outlets selling their phones coming up every day. ―so I took the risk. the average volumes per store started falling. . He wants to take that to Rs. These phones that have been around since 2007 became one of the most in-demand features during the last two years as Indian mobile users tried to profit from the tariff wars between operators without having to change their number frequently. like his bigger and better-known competitor Micromax did earlier this year. which was the first ―Nokia Priority Dealer‖ and ―Nokia Care Center‖ in north Delhi. But thanks to a combination of lethargy on its part and nimble-footedness from the newer brands.000 in June.000 mobiles in April. it was a risk worth taking. In hindsight. In March. the big daddy of mobile phones. And if they can hitch a ride on his journey to make some money in the process. Agarwal is turning to private equity investors. a director with a Delhi-based distributor of mobile phones.‖ says Sanjeev Naswa.000 in August and 300. Digilogic Infosystems. ―Nokia became an over-distributed product. He compounded that by buying expensive airtime during the Twenty20 cricket World Cup to air his as-yet unknown company‘s first advertisement.‖ The expansion cost a lot of money.‖ he says. he took in a $20 million investment from Singapore-based Star Holdings. His sales began to zoom shortly thereafter. A Giant Stumbles Much of the market share gained by the new mobile handset companies in India has come from the leviathan Nokia. As the number of outlets selling Nokia phones exploded. Because making money from Nokia phone sales had always been a volumes game – the company usually gives 2 percent of a handset‘s price as ―margin‖ to a distributor or retailer — this hurt many phone retailers a lot. Research firm IDC India says Maxx had a 4. Maxx‘s revenue during that period was Rs. that share is down to 54 percent.7 share of the January-March 2010 mobile handset market in India of over 36 million handsets.000 by the end of the year. 3. ―Many of them were forced to become multi-brand outlets while the quality of newer dealers went down drastically. To do so. including its accessories business. From 3. 454 crore.‖ says Naswa.000 crore by the end of the year. Agarwal went on to sell 50. The best example of its inability to react to changing market conditions can be gauged from its dual-SIM strategy. scratching their heads to understand how a 14-year old school dropout built a Rs.―I believed that we should hit pan-India. says Agarwal. The visibility of the advertisement and an aggressive reach-out from his staff helped Agarwal sign up nearly 500 distributors in just two months.000-crore business so quickly. Yet Nokia took till June this year to introduce its first dual-SIM phone.

its volumedriven sales organisation tacks on additional sales targets in the process. which Nokia will address through its services like Ovi and Mobile Money. it is unusual that the mobile phone market is crowded with so many manufacturers as it is in India. ―Though that hasn‘t happened in other countries. distributors and ―super stockists‖ will get 6 percent and 2 percent respectively. Samsung and LG – have their own local manufacturing. . Even when Nokia tries to counter such strategies by offering higher margins. causing many of its consumers to turn to the grey market.In contrast. scale being the first. ―The number of mobile email users will increase from 7-8 million currently to about 130-140 million by 2013-14.‖ he says.‖ says Naswa. all of them will not survive. They are right. He does admit.‖ says Naveen Mishra. In addition. the head of its operator channel in India. something it took time in responding to. ―There are 143 mobile phone companies in India. "Though in the short term the market may keep growing in leaps and bounds. there may not be as many players in the future. Only a handful are likely to make it through the inevitable melee that will play out over the next couple of years amongst these 140. a Wi-Fi enabled QWERTY phone it plans to launch in September. The three multinationals – Nokia. V. Four characteristics are likely to define the survivors. But Nokia is fighting back now. Ramnath. email or banking on mobile phones will be examples of this shift. while the remaining – 37 foreign companies and 103 domestic ones – are all merely importing and selling phones in India.‖ says Agarwal. analyst with IDC India. the newer brands offered margins ranging from 10 to 20 percent of a phone‘s value to dealers. ―But the market is moving away from handset features to handset plus services. Of course. Thinning of the Herd Globally.5 percent across different states. though. Maxx will offer its dealers 20 percent margin on the sale of each MQ868. In his opinion.‖ he says. ―Their revised sales targets become so aggressive that you cannot make more profits even with higher margins. that Nokia‘s competitors also benefitted from the dual-SIM trend. says the last year was an aberration caused by the entry of newer mobile operators which gave consumers a significant tariff arbitrage. For instance. You will need to evolve. Ramnath also blames arbitrary valued added tax (VAT) hikes ranging from 1 to 8. It is ‗What else can I do beyond voice and SMS that can impact my life?‘‖ he says. the Chinese rebranded and unbranded phones benefited from it.

‖ says Wadhera. supply chain purchasing power with manufacturing partners. Agarwal says he has spent Rs. primetime ads will be run and crores will be burnt. branding and ad dollars that stretch across a larger base and the ability to sustain the logistical cost of a national footprint. stable margins.Infographics: Hemal Seth ―The benefits of scale are many – the best distribution partners. Building strong brands usually takes plenty of time and money. Stars will be signed on for endorsements. Reaching that scale – more than a million phones every month at the minimum – will require customers to ask for specific brands at mobile stores instead of being merely sold whatever brand earns the retailer the most margin — a combination of pull and push. 50 crore this year on advertising . companies are doing the next best thing – pouring money into advertising. as the industry terms it. cricket tournaments will be sponsored. But since time cannot be bought.

The most critical of the success factors is designing the next generation of phones that will continue to keep the cash registers ringing. ―The government has been threatening us with a 20 percent safeguard duty on imported phones if we don‘t manufacture locally.000. The push for local manufacturing is being mandated by the union communications ministry which wants to create a domestic manufacturing ecosystem to generate additional jobs and taxes while minimising the so-called security threat from phones made in China. says he too is evaluating local manufacturing. It‘s also working closely with chipset makers to tightly integrate their product features into its phones. Agarwal. is introducing Google‘s Android-powered smart phones in September starting at a price point of Rs. With his three plants already churning out mobile batteries and chargers. Which is why. Maxx alone has introduced 45 models in less than two years of which 25 have been phased out. but if they don‘t entrench themselves through product differentiation then over time they will lose their edge and become me-too brands. or ODMs (nobody else would have access to their designs). Ironically. and he‘s got a long way to go.‖ says Agarwal. with entire product lines being replaced every six months. Recently. it hired the head of R&D from a global company to steer its own efforts. . having hired KPMG to do a feasibility study. ―While the masses were okay with a phone with a flashlight 18 months ago. one of the co-founders of rival Micromax.this year alone. there is even talk of a 31st December 2010 deadline. In short. From being a ―fly-buy‖ phone brand. with another 27 in the pipeline. provided prices go down further. today‘s aggressive challengers will need to morph into tomorrow‘s defensive incumbents. the survivors will also end up becoming more like the incumbents they were trying to dethrone for so long – investing significant amounts of money to put up their own manufacturing plants and on R&D to create truly differentiated products. ―Local manufacturing is an opportunity Micromax is exploring aggressively as it allows for both redundancy and nimbleness in the supply chain.‖ says venture capitalist Relan. meanwhile. that‘s not even playing stakes anymore.‖ says Wadhera. he says. sustaining the breakneck pace of innovation the industry is used to. He believes that half the Indian users will switch to such smart phones in the next couple of years.‖ says Wadhera. he is planning on adding a new one for making handsets too. will become impossible. ―Today Micromax and Maxx are brands. After a while. Vikas Jain. In fact. 8. Micromax today claims to have exclusive deals with Chinese original design manufacturers. R&D will become Micromax‘s primary engine of differentiation.

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