The Expanding Chinese Smartphone Market in India
Aayush Mohanty, Research Associate, VIF

The recent news of ‘One Plus’ investing Rs.1,000 crore in Hyderabad for research and development which would focus India-centric features while also working on globally standard features1 is a testament to the fact that global companies, primarily based out of China, have started taking particular interest in the Indian market. The Indian smartphone and telecom market is growing at a rapid pace. Indian telecom operators have to decide on how to step up manufacturing capacities and provide services at low prices to capture more market share in this new competitive environment.

When Reliance Jio launched its 4G services by mid-2016 in India, it claimed to have added 16 million subscribers, thus creating a world record. This service was first of its kind where Reliance offered its customers unlimited voice calls, free-roaming charges and high-speed internet (capped at four gigabytes, going beyond the limit the speed reduced to 128 kilobytes per second (kbps)) which led to competitors like Vodafone India, Bharti Airtel, Idea cellular coming up with similar plans. While internet speeds have gradually increased the tariffs placed on the customers to avail this feature was removed, and no additional costs were imposed on the customers.2 Phone makers like Xiaomi, who has Indian backers like Tata have made smartphones affordable and tailor-made for Indian customers.

An example of a Chinese smartphone maker doing well is Xiaomi which has one of the most significant market shares in India. Ratan Tata acquired 0.0024 percent stake in Xiaomi Corporation, which was about one million USD in 2015. Tata has doubled his investments in Xiaomi which is approximately 2.1 million USD (at Xiaomi’s valuation of 90 billion USD). India is Xiaomi’s second-biggest market after China and operates six manufacturing plants in India. While Xiaomi’s sales have stagnated in other markets, its three-year investment of 500 million USD has paid off, and the company now earns profits from its sales in India.3

Chinese Smartphone Growth Story in India

Before Chinese smartphone makers became the dominant force in the Indian market, Indian firms like Micromax, Lava, and Spice had market shares bigger than their Chinese, Korean, and American rivals. The growth story of the Indian companies during the last decade was based on expanding demand for mobile phones in the country. The story was led by the expansion in network by all the operators into the hinterlands of the country and the widespread use of data fuelled by Facebook, WhatsApp, and other social media applications. However, this growth story was entirely based on trading the handsets into India, after getting them manufactured in China. These companies started distributing the phones in large volumes, and hence had to create a distribution chain which created jobs in the retail sector. But, the technical know-how, as well as the manufacturing skills.

As the mobile handset market started to mature, and the availability and speed of data increased with the prices going down, the market demand started shifting from feature phones to smartphones. The smartphones which were predominantly used by the urban population now found their way into the rural market with a tremendous surge in data which was fuelled by large number of aforementioned applications. The price of the medium-end smartphones started falling, and the demands started growing, especially with the onset of 4G. China market which had already seen a significant change into 4G before had vast stocks of 4G Smartphones which companies like Vivo, Oppo, Gionee, Xaomi, and others launched into the Indian market. These companies had large sales worldwide which they leveraged to get the targeted prices which the Indian companies could not compete with as their sales were restricted to India only. The feature phone sales were drying up as it did not offer the same features a smartphone would. This led to a massive dip in sales, so much so that some of the Indian companies started winding down as well.

Chinese Investment in India is primarily led by investing in setting up trading led businesses and not technology-led. The Chinese products easily find a way into the Indian customers because of their cost-effectiveness and a massive amount of money they spend on advertisements and promotion. These companies have deeper pockets due to their sales worldwide and spend money in India to get a more substantial return. The volumes in India cannot be matched by others. Hence, they get fair leverage on their purchase of raw material and the factories are also more viable due to volumes exported into India. Recently, with the tweaking of the import duty with some advantage being given to manufacturing, the Chinese are investing in factories in India both for mobile phones and solar panels. However, it is only assembly that they do in India.

Chinese smartphone makers, since their entry into the smartphone market, have been accused of two things. One is that they do not bring in new technology, and the other being the security-related issues. The alternative to bringing new technology for the Chinese smartphone makers has been price competitiveness and packaging of features. This is possible as they leverage their volumes to get much better purchase prices and the factories are more viable in cost. The labour currently in China is not as cheap as it used to be a decade back. On the security related issues it has never been definitively proven that smartphone makers share customer data with Chinese intelligence agencies. The threat of security onto the mobile phones from China has always been downplayed as the market is too big and there is a large dependence on the jobs in retail due to the imported Handsets. Telecom Network gears could pose a more extensive security threat. However more recently, some of the Chinese telecom companies have also been cleared to set up networks for telecom companies in India due to lower cost. More so it has been necessitated by the falling average revenue per user (ARPU) in the Indian telecom market.

Security, as explained above, is a different proposition, and it also depends in no small extent on degree of robustness of Indian networks to challenge any threats. However, the trade imbalance is a problem. India’s imports of electronic items from China like mobile phones, other sundry electronic items such as set-top boxes and solar panels are relatively large, so much so that it stands second in terms of India’s import bills, after petroleum products. On one side India makes software for the entire world, but lies behind in manufacturing so much so that we have to import even set-top boxes from China. It is just not India alone, but the world does it due to the competitive prices.

Research, Development and Manufacturing in India by China

When Chinese smartphone makers entered Indian markets, research and development neither happened out of China or India. It happened out of US and Europe, particularly the hi-tech products. These companies in US or Europe have outsourced a large part of their research and product development to India and China, the advantage of the same has been taken by the private enterprises of the latter. For India the outsourcing has boosted software exports. However, the revenue volumes are much lower compared to the large scale exports which China does out of manufacturing - as manufacturing engulfs every sector, but software developments are only required for hi-tech industry, where the end product is sold at a hefty price, but the research and development constitutes a fraction of the total cost.

On the manufacturing side in India, it has seen a significant change from the days of trade unionism. The labour laws have also seen a change and the market forces now determine the salaries of the workers rather than state regulation. The minimum wages have also undergone an upward revision. Role of the private sector in the industry has also shifted the paradigm of labour reforms. Other than a few states where this problem is deep-rooted, many other states have seen significant changes.

Meanwhile, the manufacturing story in China has seen growth and reform evolving with time. While there has been significant reforms of labour laws in both countries, the laws are still stringent in China. Workers earlier needed permission cards issued by the government to come and work in factories in urban areas. Things have become relaxed now, but quite a few regulations of this nature remain. Overall this helps China economy to a large extent, and they are the most dominant force in global manufacturing today. This also puts factory owners in China and the workers to work under challenging conditions as they have to meet stringent delivery commitments across the globe. There is hardly any refusal of an order fearing that continuous refusal could lead to building up of alternate manufacturing base in another country. Chinese factories work across time zones to cater to deliveries across the world.

Conclusion

The recent investments by Chinese smartphone makers to set up research and development centers in India attests the fact that while in other markets they might be struggling but in India the Chinese smartphones are well received for their considerably cheaper products and services. There is also now a push into Smart TV business, which is yet to pick up in India. The Chinese smartphone companies believe that unlike other markets India’s market is still under-penetrated and there is massive room for growth.

Enormous manufacturing units have been set up by these companies in India to cope up with the rising demand of Indian customers. Companies like OnePlus want to make India their manufacturing base to sell products made in India in Europe and the US. In a country of more than a billion people there are 400 million smartphone customers which enable Chinese smartphone companies to maintain the brand loyalty which they have created while expanding through retail touchpoints. The Chinese smartphone companies’ future investments in India can be defined by what Pete Lau, the Chief Executive Officer of OnePlus has said, “….new development is in three phases: One, expanding the 'Made in India' concept; two, investing heavily in employing Indian talent; and three, strengthening India as an innovation hub for domestic and global markets."

(The author has interviewed an expert on the smartphone industry in India to get the inputs on the growth of Chinese smartphone market in India)

References:
  1. Pandey, N. (2019, August 26). OnePlus to invest ₹1,000 crore over 3 years for R&D facility. Retrieved from https://www.livemint.com/technology/tech-news/oneplus-to-invest-rs-1-000-crore-over-3-years-for-r-d-facility-1566812760844.html
  2. Desk, T. (2016, October 10). Reliance Jio 4G claims it crossed 16 million subscribers in first month. Retrieved July 17, 2018, from https://indianexpress.com/article/technology/tech-news-technology/reliance-jio-creates-world-record-16-million-subscribers-in-one-month-3073468/
  3. Sharma, N. (2018, June 23). How India And Ratan Tata Helped Xiaomi Set Up Biggest IPO Since Alibaba. Retrieved July 17, 2018, from https://www.bloombergquint.com/markets/2018/06/18/how-india-and-ratan-tata-helped-xiaomi-set-up-biggest-ipo-since-alibaba

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>


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