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Changing Dynamics: Handset market evolves from feature phones to smartphones

November 29, 2013
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The Indian handset market has witnessed significant growth in the past few years owing to a reduction in device prices and increasing consumer income. Smartphones are witnessing higher adoption vis-à-vis feature phones on account of higher data usage and the consumer demand to experience internet on the go. While in the near term feature phones will continue to witness demand in Tier II and Tier III markets, the trend will shift towards greater adoption of smartphones going forward. Industry experts express their views on the Indian mobile handset market and its prospects…

Shashin-devsareHari-Om-Rai

What is the current size of the Indian handset market? What are the emerging trends in this market?

 Shashin Devsare

The Indian mobile handset market was valued at about Rs 359.46 billion in 2012-13 as compared to Rs 313.3 billion in 2011-12, representing a growth of 14.7 per cent. Gartner has forecasted that handset sales in the country will increase from 221 million as of end-2012 to 251 million as of end-2013.

Some trends have supplemented this growth. These are:

•   Increased app usage: The Indian mobile consumer is using a variety of apps. From social networking to mobile banking, and from gaming to infotainment, the Indian handset market is evolving on the back of app consumption.

•   Entertainment brands drive business: From checking infotainment programmes on mobile devices to voting for their popular contestants on TV shows, entertainment brands have captured the imagination of the Indian population.

•   Rise of local language apps: India being a multilingual country, the demand for local language apps is on the rise.

•   Mobile banking: Mobile banking is the next big thing for the Indian mobility sector, where more and more consumers are carrying out commercial transactions on the go.

•   Reverse bundling: With Indian wireless carriers focusing more on increasing the adoption and usage of data-based services, a new trend of them partnering with smartphone players to offer bundled data plans and devices has been witnessed. Users are more attracted towards devices that offer free internet usage.

 Hari Om Rai

India is the second largest mobile handset market in the world after China and is poised to grow further with expected shipments worth Rs 208.4 million in 2016 – at a compound annual growth rate of 11.8 per cent from 2010 (as per Research & Markets). The Indian mobile consumers’ increasing preference for high-end handsets and demand for mobile Web 2.0 technologies from the youth segment could drive market revenues to Rs 350.05 billion in 2016.

Further, 3G will rapidly increase the penetration of smartphone users in Tier II and Tier III cities. India is set to become the third largest smartphone market in the next four years – smartphone shipments in India are expected to increase to 155.6 million units in 2017 from 27.8 million currently (as per International Data Corporation [IDC]) – as handset manufacturers launch more affordable 3G handsets bundled with data plans and look to tap buyers in small cities and towns.

 Senior Official, BlackBerry India

According to industry experts, the Indian handset market reported revenues of Rs 359.46 billion in 2012-13. This market witnessed year-on-year (YoY) growth of 21 per cent and quarter-on-quarter (QoQ) growth of 4 per cent for the three-month period ended June 2013.

This growth in handset sales is mainly due to the increased adoption of smartphones in the Indian market. Vendors shipped a total of 9.3 million smartphones during April-June 2013 as compared to 3.5 million units in the same period in 2012. During April-June 2013, the total number of units shipped was 50 per cent more than that shipped during January-March 2013. The market for 5.0-6.99 inch screen size smartphones (phablets), grew 17 times YoY and phablets’ share in the handset market stood at 30 per cent as of June 2013 (as per IDC AP Quarterly Mobile Phone Tracker).

The key market trends are:

•  Increased adoption of smartphones by the urban youth

•   Increased share of phablets (5.0-6.99 inches)

•   Growing smartphone penetration in Tier II/III markets

•   Increased adoption of  bring-your-own-device among enterprises.

One of the key trends in the market is the emergence of devices that are suited for enterprise and personal use.

 How has the smartphone market evolved over the past few years? What are the key growth drivers?

 Shashin Devsare

Currently, India is ranked fifth in terms of the smartphone user base with an estimated 67 million subscribers in 2013, behind China, the US, Japan and Brazil. The YoY growth in smartphone users is expected to be the second fastest after Taiwan.

By end-2013, smartphones are expected to account for 16 per cent of the total shipments which translates to about 37 million shipments, as compared to 19.6 million shipments in 2012. The key growth drivers in this regard are:

•   Falling smartphone prices: Today, smartphones are becoming more affordable than in the past owing to declining smartphone prices. High competition and consumer aspirations have driven this. Going by the current trends, the cost of an average smartphone device would decrease from about Rs 6,000 to Rs 4,000 in the next one year. A growing trend of price war between Indian and Chinese vendors has resulted in the availability of more affordable smartphones.

•   Increasing data usage: There are more than 143.2 million mobile internet users in India, which number is likely to increase to more than 350 million by 2016.

•   Consumer aspirations: Increasing affordability is driving smartphone uptake. With smartphones becoming more visible, feature phone owners are inclined to upgrade to smartphones as they see the price lines blurring between smartphones and feature phones.

•   Replacement-driven market: Growing consumerism in India has led to the development of a replacement-driven market. Today, replacement sales account for 75 per cent of the Indian handset market, which is driving the demand for smartphones. Instead of buying a new device, consumers are more likely to replace and upgrade their existing ones, which is leading to greater use of smartphones.

 Senior Official, BlackBerry India

The smartphone market is probably one of the most dynamic industries in the world. It is growing in terms of application availability and improved hardware configurations.

One of the key drivers for this market is the urban youth, which is creating the demand for improved hardware and applications. Also, there is significant activity in the phablet category. These devices account for 30 per cent of the total smartphone market. Another important driver of this market is Tier II and Tier III cities. These are the true “mobile first” markets where people are experiencing the power of the internet and its social impact by using their mobile handsets.

 What has been the impact of growing smartphone demand on the feature phone market?

 Shashin Devsare

In the short term, the demand for feature phones will be stable, but it will decline in the long term, owing to the growth of smartphone usage. With the lower purchasing power in rural areas, consumers are aggressively buying feature phones.

 Hari Om Rai

While the smartphone segment continues to be a growth driver, a large market for feature phones remains untapped. Players who can differentiate in this category and offer value at different price points will continue to prosper. Several customers in Tier II and Tier III cities buy feature phones for battery backup, sound clarity and multimedia experience.

 Senior Official, BlackBerry India

While feature phones still account for the lion’s share of the market, smartphones have been steadily gaining ground. The share of feature phones has been reducing. The smartphone market has witnessed unprecedented growth in the past year. According to IDC’s AP Quarterly Mobile Phone Tracker, vendors shipped a total of 9.3 million smartphones during the quarter ended June 2013 as compared to 3.5 million units during the same period in 2012.

 What are the key impediments faced by companies manufacturing handsets in India?

 Shashin Devsare

The challenges facing the mobile handset market are:

•   One of the basic impediments to handset manufacturing is  increasing production costs. With critical components like semiconductors, memory chips, internal boards and machinery becoming costlier due to the global economic scenario, Indian handset manufacturers are finding it difficult to deliver cost efficient mobile phones, which was one of the USPs of this market.

•   Moreover, manufacturers have to pay multiple taxes. This is a challenge for mobile handset manufacturers who are facing issues in importing various inputs.

•   Also, securing technology from various channels involves challenges. Manufacturers need to interact with several vendors to source technologies for their manufactured devices.

•   The lack of a skilled workforce is another challenge. With rapid technological developments, the need of the hour is to have a workforce which is competent and can embrace technology proactively.

 Hari Om Rai

Manufacturing is a low-value-addition activity in this industry and therefore players have been reluctant to enter this segment. Design, development and manufacturing are the three key components of a product development cycle. At present, Lava controls the design and development of products, while manufacturing services are outsourced to Chinese electronic manufacturing service providers. The company has an in-house research and development set-up in India and China for component selection.

 What has been the impact of rupee depreciation on the handset manufacturing business?

 Shashin Devsare

The impact of the rupee depreciation has been catastrophic for the Indian handset business. Indian smartphone and feature phone manufacturers have been hit hard by the unfavourable conditions. They had to increase their product prices by 5-10 per cent to maintain their margins, but this price hike affected sales.

 Hari Om Rai

The depreciation of the rupee is an external factor and has impacted margins. The company had earlier enforced a price increase of 3-4 per cent across models. The challenge for all companies is to adapt to the volatile macroeconomic scenario.

 Senioe Official, BlackBerry India

The capricious nature of the rupee has been a cause of concern for all industries that are reliant on the import of goods. It has been especially challenging for the highly competitive handset market as the margins in the mobile hardware space have reduced and manufacturing cycles have become shorter. Another issue is device obsolescence resulting from the rapid launch of products. This highly competitive market has created immense pressure on logistics and supply chains.

The volatile rupee has added to these challenges as it is difficult for handset vendors to plan their product cycles and pricing without visibility on the future of the currency. The actual impact has been in the form of irregular availability of products due to logistical issues as well as frequent changes in the market prices of products.

 What is the near-term and long-term outlook for the Indian handset market?

 Shashin Devsare

In the near term, the Indian handset market may take a hit owing to the global economic scenario, where the depreciation of the rupee will force manufacturers to increase their handset prices. This may have a short-term impact on sales. Also, consumers will look towards more feature-rich devices coming into the market, which are coupled with exciting data offers.

In the long term, the Indian mobile industry will witness consolidation. It will also witness particular channels of device users – business smartphone users, tech smartphone users, feature smartphone users, among others. This will provide an opportunity to mobile handset manufacturers to bring in specific devices for specific tastes into the market.

 Hari Om Rai

Today, consumers are very rational and smart about spending money. A few years ago, there were over 200 players in this industry. Since then, the market has witnessed consolidation. If the existing players keep consumer needs in mind and add value to every stakeholder, there is significant growth potential in the industry. There could be a situation where more brands enter the market but in such a competitive scenario the key to sustainability will be continuous value delivery to the consumer through products, distribution and services.

Most of the brands are currently concentrating on communication and improvement in service quality to offer an attractive value proposition and strengthen their market position. In the short term, most players will remain focused on the former, as smartphones are a high-involvement product and it is important to be visible across multiple platforms to make a mark on the consumer’s mind. However, this should be backed by a strong value proposition, which is an amalgamation of products, service and brand.

In the next few years, the revenue share of smartphones in the mobile handset market is expected to rise steadily, as an increasing number of players are targeting this space for higher margins. The mid-tier price bracket is likely to witness the highest uptake and hence Indian manufacturers are strategising to tap this demand. That said, differentiation will play a key role across segments.

 Senior Official, BlackBerry India

In the near term, the handset market will keep growing, and smartphones will gain market share. The 5-6.99 inch handset segment will become the new sweet spot for all full-touch smartphones. In the longer term, the focus will be more on machine-to-machine communication.

 
 
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