The Clash Of Handset Titans
The gloves are off. The time is ripe. The top selling handset makers are battling it out to reach the No. 1 slot in India’s smartphone market
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Nearly two decades ago, Nokia invaded the fledgling Indian mobile market with a plethora of feature phones at attractive price points. Half a decade later, Nokia had a monopoly in the market as its products struck a chord with the masses and the classes. However, the Finnish telecom major’s dominance was short-lived as Samsung, which came out with its affordable feature phones and next-gen android smartphones, stormed the handset market. The game, it seems, is being played out again. Over the last few quarters, Samsung is finding it difficult to hold on to its lead, as Xiaomi, a five-year Chinese startup, has hit the sweet spot in the world’s fastest growing smartphone market by offering best deals at cost-sensitive price bands.
India being a cost-sensitive market, Xiaomi, through its online only sales, has lured consumers with its spec-heavy handsets. Moreover, the company’s strategy of online flash sales with limited stocks on offer and a strong presence on social media has certainly helped them grow significantly in India. But online flash sales also hampers their potential customers as black marketers hoard handsets and customers have to wait for the next sale.
This goes to show that Xiaomi, too, suffers from vulnerabilities and there are other brands upping their ante to beat competition. For instance, brands like Realme and Honor that offer similar phones at reasonable prices have also climbed the popularity charts and posing a threat to the business model of Xiaomi.
So will it be a smooth sail for Xiaomi? Industry analysts do not seem to think so. Globally, there are around 1,000 companies that make smartphones. However, just one company, that is Apple, makes 92 per cent of the industry’s profits even though it sells less than 20 per cent of the overall handsets.
Richard Rothman, MD, OpenMind Opportunity Consultancy, says, “For everyone else, with the possible exception of Samsung, the market is basically a rat race. Apple makes a profit of $250 per phone; Samsung makes $18, while Xiaomi reportedly makes only $2, and probably loses money if overheads are priced in.” Rothman further explains that although Xiaomi has managed to quickly gain a large market share in India through value pricing, low price doesn’t provide Xiaomi with sustainable competitive advantage because it has no proprietary cost advantages over its competitors. “Can it remain a market leader in smartphones? Only until it’s funding finally runs out. In the end, the only one who benefits are Indian consumers,” he says.
Moreover, offline remains the dominant channel for smartphone sales in the Indian market, while online account for barely 35 per cent of the total sales. Xiaomi, which has so far leaned more on online to push sales, , in order to sustain longer in the Indian market needs to dive deeper into India’s offline market — an area where brands such as Samsung, Oppo and Vivo have deep rooted strategies. The strong online push has worked in favour of the Chinese players who have so far been spared from spending much on advertising. However, Xiaomi has now begun to focus on building its brand equity in the country by spending on TV commercials, outdoor ads, and signing up actress Katrina Kaif as the brand ambassador for their Redmi Y series.
Even as a section of experts is closely monitoring Xiaomi’s progress, there are others who are not ruling out Samsung’s strong comeback. “The South Korean electronics giant, with its years of experience in India, still enjoys a huge brand appeal because of its lifestyle brand image along with a wide sales and distribution network across India,” says Upasana Joshi, Associate Research Manager, IDC India. She further adds, “India is different from other markets in the sense that the offline channel is very important for a longer-term sustenance in India for any consumer product company.”
Back to the future
India has witnessed a dramatic rise in smartphone sales with more than 124 million handsets shipped in CY2017, registering a year-on-year growth of 14 per cent. Research firm IDC says that India will continue to remain the fastest-growing large market for smartphones clocking double digit growth for the next few years. However, the Indian market is hyper-competitive with a major chunk of the pie remaining in two hands: Xiaomi and Samsung. In 2017, the two accounted for nearly half the market share.
Samsung has been ruling the sales charts since 2012 when it overtook Nokia. The South Korean giant has also sustained its leadership for more than five years despite being challenged by Indian smartphone brands such as Micromax, Lava, Karbonn and Intex. But when Xiaomi entered the Indian market in 2014, Samsung was the leader with a 29 per cent marketshare followed by Indian brands such as Micromax (18 per cent), Karbonn (8 per cent), and Lava (6 per cent).
Four years down the line, the domestic smartphone landscape stands changed. Xiaomi has dethroned Samsung from the pole position with around 30 per cent market share. Although Samsung is still at the second spot with around 25 per cent share, Indian players have simply fallen off the top 5 list.
“The Indian smartphone market is crowded, highly competitive, and unprofitable for most brands. The Indian smartphone brands lost out because of their slow transition from 3G to 4G models,” says Neil Mawston, Executive Director of Strategy Analytics. He adds: “The rapid shift to more-complex 4G technology caught Indian players like Micromax by surprise, and their marketshare collapsed as a result. We expect the Indian smartphone market to remain fiercely competitive. If Xiaomi is going to maintain its leadership position across India, then it must not miss the next switchover from 4G to 5G during the next 3-5 years.”
Meanwhile, Huawei, which is the sixth largest smartphone brand in India, is investing heavily here and is likely to push into the top 5 smartphone rankings during the coming months. It is widely believed that there will be more Huawei smartphones on sale in major cities and rural areas next year.
Xiaomi’s surge to the top
Within a short span of time, Xiaomi has grown to be the leader in the three main categories — smartphones, headphones, and wearables. In terms of online smartphone sales, Xiaomi holds 55 per cent market share and 20 per cent when it comes to offline sales. According to industry analysts, smartphones priced under Rs 20,000 constitute 90 per cent of the Indian smartphone market, which Xiaomi has been targeting for a long time now. “Xiaomi has a strong portfolio of Android models, an extensive retail presence, and it seems determined to gain market share at any cost,” says Dawson.
Xiaomi, which started out as a software company, got into the smartphone business only to get people hooked on to its OS. It was in 2014, when Xiaomi appointed Manu Kumar Jain as the head of their Indian operations, that the company came up with its first phone — Mi 3 in India. In mid-2015, Jain was asked by the company’s co-founders for a timeframe within which Xiaomi would become the No. 1 smartphone company in India. Jain had then replied, “Three to five years from now and it will be a great thing to achieve by 2019.” But surprisingly, the third quarter report of the CY2017 revealed that Xiaomi has topped the Indian smartphone market share tally for the first time.
Xiaomi is not just a smartphone company. According to Jain, who is now Xiaomi’s Global VP, there are four parts to their business. The first is their OS business which is MIUI. The second part is smartphones —where Xiaomi is the fastest growing company. Another interesting part of its business is e-commerce. Mi.com, started three years ago, is now India’s third largest e-commerce platform for smartphones, only behind Flipkart and Amazon, with more than 100 million visits each month.
“We don’t even buy traffic from any other sources. Still we get hundreds of millions of visits from Mi.com every month,” says Jain. “When we look at the GMV or revenue or any other parameters, we will be the third biggest e-commerce platform in India and eighth largest in the world.
Xiaomi has also started to deepen its roots in the IoT business. They have got smart TVs, wearable devices, smart shoes, and a bunch of other smart devices. Jain claims the company has more than 100 million IoT devices across the globe.
In the power bank industry, Xiaomi is believed to have captured 30-33 per cent of the market. Jain says, “The No. 2 power bank company in India is ‘fake Xiaomi’, and if you include those, our market share will be 55 per cent.” In fitness bands, too, Xiaomi leads the segment with 55 per cent market share. “In fitness bands, we have 55 per cent marketshare, which means if there are two wearables bought in India, one is basically Xiaomi. So we are almost 12 times bigger than other brands when it comes to wearable devices.”
Experts believe that Xiaomi over the years has been in a desperate search for a viable route to profits by foraying into wider product lines, online services and retail. “Is selling low-cost rice cookers and TVs an opportunity for Xiaomi? Is setting up a rural retail network an opportunity? In the medium to long run, probably not, because all of these moves can easily be copied by its competitors,” says Rothman.
In recent times, Xiaomi has invested in hundreds of startups to create its own ecosystem. “Unless Xiaomi is very lucky, this spending spree is likely to waste billions of dollars,” adds Rothman.
Still, Jain is very optimistic about Mi TVs, which they launched in India earlier this year. He believes that they are already No. 1 player in smart TVs. Xiaomi has recently announced the sales figures of Mi TVs — nearly half a million within a period of six months.
“I can say whatever we have been able to achieve in phone in six years, our TV business will achieve something similar in four months. We will soon launch TV in the offline segment.”
Xiaomi India crossed the revenue figure of $1 billion in 2016 — Jain claims they are the first smartphone brand in India to do so within two years of their operations in India. “We are a multi-billion dollar business in India. In the first year in 2015, we made losses. In the second year in 2016, we crossed the billion-dollar revenue mark, and making profits out of that is incredible,” says Jain.
It may be recalled that Xiaomi’s first manufacturing unit for phones with Foxconn at Andhra Pradesh went on stream in 2015. Two years later, its second unit for phones at the same location and another unit for power banks with Hipad at Noida began operations. In 2018, Xiaomi announced three new manufacturing units out of which two (in Andhra Pradesh) are earmarked for phones and the third one for PCBs (at Tamil Nadu). In total, Xiaomi has six factories across three campuses in the country.
“We announced our Make in India plans in January 2015 and this was before the government had announced tax benefits (in March 2015). The reason we wanted to make in India was because we had one of the leanest cost structures in the world. We have leanest manufacturing, distribution and leanest just-in-time with no working capital cost. We wanted to increase our supply and in order to reduce our working capital we started building locally,” says Jain.
One of Xiaomi’s component suppliers Holitech recently signed an MoU with the Andhra Pradesh government and the company will invest Rs 1,400 crore and manufacture components such as fingerprint sensors, touch panels, camera sensors.
“We asked 50 of our component suppliers from across the world such as China, Japan, Korea, Taiwan, Europe, the US, etc., to visit India and see whether they can set up manufacturing plants here in India. We believe all these 50 partners should come so that we can generate 50,000+ employment in India and can get in another Rs 50,000 crore (investments). So that is $2.5 billion worth of investment,” adds Jain.
Beating the best
Although Xiaomi is expected to remain the top smartphone player in India this year owing to its strong portfolio of Android models and an extensive retail presence, there could be a possibility that it might lose the crown to an existing or a new player. “Every single Indian wants to own a smartphone, so clearly new players will always try to enter this market. It would be an overstatement to say that Indian consumers are currently “loyal” to Xiaomi simply because the brand has done well for a few quarters. Indian consumers didn’t stay loyal to Nokia, or to BlackBerry, or to other brands that had their day in the sun and are no longer around. Indian consumers in the mid- to low-market smartphone space will continue to shift their loyalties very quickly to brands that provide the best price/value equation,”Rotham explains.
So then will Xiaomi buck the trend? Only time will tell.