New Entrants Poised to Join Smartphone Market

The number of players in the global smartphone market is set to substantially increase between 2010 and 2015, according to a new white paper from Juniper Research . Apple Shows the Way Vendors Vie for Smartphone Market Position credits the Apple iPhone with opening the smartphone market to a wider array of providers. By linking the hardware device, the smartphone, to a content delivery platform, the App store, Apple has managed to create a powerful hardware/ content combination. Thus Apple has removed one of the main barriers to entering the smartphone market: how to generate revenue out of content. Hardware Advances Will Likely Spread Successful advances in hardware may spread rapidly to all smartphone manufacturers. Several important developments in particular will likely be seen during the next five years:


Smartphones will increasingly be equipped with HD video recording capabilities. Several handsets already have HD video recording available such as the Samsung OMNIA I8910 HD and Sony Ericssons Vivaz. Economies of scale will reduce the cost of this component as more OEM handset vendors will adopt HD video. High-end smartphone devices are expected to have dual core processors by the end of 2010; by 2012, most smartphones will have dual core processors. (With a dual core processor, different applications can be split between the processors, saving on battery life and improving processing speed.) New form factors are expected to emerge particularly as smartphone devices become smaller, typically to the size of a standard handset. Samsungs pico projector phone, called Beam which was launched at Mobile World Congress 2010, is expected to be the first of several handsets that are equipped with projectors to get over the problem of limited screen real estate inherent in the smartphone device. 3-D technologies for video and still photos are being developed by several handset manufacturers. This is achieved by mounting two cameras on the device to replicate the distance between the eyes.

as detailed in the chart above, new smartphone market entrants (such as Dell, Acer and Huawei), which have virtually no presence in the current smartphone market, will account for a much larger share of the total market, forecast to encompass more than 26 million shipments. Other providers, such as Google, which also currently have almost no presence, will represent roughly the same marketshare in 2015. A smaller, but still substantial, majority of the market will be taken by closed OS manufacturers such as Apple and RIM. HP is also a new entrant in smartphone market the definitive agreement for HP to purchase Palm and the Palm webOS mobile operating system for $1.2 billion is a sign of the times: at least three other major electronics players are looking to enter the smartphone market this year. And its not as if the smartphone market is lacking in competition, or, for that matter, new entrants.Dell and Acer are planning launches, as, it appears, is Microsoft. Microsoft already has its own mobile OS, of course, but has shied from the hardware market even in PC domain, despite its massive dominance in the OS market. For HPs part, taking out the superlatives from the first lines of its press release gives us: Palms operating system provides a platform to expand HPs mobility strategy [over] multiple mobile connected devices.

The phrase is telling. One only has to look at the success of the IPad to realise that connectivity will be at the centre of the next generation of consumer electronics devices, hence the interest from the consumer electronic giants. And in the device market, barriers to entry have been coming down for some time- if you are big enough. Many aspects of the PC market are now commoditised, with few differentiating factors but price. With open source, even the operating system is open for any company to develop into its own-brand handset. Screens, batteries, chips, casings and SIMs can also all be bought en masse for assembly. And Michael Dell has demonstrated what can be done with a commoditised market. Dells smarphone efforts will be concentrated on Brazil and China, it appears. As for HP, the one asset that HP is purchasing not mentioned in the release is Brand. And Brand is becoming more and more important in a market where differentiation is harder and harder to achieve (though Apple still excels). Palm may have lost out to other players as the PDA was superceded by the smartphone but HP now has the unique chance to revive it.

Others regional players

The domestic smartphone market in China is set for record growth in 2011, with shipments growing 53 percent to 54.1 million units, up from 35 million units last year, according to new IHS iSuppli Research. Of the projected domestic total for this year, more than 10 million smartphone units will come from the giant Chinese makers ZTE and Huawei, with the overall number of smartphones to continue rising in the years to come. By the end of 2015, IHS forecasts that Chinese companies will ship 111.0 million smartphones, a figure that does not include iPhones from Apple Inc. that have been smuggled into the country or phones made by HTC that are sold into Chinaestimated at somewhere in the range of 7 million units in 2010. Meanwhile in the Chinese white-box and gray-smartphone market, 2011 will see domestic Chinese suppliers focus mainly on EDGE smartphones based on the Android operating system, as well as 3G smartphones from 2012 onward. Overall gray-market handset shipments are projected to expand to 255 million units in 2011 and then begin to decline to 213 million units in 2012. This will launch a pattern where gray-market handsets continue to decrease in unit shipments for the next four years.

While gray-market suppliers are positive about prospects in the emerging markets, a lack of new and compelling selling features will result in price-based competition. This is true even in 2011, with the gray-handset market anticipated to see lower revenue despite an increase in unit shipments. Existing players also may leave the smartphone space altogether to seek greater opportunities in other consumer electronic sectors, such as tablets. Several factors account for the decline in the shipment of gray-market smartphones in China, including stronger supervision by the Chinese government of gray-market handsets and a serious crackdown on counterfeit mobile phones. Moreover, players in the emerging markets, supplying product to their own areas, are grabbing market share away from grayhandset suppliers. Other factors include concern from end customers about the quality and aftersales services of gray handsets; the expansion in market share of dominant local players like ZTE, Huawei, TCL/Alcatel and Sangfei into the developing countries, with cooperation from local operators; the change from some traditional gray-handset suppliers into branded original equipment manufacturers that promote their own trade names in the developing countries; the increasing effort of gray handsets in differentiating from similar platforms, such as those operated by big entities MediaTek or Spreadtrum; and the lack of a cost advantage in gray handsets when compared to 2G phones, as well as the absence of a competitive 3G turnkey solution for gray handsets in the near future. In the second quarter of this year, IHS saw the closure of many small independent design houses for handsets in the Shenzhen area because of continuous losses, following the sharp decline of the export white-box and gray-handset market in April and May. Channel inventory had been too high in the first quarter of 2011, while demand declined in the emerging markets during the second quarter. Moreover, the Chinese government cracked down hard on illegal gray handsets and the suppliers of counterfeit phones in Shenzhen during that time, adding to the pain of local gray-market manufacturers China's ZTE, which has made big gains in mobile phone market, aims to boost its smartphone sales in 2011 by five times.

The company is targeting a shipments of 10 million units, an increase from the 2 million units sold in 2010, the company said. ZTE, a Chinese network equipment supplier, is also a global manufacturer of handsets for mobile carriers. In the fourth quarter of 2010, ZTE finished as the fourth largest mobile phone vendor with a 4.2 percent market share, putting it ahead of Apple's 4 percent share, according to research firm IDC. Nokia, Samsung and LG Electronics lead as the top three. During 2010, ZTE shipped a total of 51.8 million handset units, an increase of 94 percent from the previous year. The company's recent success was due to its rapidly expanding smartphone line, even as the company has historically focused on the lower and middle-end markets, IDC added in a report. On Monday, ZTE announced a new strategy for smartphones at the Mobile World Congress. The strategy focuses on the middle and high-end markets, with the goal of developing more smartphone, tablet and Internet TV box devices. The company also showed off a new low-cost smartphone at the event. Called the Skate, the device has a 4.3-inch screen and uses the Android 2.3 operating system. ZTE said it will start shipping the smartphone globally in May. The company also announced plans to launch a tablet running Android 3.0 in the third quarter.

With cheaper rival offerings and a falling rupee cutting short their dream run, homegrown handset makers are planning a complete makeover by reducing dependence on design and contract manufacturing in China to hold on to their slipping share in the 30,000-crore cellphone market. Leading companies like Micromax, Spice, Lava, Zen, Karbonn, Maxx and Olive have begun to set up new research and development wings to design and make their phones in India, create own software for operating systems and mull app stores, breaking away from the practice of buying off-the-shelf designs and getting them manufactured on contract in China. "Local handset makers would have to change their strategy from simply borrowing low-cost designs and mass producing to innovating and creating locally relevant products," says London-based Analysys Mason's India director Kunal Bajaj. "Indian handset makers had lost market share during Diwali because Samsung got better devices in the market and Nokia got back with differentiating handsets. Local companies would have to come up with some core innovation to differentiate." Sales of domestic players have either remained stagnant in the past year or have gone, data shared by market research agency GfK showed. According to research firm Gartner, Micromax has lost its pole position among Indian handset makers, overtaken by Karbonn Mobiles as the leading Indian brand as of the third quarter this year. International Data Corporation showed a 3% quarter-on-quarter decline in Indian mobile phone shipments during April-June at 42.8 million units. The fast depreciating Indian currency, too, has compounded the industry's woes, as chief executives project zero margins if the dollar touches the 55 mark. As it is, the likes of Lava and Micromax have been forced to raise prices twice in three months, a development that even could price them out of the market.

"It's a fine linea, companies will have to maintain a tricky balance," Bajaj said. If they continue to under-spend and only copy designs, they may become obsolete since there would be nothing to differentiate them from the clutter. However, they would have to be careful of investing in these overheads since they operate on low margins that run the risk of becoming thinner due to the rising dollar." Gartner's principal analyst Anshul Gupta says the Indian companies have to innovate. "It is mandatory. If there is no differentiation then they won't be able to survive in a market overrun by brands. Most companies are banking on internal accruals, amassed during their hey-days, to fund their R&D efforts. They are also considering channeling part of their revenues into in-house research, on the lines of Nokia and Samsung, which invest nearly 10% of their global revenues into R&D. Indian R&D push Micromax, the largest Indian-owned brand by sales, which has invested more than $10 million in R&D, is stepping up funding to form a separate division for in-house research to a create a smartphone range "rivalling Nokia and Samsung's", an executive said. "We are working towards manufacturing feature-rich smartphones. One such effort is a gesture control engine on our Superfone device," said Micromax's co-founder Rahul Sharma. This technology enables a user to operate a Superfone simply by hand gestures. Lava Mobiles, one of the top five local handset makers, is spending Rs 100 crore on its design, supply chain and a substantial part in research and development centre in Bangalore. The Noida-based company, which already has 100 people in its China team, is hiring more people at the Bangalore centre. "It's not a dream run anymore," says Lava Mobile's co-founder SN Rai. Lava is talking to chipmaker Qualcomm and technology firm Mediatek for co-developing user interfaces on mobile phones the company's internal design and development team is planning to come out with nine models, giving it more control on quality. "Around 50-60% are our own models and the rest come from original design manufacturers. Slowly, this percentage will go up," Rai said, adding that he is considering creating an India-focused app store. Chinese contract manufacturing is of poor quality and there is little after-sales service, Rai said. So making its own models has solved a lot of quality problems for Lava. "There's a cost saving of 15-20% from having your own design and common inventory." Karbonn Mobiles, ranked after Nokia, Samsung and G'Five in India, is working on a unique product architecture, patented user interface and an operating system to create its own intellectual property. It is expected to form a venture with an R&D centre that has presence in India and Europe in the next quarter.