India is the 2nd largest mobile phone market and 3rd largest smartphone market across the world that makes it particularly attractive. There are over 200 brands vying for 250 million units a year mobile phone market. As the market transitions to smartphones, an array of Chinese manufacturers have headed to India recently, with Lenovo, Gionee and Oppo all boasting a good portfolio of smartphones. Motorola reentered India with its successful Moto G & Moto E models managed to sell over a million devices in 4 months and became the 5th largest smartphone vendor in the country in Q2’14 (source: IDC). Similarly Xiaomi has sold over 95K devices in its first month of launch and even a lessor know company, Gionee is making its presence felt in the smartphone market. Let us look at the India market entry strategies adopted by recent entrants and what the new players can learn from it.
Product & Pricing
India is a price sensitive market and hence value for money is critical for success. The sweet spot for smartphones in India is between $100 and $200. Having a portfolio to support the strategy is probably the most critical aspect. Motorola decided to re-enter India once they were confident on their portfolio. A number of companies make the mistake of not paying too much of attention on the portfolio and relying too much on one model. Successful entrants have been able to straddle the $100-200 price points with 2-3 models offering significantly better features than the competition. A look at the comparison below shows that disruptive pricing by Motorola and Xiaomi (click to enlarge)
Clearly, the devices from Motorola are much better spec’d than Samsung or Sony devices in the market. The price of the Moto E is more than 10% below popular Samsung Galaxy S Duos model. Motorola is demonstrating how even a badly weakened brand can bounce back – by diving to the gutter to fight for low-end market share. Its new owner (Lenovo) must be eager to take this success further in the coming years. Xiaomi Mi3 is a smartphone that is priced similar to Moto G and gives features of the Nexus 5. The impact of Mi3 was such that even Motorola had to slash Moto G price by Rs 2000 despite being launched at competitive price.
The reason the new players like Xiaomi have managed to keep the prices so low is because they sell at near cost price with low single digit gross margins. Xiaomi makes money by selling apps, games and online services while other players used disruptive pricing to gain share. Gionee has been on a roll with its E7 which has received rave reviews for its performance and awesome camera. Seeing the success of the MI3 in India, it would be prudent to imagine that Gionee would be pricing its phones very aggressively in the months to come.
India is traditionally known for the offline retailing. However, the new players disrupted the market by entering into exclusive arrangements with the leading online players like Flipkart and Amazon. Time to market and scale are the two advantages of online when it comes to smartphones. Getting to scale is very important in India and yes, in the long run, offline is the only way of getting the scale but offline distribution takes time to build. On the other hand, with online channel, a new entrant can hope to reach the consumers in top cities pretty fast. Both Motorola and Xiaomi used the online channel to quickly reach out to consumers ready to try their products. Both the players had an established brand name so it helped but still creating physical channel would have taken many years to reach the scale they have managed in a short time. Gionee is building its own physical channel but is doing so one territory at a time instead of a nationwide coverage which is a very slow and painstaking approach. Weak brand equity is one reason why Gionee is relying on the offline distribution.
Online channel now contributes to over 10% of smartphone sales in India (up from ~4% a year back) and continues to rise. Most of the experts predict that it would reach close to 25% of smartphone sales by middle of next year. In 2014, the smartphone sales is expected to be over 75 million devices or $11.2 Billion by value which means that online channel would contribute to over $1 billion sales only from smartphones and this would go upto close to $4 billion in 2015 (25% of $16 billion market value for smartphones in 2015). This is phenomenal and big businesses can be build on the strength of online space alone. Motorola’s position as 5th largest smartphone vendor in Q2’14 outlines the strength of the online channel.
The number of retail outlets in the country are a little over 400K and smartphones are sold in a quarter of those outlets. This means to have any meaningful coverage, a smartphone brand needs to reach out to at least 20-25K outlets. The cost to serve to 20K+ outlets is very high as the distribution structure needs to include distributors and sub-distributors leading to total channel margins and back-end schemes close to 20% apart from the inventory carrying cost. Contrary to the physical distribution, the margin to an online player is sub 10% and the inventory carrying cost is also low. There are fewer chances of stock-outs as well. There are a number of steps involved in establishing a physical distribution network, e.g. identifying a strong national distributor and regional distributors. Flipkart has 22 million registered users which are growing at over 100% annually. Hence, if a brand wants to attain scale and speed, online is a good cost effective option. This also cuts out the overheads such as rent, salary of store staff and IT infrastructure. Online can also be a medium to quickly test waters without a full fledged roll-out. The rich data available with online players can significantly reduce the spends on market research. Motorola or Xiaomi can take the demographics of their buyers for further analytics and targeted advertising. Even the user reviews are a good barometer for net promoter score.
Television advertising is considered the best medium to reach the consumers. Traditionally, a product launch would mean $4-8M as marketing spends (over 2 months). However, Motorola and Xiaomi decided to tie-up with exclusively with Flipkart and Amazon which ensured that they spend minimum amount on new launch and utilize the reach of the online players. Motorola did a joint promotion with Flipkart with a few round of print ads (my estimate is $2M as spends, refer image on the right for sample print ad) and Xiaomi depended more on the buzz created by its PR machinery rather than direct advertising.
Xiaomi, which has not spent a penny on advertising or marketing its sales in India, only uses the power of social media to market its phones. This is the same model that it uses to sell phones in its home market, China. It is important to mention the approach taken by Xiaomi – Drip Sales. So far Xiaomi has sold only about 95,000 units of Mi3. This in itself is not an impressive sales figure. What is very interesting is the way they went about selling it. Most handset manufacturers can’t wait to flood the market with their offerings. The launch is talked about for about a week or so, and then the handsets are soon out of sight in the public mind. Xiaomi, on the other hand, holds weekly flash sales with limited quantities (10-15K in each flash sale). For each flash sale the desirous buyers had to register afresh. Every Mi3 flash sale got talked about for the duration of the week across print & online media. This is much more press coverage than any other handset launch in India till date!
India is a huge market for mobile phones that is transitioning to smartphones. Success in this country for a new vendor is not easy. Smart vendors can make successful entry if they focus on the price-value equation, choose appropriate distribution to reach the hands of the consumers and look at low cost ways of promotion.
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Mohit is a telecom professional with rich experience over 15 years. His expertise is in the area of strategy and planning and his work experience includes stints with two of Big 5 consulting organizations, a telecom operator and a handset vendor. Mohit can be reached at firstname.lastname@example.org