Local call

Arunima Mishra / New Delhi July 26, 2010, 0:05 IST

Indian handset brands have taken on their multinational rivals. Can they survive in the
long run?

The unthinkable has happened. In less than two years, a clutch of Indian brands like
Micromax, Spice, Karbonn, Zen and Lava have snatched 14 per cent of the mobile
handset market from multinational corporations. This, mind you, has happened when the
market has expanded from about 8 million handsets per month two years ago to 10
million a year ago and almost 11 million now. And their share could grow further in the
days to come: In China, local brands have around 20 per cent of the market. So there is
headroom for them to grow.

Some of them have begun to attract talent from top-notch institutions like the Indian
Institutes of Technology, Indian Institutes of Management and Indian School of Business.
Their advertising budgets run into hundreds of crores of rupees, and well-known
Bollywood celebrities endorse some of these brands. Almost all of them want to replicate
their success in South-East Asia, Africa, West Asia, South America and East Europe —
such is their confidence. Rivals from overseas have been left with no option but to give a
hard relook at their business plans for India.

Of course, there are no entry barriers in this business — one reason why private equity is
not yet convinced that there is a great business model in the making here. Indeed, over 50
brands have joined the bandwagon in the last few months. Handsets can be sourced from
China for as little as $16 and brought to India after paying an import duty of just 1 per
cent. Even the cheapest handset offers a net profit margin of Rs 200. If you manage to
sell 50,000 handsets, you could make Rs 1 crore in a month — not bad at all. No wonder,
Micromax and Lava claim to be profitable already. (They refuse to disclose numbers
because they are closely held.) But experts reckon increased competition could bring the
profit margins of Indian brands down from 10 per cent now to below 5 per cent in a
year’s time.

With the recent moves against deployment of Chinese telecommunication equipment in

border areas, some have started to explore the possibility of manufacturing in India. Will
they then be able to match Chinese prices? Also, there is no data on the repeat purchase
of these brands, which could be a proxy for measuring consumer satisfaction. Karbonn
Mobiles Director Shashin

Devsare says that the warranty on Karbonn handsets is the same as that on multinational
brands. It is perhaps too early to pass the verdict on quality. But unless that data in
available, it is difficult to assess if consumers are satisfied with these brands. Still, their
game plan seems to have delivered the goods so far.

Price pull
Their biggest USP, of course, is price — 50 per cent below comparable models of
multinational corporations. Micromax (4.1 per cent market share in 2009-10, according to
Voice & Data’s annual Indian Telecom Survey) sells from Rs 2,000 to Rs 5,000, Spice
(3.9 per cent share) from Rs 1,500 to Rs 16,000, Karbonn (3 per cent share) from Rs
1,800 to Rs 6,000, and Lava from Rs 1,400 to Rs 6,000. Most of their sales are bunched
in the Rs 2,000 to Rs 3,000 band. All of them import from China, where almost 60 per
cent of world handsets are produced. Low overheads and lean organisations ensure that
not much gets added to the price.

Curiously, none of the advertisements put out by these brands talks of the price. Pundits
would say this is the surest sign that these are all inherently discounted brands. But the
companies look at it differently. “We purely talk about our product package and our
positioning. Price happens to be the final delight that the customer gets when he buys our
phone,” says Micromax Business Director Vikas Jain. The fact remains that their prices
are the biggest pull. Till Micromax came out with its Qwerty for Rs 5,000, these phones
were not available for less than Rs 10,000. There’s more to come. Jain now plans to
launch 3G (third-generation) phones for less than Rs 4,000. Lava Co-Founder & Director
SN Rai, who earlier worked with LG, wants to launch smart phones as well as 3G
handsets with price tags of less than Rs 6,000.

Instead of attacking the metros, where the market is now all about replacement and
upgrade, these brands have gone to smaller towns and even villages first.

This is smart. Not only do multinational corporations have lesser brand recall there, the
customers too are extremely price and value conscious — just the right market for value-
for-money products. “Our target audience has an annual income of Rs 36,000, and is in
the age bracket of 18 to 33. He loves Bollywood and adores Mahendra Singh Dhoni,”
says Rai. Lava and others plan to move to the metros once they have got the acceptance
and volumes in the upcountry markets. What has also helped is that homespun brands
offer their dealers profit margins of up to five per cent, which is almost double of what
multinational corporations offer. This shows in their performance outside the metros.
Thus, Spice claims to have a share of 18.2 per cent in Rajasthan, next only to Nokia, and
10 per cent in Madhya Pradesh. MVL, the latest entrant, plans to hold road shows in
villages and sell through post offices.

Tech play
With production and distribution taken care of, the homespun brands have focused on
technology (features, applications and so on) and brand-building. Most of them have got
features like dual SIM-card slots, long-life batteries which suit fine Indian conditions like
patchy network coverage and erratic power supply. Micromax has introduced a handset
that can also work as a universal remote and another one that has an in-built mosquito
repellant. Most of these features can be bought off the shelf. The companies need not
reinvent the wheel. For instance, according to Jain, the technology for a universal remote
control is available for as little as $4-6 (less than Rs 300). Had Micromax built the
technology in-house, it would have stretched the go-to-market time. The trick is to
identify the right feature and application for the Indian consumer.

Lava, on its part, has set up a team of 150 people to develop software applications. Not
only does it help the company score points with consumers, it also keeps costs low.
“Almost 25 per cent of the cost of the handset is the software,” says Rai. Lava is working
closely with chipset manufacturers who use open-source software. “This leaves the space
to write your own software in the middle,” says Rai. One application Lava introduced
was currency reading, given the rising threat of fake currency in the country. “We bought
this technology and integrated it into our handsets. Customisation has been the key for us
to open up the market,” he adds.

But this is a low-end game that multinational corporations can perhaps play better than
Indians. Indeed, features like dual SIM-card slots and long-life batteries no longer remain
a USP. Whoever stays ahead of the curve will win the game. Micromax thus has 16
products under development, and the pipeline of products for the next 10 months has
been finalised. Lava wants to bring down the product development cycle from five
months to three months in one year.

Marketing mantra
The Indian brands have quickly realised that only two things sell in India: Bollywood and
cricket. All of them have quickly latched on to the mantra. Micromax has signed on
Akshay Kumar, Spice has got on board Sonam Kapoor and Zen (market share: 2.5 per
cent) has got Amitabh Bachchan. Karbonn and Micromax have invested heavily in
cricket — in the Indian Premier League as well as subsequent one-day and Test series.
Karbonn has a budget of Rs 150 crore, Spice of Rs 120 crore, Lava of Rs 100 crore and
Micromax of Rs 75 crore for brand promotion. And since they don’t have other
shareholders and bosses breathing down their spine, they are nimble on their feet. “We
take decisions while walking in the corridor,” says Rai.

Will this be enough? Gartner Principal Analyst (mobile devices) Anshul Gupta says that
Indian brands have been able to gain visibility and differentiate themselves till now; the
future could be different. “The challenge will be the distribution channel. If they track
that smoothly, keeping in mind their differentiators, they will be here to stay.” KPMG
Advisory Services Executive Director Jaideep Ghosh says that these brands need to build
competence in smart phones because Indian consumers are moving rapidly up the value
chain. “Indian brands have been successful in the lower and mid segments so far. In the
long run, their success will depend on their ability to tap the smart phone segment which
is still ruled by global brands.” Some have begun to upscale. Micromax, for instance, has
come out with a lifestyle handset called Q55bling.

Multinational rivals are convinced that Indian brands do not have the quality or the
commitment to service that is required to survive for long. Meanwhile, they have learnt
the lesson. “According to feedback, the customer first looks for a feature in the Nokia
range of devices. It is only when he doesn’t find it in our devices that he looks at other
options,” says Nokia Director (operator channel) V Ramnath. “We are trying to provide
more feature-centric devices. We are in sync with the customer’s needs.” LG, according
to business head (mobile communication) Sudhin Mathur, plans to invest Rs 270 crore
this year in above-the-line and below-the-line promotion to raise its stake from 5.9 per
cent to 10 per cent. Indian brands are only too aware that not all 50 of them will survive
— a vast majority may soon have to bite the dust. One thing is for sure: The market place
just got more interesting.