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If you are a phone geek like me, you must have noticed it already.
India gets many of the coolest phones these days.
Just to name a few, Xiaomi and OPPO have both built whole new brands for India with Poco
and Realme and Samsung made their super aggressively priced new M series phones here.
And not only do these India-first offerings put the devices we in the West have to shame
in terms of price/performance ratios, increasingly, they are also made in India.
So in the 48th Episode of the Story Behind series, let's explore why the Indian Smartphone
industry has become so competitive and if the country can take this recent smartphone
boom to the next level and become a true smartphone superpower.
Quick note before we start: This video reference a tons of statistics, government
policies and articles, so if you want to explore those yourself, I've actually linked a ton of
sources in the description of this video, so take a look at them.
Alright, back to the video!
India actually already had a brief moment with home-grown smartphone brands a few years ago.
Back in 2014, over 2/3rds of the phones in the country where sold by Indian brands like
Micromax, Karbonn, Intex and Lava, and that same year,
Micromax actually managed to outsell Samsung for the first time ever and briefly became
the largest mobile brand in India.
This explosive domestic success didn't last very long though, as just a year later, Samsung
re-claimed the throne, and Chinese brands like Xiaomi, OPPO and vivo started entering
the market.
Turns out, the Indian brands didn't really stand a chance against this new onslaught,
as their whole strategy was just to buy ready-made phones from second or third tier manufactures
in China, stick their logos on them and sell them to customers in India.
Of course that didn't hold up
against brands like Xiaomi and OPPO, who had large R&D facilities, extensive control over
their own hardware, as well as deep, deep pockets from their successful operations in China.
According to this fantastic article by Gadgets360, when Chinese brands like OPPO entered the
market, they initially paid up to $110 per customer acquisition, compared to the $3.2
dollars some local brands where paying at the time.
That is an insane 30x increase in marketing spending, even if it was a temporary one.
In a similar vein, Xiaomi didn't spend much on marketing, but had no trouble losing money
on phones for years in India to build up its brand and drive competitors out of the market.
None of the more simple Indian companies could keep up with either of those, so it's no wonder
that by now, they have lost ground and only Micromax occasionally manages to make it to the top 5.
But in their frenzy to out-spend and out-compete each other, these foreign companies quickly realized
that, in order to win in India, they needed to invest more and more locally.
Samsung, OPPO, Xiaomi and Huawei now all have local R&D facilities in India, even if they
are somewhat small, and all major brands now assemble the majority of their phones sold
in India domestically.
In fact Samsung has recently opened the largest mobile manufacturing plant in the world by
output in India,
and Foxconn, the world's largest electronics manufacturer has also opened up multiple factories
here, including ones for Xiaomi and even for Apple to assemble some high-end iPhones.
These phones, while assembled in India, still use components that are mostly imported, but
that's a major step forward nonetheless.
So in a sense, things have kind of come full circle.
Instead of Indian companies selling phones made in China though, now it's Chinese (and
Korean) companies selling phones made and to some extent developed in India.
That's still far from India having it's own Samsung or Xiaomi, but it is a significant
revival of the industry.
So, let's look at why this revival is happening.
It starts with macro-economic factors.
India has over time become the second largest smartphone market in the world and is the
only large one that is growing significantly.
All other major regions are suffering declines, so India has become crucially important as
a market.
At the same time, China, the original factory of the world is losing its attractiveness
as a manufacturing hub.
With manufacturing wages having tripled over the last decade or so, environmental and labor
rules getting stricter, taxes rising and the US-China trade war in full swing, companies
are more eager than ever to move their factories out of the country.
India, together with Vietnam and other South-East Asian countries are a logical destination
country and indeed, India has recently toppled China to become the largest recipient of foreign
direct investment in the world.
Seeing the increasing attractiveness of India as both a market and a manufacturing hub,
the Indian government has implemented the so-called Make in India strategy.
Make in India covers many industries, not just phones, but in this video we'll just
focus on its impact on phones.
Under the plan, the government simplified taxation and labour regulations, it encouraged infrastructure
development and it made it significantly easier for foreign companies to invest into India.
It has also introduced the so-called Phased Manufacturing Programme, which is a step by
step plan to incentivize phone makers to bring their manufacturing to India.
Step one of the program is to first slap import tariffs on finished phones coming into
the country, but let components come in mostly untaxed.
This is supposed to encourage phone brands to assemble their phones in India from imported
components first, and it seems to have worked very effectively.
India has recently become the second largest phone manufacturer in the world after only China,
there are now well over 200 manufacturing plants across the country, up from just 2
a few years ago,
and the ratio of imported devices dropped from 78% to below 18%.
Step two in the programme is slowly implementing import duties on components one by one to
encourage also the domestic manufacturing of the individual components, not just the
assembly f them.
As you can see, the government planned to start with simpler components like chargers
and batteries, and is planning to add increasingly complex components like microphones, printed
circuit boards, camera modules and touch screens over time.
Progress with this plan has been made too, but it's slower than expected.
According to Counterpoint research, India still imported $13 billion worth of components
in 2018, which accounted for 80% of value of the phones made in India, and domestic
component manufacturing is lagging behind the planned output significantly.
While the first two stages have seen some success, the third and current stage, which
is the most important as it accounts for 62% of the value, has seen very little success
so far, meaning that more complex components are still mostly imported.
The first PCB manufacturing plants are already being set up by companies like vivo, but things
are taking longer than expected.
Either way, despite being behind schedule, I think the direction is pretty clear.
India went from being a completely import-driven phone economy to having a reasonably
large manufacturing sector, and there are no signs of a slow-down.
In fact, the government has set the goal of manufacturing 500 million phones in 2019,
of which it actually wants to export 120 million.
Now, I think that's a little optimistic, given that we are pretty deep into 2019
and we haven't seen any exporting activity yet, or at least I couldn't find it,
but it is an impressive state nonetheless.
Now, the last question is how this smartphone boom will impact Indian companies.
Cause having foreign companies manufacture stuff domestically is of course better than
nothing, but on the long term, can't be a sustainable strategy.
I personally think big, home grown success stories will take a significant amount of time to develop
and I also think that India might be a little late to develop its own major smartphone brand,
this market feels very mature, extremely competitive and extremely oversaturated already.
But there are other areas that we could see promising Indian companies in.
In fact, the first crop of them have already arrived.
Reliance Jio, a gigantic Indian conglomerate, has wiped the floor with competitors in the
smart feature phone business with its home-grown JioPhone line selling tens of millions of
units out of nowhere, and while these aren't advanced smartphones per-se, they are hugely
important for the Indian market.
Similarly, chipmaker Signalchip is the first Indian company to bring microchips to the market.
They are currently focusing on 4G and 5G modems and microchips for base stations, which are
the units that beam radio waves for mobile networks around, and it's still unclear just
how good their chips really are, but the fact that an Indian company was able to design
and bring something as complex as semiconductors to market at all, is a massive step forward
for the country.
And as foreign companies bring more and more knowledge and capital into the country, as
the infrastructure and the supply chains improve, I see no reason why similar success stories
wouldn't become more common in the future.
Success breeds success, and overall I'm very positive about the outlook of Indian tech
companies.
One last way I'd like you to think about the rise of Indian tech companies is
through this model of technology transfer that I admit I just made up.
Let's take a look.
Typically, the more complex a technology gets, the more profitable it becomes to make it.
Countries and companies typically work their way up this ladder, chasing each other over time.
And what we are seeing is India entering at the bottom, taking away some of the low-end
assembly work and simple component manufacturing from China.
China is moving up this latter, making better and better phones like the Huawei P30 or the
OPPO Reno for example, squeezing companies like HTC, Sony and LG out of the commodity
smartphone business.
Korean, Japanese and Taiwanese companies are also moving up the ladder, focusing more and
more on high-end semiconductors, memory chips, camera sensors and so on.
Of course all of this is an oversimplification, but I think it illustrates quite well
how countries and companies have to move up this value chain quickly enough to offset
losses they see at the bottom. And it will be really interesting to see how quickly
India can take over parts of China's old business while China is trying to encroach on those of the others.
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