Smartphone industry In India to contribute over 8% to GDP by 2020

Globally, Smartphone vendors shipped a total of 355.2 million units during the third quarter of 2018 (3Q18). Smartphone shipments in India touched an all-time high of 42.6 million units in the third quarter of 2018. Locally, India currently produces 225 million phones valued at USD 18.97 billion a year. In India, 257 million smart phone volumes will be shipped by 2020 and the market will be growing at a CAGR of 20.8%.

Definition / Scope
Market Overview
Market Risks
Top Market Opportunities
Market Drivers
Market Restraints
Industry Challenges
Pricing Trends
Regulatory Trends
Other Key Market Trends
Market Size and Forecast
Market Outlook
Distribution Chain Analysis
Competitive Landscape
Competitive Factors
Key Market Players
Strategic Conclusion
References

Definition / Scope

Mobile devices are broadly categorized under the following three types:

Mobile phones

Mobile phones are usually the most affordable phones when it comes to price on the market, for instance, Nokia 100. While a mobile phone doesn’t come bundled with high-end features, what it does offer is a brilliant battery life. This one has a standby time of 840 after fully charging the battery.

A mobile phone’s crucial job is to enable users to make a phone call and the odd SMS. In addition to its affordable price, one of the key reasons this model is so popular in places like rural India is its durable, dust-resistant design.

Feature phones

Feature phones lie in the space between mobile phones and smartphones. They are rich in features, very clearly more advanced than a mobile phone, but not quite so advanced as a Smartphone. They have built-in cameras sometimes with a fairly high megapixel count and support apps, game download and feature a Web browser. The Nokia Asha 305, Nokia Asha 306 and Nokia Asha 311 are all feature phones.

Smartphones

Smartphones, tablets, and laptops have moved from the fringe of computing to the mainstream in just five years. Sales of these smart devices exponentially grew as consumers saw the benefits of seamless connectivity, and were drawn to the simplicity of new user interfaces. In many cases, the environment benefited too, as energy efficient devices displaced older computers, and new mobile-enabled cloud systems became platforms for efficiency across the economy.

Today mobile phones have moved beyond their primary role of voice communications and have stepped up to become an essential entertaining device for mobile users. Today‘s youth use it to express their thoughts, for social networking, to show their interests, play games, read the news, surf on the internet, listen to music, chat instantly with friends & families and even transact banking services. There are various phone manufacturers providing handsets.

The Indian mobile industry is the fastest growing in the world and India continues to add more mobile connections every month than any other country in the world. The telecom boom in the country provides a great opportunity to handset manufacturers and the hottest segment for these manufacturers is the entry-level segment. Among the fastest growing sectors in the country, telecom has been booming up the growth curve at a fiery pace.

India is currently facing the onslaught of cheap sub-standard Chinese phones, which occupy as much as 25% of the market. The boost to exports to mobile phones and their parts will encourage local manufacturing, which is the best answer to compete with the cheap sub-standard Chinese phones imports. Mobile phone exports from India could double as a result of Commerce Ministry granting 2 percent Focus Product Scheme (FPS) on mobile phone exports.

Within the product mix of smartphones, the various other product types make the smartphone ecosystem. Such product types include:

Phone Cases
Headphones & Earphones
Power Banks
Portable Speakers
Others

Consumers primarily use of smartphone for SMS and calling which stands at 45% of total activities performed. Besides these activities, the use of devices for social networking, video streaming, emailing, mobile banking, and browsing has dramatically increased in recent years.

Users mostly install gaming applications on their deivce which comprises 39% of total storage space followed by using social networking and watching videos where both types of applications stand 29% each. Weather application and Shopping applications are also in increasing use standing more than 10%.

Market Overview

Globally, Smartphone vendors shipped a total of 355.2 million units during the third quarter of 2018 (3Q18), resulting in a year-over-year decline of 6.0%. In contrast, 377.8 million smartphones were piloted in the third quarter of 2017. Samsung, the largest smartphone vendor in terms of market share, accounted for 20.3% of shipments in 3Q18, while it had gained a market share of 22.1% in previous year’s 3Q.

Meanwhile, Chinese brands’ Huawei and Xiaomi witnessed positive growth in the 3rd quarter of 2018 comparing the shipment volume in the third quarter of the previous year. Huawei’s market share grew from 10.4% in 3Q17 to 14.6% in 3Q18. Similarly, for Xiaomi, it maintained steady growth in shipments volume accounting 9.7% market share in 3Q18 from 7.5% in 3Q17.

Apple’s smartphone shipments were leveled off in both quarters with insignificant change in market share of 12%. There was a marginal change in Oppo’s global smartphone shipment of around 30 million in the third quarter of both the years.

Smartphone shipments in India touched an all-time high of 42.6 million units in the third quarter of 2018, registering a year-on-year growth of 9.1 percent.

Xiaomi led the smartphone shipment race with a shipment of 11.7 million units contributing 27.3 percent market shares. It is followed by Samsung, which transported 9.6 million units making 22.6 percent market share. Other market players like vivo shipped 4.5 million units capturing 10.5 percent market share, Micromax sailed 2.9 million units in India with 6.9 percent market share and Oppo made 2.9 million units shipments in 3Q of 2018 gaining 6.7 percent market share.

The proliferation of mobile phones in India seems to be bridging the digital divide by connecting millions of people. India is already the third-largest Smartphone market in the world and the second largest telecommunication after China.

The sheer scale of this market is attracting both local and international manufacturers, with a number of the latter looking to shift handset manufacturing to India. The Indian mobile market is unique from a global perspective, with 12 active telecommunication operators.

It is by some distance the most competitive market in the Asia Pacific. Mobile already makes a significant contribution to economic growth and job creation in India.

In India, the number of people who own mobile phones is greater than the number of people who own desktops or personal computers. Thus, it is only logical that in India, the Internet finds its way to reach the masses through mobile devices. In fact, in India, more than 50 percent of Internet users are mobile-only Internet users.

The main challenges faced by local consumers looking to upgrade from feature phones to smartphones are the cost of devices and the affordability of data services. The sheer size of the smartphone market has already attracted a range of local and international manufacturers; several overseas manufacturers have announced plans to shift production to the Indian market.

A decentralized mobile phone repair market works in conjunction with the informal resale market. Broken devices are repaired and refurbished, while defunct devices are stripped and sold for parts. As there is a huge demand for cheap and low specification devices, the second-hand market is likely to continue to grow and, without other interventions, will remain informal and decentralized.

Due to low levels of overall wealth and high inequality, the premium market is already saturated. Apple has less than five percent market share, and Android dominates 90 percent of sales.

India has one of the fastest growing telecommunications sectors with over 1.1 billion connections. It is the second largest in the world while it is continuing to grow at a Compounded Annual Growth Rate (CAGR) of 19.6 percent from 2007-2019.

Driven by an exponential surge in data consumption in the recent few years, India ranks among top five countries across the world in highest internet users and is speculated to rank as the fourth largest market by the year 2020 with two out of every three mobile phones to be smartphones.

The Indian handset market recorded over 350 million handset shipments in the year 20171 compared to 280 million in 2016.

Globally, the number of mobile subscriptions grew at 4 percent year-on-year, reaching 7.9 billion in Q1 of 2018. China had the most net additions of 53 million in the first quarter of 2018, followed by India, with 16 million mobile subscribers. In 2023, there will be 8.9 billion mobile subscriptions, 8.3 billion mobile broadband subscriptions and 6.1 billion unique mobile subscribers in the world.

Penetration will accelerate over chipset and device generations, as declining costs and prices increase volumes sold. By 2023, 1 billion 5G devices for enhanced mobile broadband are expected to be connected worldwide.

Along with increasing connected device ownership and time spent online, consumers’ media consumption habits are also shifting. India has already become the second largest market for social networking giants like Facebook with over 155 million users & LinkedIn with over 37 million users and is expected to surpass the USA to lead the global tally of the largest Facebook user base on mobile devices by 2018.

In 2017, the smartphone user penetration for India was just 33%. However, India is the world’s fastest-growing smartphone market. Smartphones provide a convenient and affordable alternative to the expensive consoles required for casual gaming and increase in smartphone penetration helped in the growth of this segment.

South Korea ranks first in the global penetration rate of smartphones, and its penetration rate is as high as 94%. By the way, South Korea is also ranked first in the world in terms of Internet penetration rate and average network speed. 94 out of 100 adults use a smartphone, which is quite high.

The penetration rate of smartphones in India is just 22% in 2018. CMR’s data also reveals that on a pan-India level, about 47% of the mobile phone users in India are on smartphones, with the remaining 53% still on feature phones.

Mobile internet penetration in rural India remains at 18%. Similarly, the figure for urban India stands at 59%. The gap between rural and urban mobile ownership in India is as high as 22 percent.

Annual production of mobile phones in India increased from 3 million units in 2014 to 11 million units in 2017. India today is the second largest producer of mobile phones, a distant second to China, which produces 900 million phones a year. Mobile phone imports reduced by more than half and the import of completely-built-units came down from 78 percent to 18 percent.

India replaced Vietnam to become the second largest producer of mobile phones in 2017.

The fast track task Force, a body under Ministry of Electronics and IT, has set a target to achieve around 500 million mobile phone productions in India by 2019, with the value estimated to be around USD 46 billion.

The body has set the target to export 120 million mobile phone units with an estimated value of USD 1.5 million by the end of 2019. There are about 650 million mobile phone users in India, and just over 300 million of them have a smartphone.

Key Highlights:

The Indian mobile phone market grew by 48% YoY in Q1 2018 driven by strong demand from the featurephone segment. The smartphone market remained flat YoY.
The performance of Chinese brands remained strong, accounting for 57% of the total smartphone market in Q1 2018, up from 53% during Q1 2017. This is the highest ever contribution by Chinese players in the Indian smartphone market.
China-based Transsion Group (the holding group of Tecno, Itel, and Infinix) has become the fifth largest player with 4% market share in Q1 2018 (combined for all three brands). Tecno, which debuted in April last year, has emerged as a leading smartphone brand and is close to entering the top ten list. The brand grew 23% QoQ in Q1 2018.
The race for the fifth position is quite close between Lava, Micromax, Honor, Nokia (HMD) and Lenovo (+Moto) brands.
In the feature phone segment, Reliance Jio now captures more than one-third of the total featurephone market – the highest ever in a single quarter, since what Nokia achieved at its peak.
Itel, is the third largest player in the feature phone segment with 17% growth YoY in Q1 2018.
Premium segment (>USD 452) remained flat YoY during Q1 2018. Samsung grabbed the top position in the premium segment, capturing half of the total premium market due to new flagships – S9, S9 Plus, and A8 Plus. OnePlus maintained the second position with one-fourth share of the total premium smartphone market.
96% of the smartphones were assembled or manufactured locally due to an increased focus on the Make-In-India program and rising import duties.

The wave of growth in India’s internet penetration is expected to come from tier II and tier III cities. The growth is expected to be fuelled by the availability of low-cost smartphones, low rates of data plans and the development of smart cities in rural areas.

The government led initiative ‘Digital India’ / ‘Smart Cities’ will certainly bring a boost for the mobile sector as that shall further emphasize on the banking services. The flexibility of technologies and convenience to use makes them capable of meeting the future needs of customers, merchants and service providers.

Country: Smartphone Penetration of Overall Mobile Phone Sales (%)

China: 96%
India: 50%
US: 96%
Indonesia: 68%
Brazil: 92%

Smartphone sales through online channels grew 65 percent in Q2 2018. Xiaomi dominated the online smartphone market in 2018. Flipkart, Amazon, and other e-tailers dominated the online channel in Q2 of 2018 with 91% market share, while vendor online channel like Mi.com and OnePlus.com accounted for 9% of online share.

Xiaomi has continued its domination on the online smartphone market with a 54 percent share, followed by Samsung at 13 percent and Huawei at 7 percent. Online smartphone market in India is set to surpass 15 million units shipments in the third quarter of 2018, growing 25 percent year-on-year and accounting for 38 percent it the total smartphone market in the country.

Online channels, including Flipkart, Amazon.in, Paytm Mall, and Mi.com grabbed 35 percent of the total smart phone sales in the country in the second quarter of 2018. Online marketplaces such as Amazon.in and Flipkart already dominated the Indian online smartphone market, whereas shipments during the quarter directly via vendors’ websites accounted for 9 percent of the total.

Market Risks

E-waste generation and penalty:

In India, Maharashtra contributes the largest e-waste of 19.8% but recycles only about 47,810 TPA (tonnes per annum) whereas as its counterparts Tamil Nadu (13%) recycles about 52,427, Uttar Pradesh (10.1%) recycles about 86,130, West Bengal (9.8%), Delhi (9.5%), Karnataka (8.9%), Gujarat (8.8%) and Madhya Pradesh (7.6%).

The global volume of e-waste generated is expected to reach 52.2 million tons or 6.8 kg/ inhabitant by 2021 from 44.7 million tons in 2016 at a compound annual growth rate of 20%. Under the new rules, producers will have to issue consumers with information on disposing of equipment after use to prevent e-waste from being dropped in domestic waste and must make the public aware of the hazardous components present.

High Investment:

Setting up a manufacturing facility involves large capital investments/setup costs which when coupled with increased raw material prices and the constantly changing tax rates does not provide a stable environment for business.

Top Market Opportunities

Smartphones seem to deliver better user experience and can accelerate the adoption of Mobile Internet. From giving access to financial transactions to the people who do not have a bank account to providing health services in the rural areas, a simple mobile phone is being touted as one of the greatest mediums of change.

New domestic entrants increasing the supply of mobile devices

China has been the manufacturing hub of the APAC region for some time and when it comes to mobile handsets, this trend has continued. However, with rising production costs in China; which have increased by over 20 percent, and increased import prices, manufacturing in India might be an economical alternative in the near future.

Since the Indian consumer is extremely price conscious, currency fluctuations impacting prices could also directly affect sales volumes.

Several Global handset manufacturers are considering setting up manufacturing units in India. Leading manufacturers in India are considering investing in local production and assembling units in the near future. Import prices too are on the rise.

The import tax is 7 percent for all handsets prices above USD 30 and is significantly higher than the 1 percent tax levied for local manufacturing. This economics of a business, therefore, make a compelling case to set up local manufacturing units for the handset manufacturers

Phablets and wearable devices slipping in

Technology innovations are allowing for the entry of phablets –devices with tablet-like screen size and smartphone-like efficiency. Leading global players have entered this market with innovative products. Such devices promise to deliver the benefits of both device types in one power packed and convenient to use the device.

The latest entry into the device market is wearable devices such as GEAR and Watch. India is barely on the radar for the adoption of wearable devices and this is also evident in the low adoption numbers. But the future for these devices seems promising.

Market Drivers

A lot of factors have contributed to the rapid growth of the Indian with an innovative market, but the two most important ones are the low cost of phones and their short shelf life. India is a cost-conscious economy, where affordable products sell the highest.

Not surprisingly, the sub-USD 150 segments of smartphones have seen the highest sales since 2012. Every smartphone maker wants to capitalize on the demand for budget devices with sub-USD 150 offerings. From local brands like Micromax to Karbonn to foreign brands like Samsung and HTC, budget smartphones have flooded the market.

To increase user adoption, several Telecom operators have competitively reduced their 3G tariffs by 80-90 percent after Jio’s entry in the Indian telecom industry. This has led the greater number of people to adopt smartphone to surf the internet.

Domestic handset vendors driving low-cost smartphone sales

An important reason for the high growth rates of smartphones in the Indian market is the contribution of domestic players which serve the low-cost smartphone segment. These vendors are enabling consumers to buy a smartphone at almost the same price as a feature phone and with better capabilities.

Due to intense competition, ASPs of the smartphones have been declining over the years, making them increasingly affordable for the mass market. As a result, the local vendors are producing sub-USD 150 phones with high-end features to increase the penetration, especially in rural areas.

Demand for 3G/ 4G LTE enabled mobile phones

The percentage of the 3G/4G subscribers as a percentage of total mobile phone subscribers is expected to increase to 29% in 2018 from just 7.5% in 2013. This is because 3G ecosystem in the country has developed rapidly, and the prices of the service have come down sharply. 4G is also facing a lot of traction, with telcos scooping up spectrum to roll out services on a large scale. This is driving demand for 4G LTE-enabled mobile phones exponentially.

Penetration of Chinese players in the Indian market, especially via online route

As China’ smartphone market has almost saturated, Chinese players are looking for avenues to leverage on India’s growth potential. They are offering high specification phones at discounted prices via online route (without setting the complex distribution network), thereby giving tough competition to the local vendors.

The emergence of dual SIM mobile phones

The emergence of dual-SIM mobile phones has been a game changer for the Indian mobile phone industry, as these phones allow consumers to take advantage of the price arbitrage in tariffs offered by different operators. Furthermore, these mobile phones enable consumers to do away with the need to carry two mobile phones.

India has a large and growing millennial population – young, tech-savvy consumers with rising earnings potential and disposable income. This demographic has historically been and will continue to be, an early adopter of new technology and new models of media consumption. India, therefore, is a market which is ripe for digital media investments. The demographics are all stacked in India’s favor for digital consumption.

Market Restraints

Incompatibility of 4G LTE devices

LTE or Long Term Evolution is the predominant 4G technology. There are two different standards for LTE namely, LTE FDD and LTE TDD. While the global 4G market uses LTE FDD, in India, LTE TDD is being deployed. Indian telecom operators have received official license to operate on LTE TDD over 2300 MHz band.

Although, the Government of India has awarded license over 1800 MHz as well which was hailed as a welcome move. However, there have been no deployments over it. The devices used for LTE FDD are incompatible with LTE TDD network. This means that many of the internationally launched 4G enabled mobile devices to fail to work in India.

Levy on Import/Export

Currently, the only export incentive available to handset manufacturers is a two percent incentive under the Merchandise Exports from India Scheme (MEIS) introduced in the Foreign Trade Policy 2015-20.

The industry is of the view that the government may increase the MEIS incentive and introduce new incentives such as freight equalization subsidy and enhance duty drawback to 3 percent to attract more players in the market and to encourage the existing players to ramp up manufacturing which would also create more jobs in India.

Secondly, zero import duty is applicable on few capital goods such as SMT lines etc. used for the manufacture of handsets. However, various other capital goods used for the manufacture of handsets and components are still not covered under the zero import duty regime. Therefore, full import duty is currently levied on various capital goods used in the manufacture of handsets and components.

Though under the new GST framework, manufacturers7 will be able to avail input credit for the equipment imported, imported equipment still add significantly to the overall cost of manufacturing in India.

Also, import of second-hand capital goods has been restricted by the Ministry of Environment, Forest and Climate Change and clearances for imports takes a long period of time to complete. Therefore, the possibility of a cost-effective alternative to import the new capital goods is virtually eliminated.

Registration of mobile handsets under Compulsory Registration Scheme (CRS) Order

The Department of Electronics and Information Technology (DeitY) issued an Order in 2015 that all mobile handsets are to be submitted to a Bureau of Indian Standards (BIS) recognized lab for testing and subsequent registration of the handset.

No handset is to be launched in the market without obtaining approvals from the BIS lab. In the telecom handset industry, competitive advantage comes from product development and faster time to market. The process for obtaining approvals from the BIS takes an average of two to three months.

As a result, the handset manufacturer loses the competitive advantage it would have gained by the timely launch of products globally and also impacts exports.

Industry Challenges

There seems to be limited collaboration between the different pillars of the ecosystem; each component is trying to take the challenges of demand, supply and customer satisfaction head-on by itself.

Bundling of services

Unlike in the developed markets where the device manufacturer gets into a strategic tie-up with the telecom operators to provide bundled services, in India, such models have met with limited success.

Under such contracts, an operator and handset manufacturer get into a partnership to offer both handsets and mobile connections at discounted rates with a lock-in period. Often penalty clauses are introduced to discourage breach of contracts. India has primarily been a prepaid-intensive telecom market with a monthly churn rate of 4 to 5 percent.

Hence, bundling of post paid services with the sale of handsets does not appeal to the Indian masses. Further, bundle options, as of now, are limited to high-end handsets which may not be appealing to the price-sensitive Indian consumer.

This not only poses a challenge in the adoption of bundled plans but also fuels the grey market for high-end handsets. However, there is potential for adoption if consumers are offered enough handset choices with personalized bundling options.

The industry is of the view that fewer benefits available with regard to export incentives, lack of a direct tax exemption regime, significant challenges related to massive gaps in skill and competency, along with stringent regulatory mandates such as restriction on imports of second hand equipment, high e-waste collection targets, etc. are making the current ecosystem unfavourable and uneconomical for business.

Export incentives schemes, tax holidays and subsidies

Indian handset exports flourished from 2008 to 2012 going up to INR12,000 crores but were interrupted by a decline of almost 30 percent in two subsequent years. Accompanied by a parallel fall in handset manufacturing, the downfall of the handset manufacturing industry became a major area of concern for the government.

In order to revive the industry, it is imperative to boost handset manufacturing in India. The FTTF, set up in 2014 has a target of increasing count of handsets manufactured in India to 500 million and handset exports to 120 million by 2020. Further, ‘Make in India’, ‘Skill India’, and other initiatives taken by the government played a pivotal role to achieve an 85 percent growth in handset manufacturing recorded in the year 2015-16 (INR 54,000 crores) over the previous year, which in 2016-17 grew to INR 90,000 crores

Reconsideration of clauses defined in the E-Waste (Management) rules, 2016

India is the fifth largest producer of e-waste in the world and discarded approximately 18 lakh metric tonnes of e-waste in 2016 (12 percent of global e-waste). Recent studies by the United Nations have predicted that by 2020, e-waste in India from old computers and old mobiles will rise by about 500 percent and 1,800 percent respectively, as compared to the levels in the year 2007.

Given that India recycles less than two percent of the total e-waste it produces annually, the Ministry of Environment, Forest and Climate Change rolled out the E-waste (Management) Rules in 2016 with the aim of reducing e-waste production and increasing recycling in the most efficient manner.

Under these rules, the government introduced the Extended Producer’s Responsibility (EPR) which makes producers liable to collect 30 percent to 70 percent (over seven years) of the e-waste they produce. The industry is unable to cope up with these targets as a majority of the e-waste collected in India is managed by an unorganized sector.

Also, informal channels of recycling/ reuse of electronics such as repair shops, used product dealers, e-commerce portal vendors, etc. collect a significant proportion of the discarded electronics for reuse and cannibalization of parts and components.

Affordability of services remains critical for those at the bottom of the pyramid and those living in rural areas. The price of devices relative to average annual incomes hinders the development of both basic connectivity and the spread of access to mobile internet.

The poorest must spend over 10% of their annual income just to afford a basic mobile phone, and even for the richest, a premium phone is estimated to cost 8.5% of their annual income.

In addition, less than 70% of rural population have access to electricity, which places a limit on the level of penetration and connectivity that can be reached and especially limits the spread of mobile in rural areas.

The median price of handsets has dropped significantly making Internet-enabled devices affordable for the masses. Several domestic handset manufacturers are contributing to the increasing trend of smartphone usage by selling high-end phones at lower price points.

Pricing Trends

The figure shows the affordability of different types of handsets for different levels of income in India. A utility phone costs the poorest 20% of the population on average 3.4% of their annual income, and this rises to 11% for a basic phone.

Even the richest 20% are estimated to be required to spend on average 8.5% of their annual income on a smart phone. Increased excise duties on imported handsets in 2015 are estimated to increase handset prices by between 5% and 7%, further exacerbating affordability issues.

Regulatory Trends

Various steps have been undertaken by the government such as the launch of the ‘Make in India’ initiative, setting up of an industry driven Fast Track Task Force (FTTF), robust duty differential scheme to encourage domestic manufacturing of handsets and components in India. Under ‘Make in India’, over 70 new manufacturing facilities have already been established since August 2015 generating over one hundred thousand direct employment opportunities.

Initiatives taken by both the public and the private sector have partially been able to help manufacturers explore the capabilities of the market.

The government has announced INR 7.45 billion incentives for electronic manufacturing which is expected to benefit the domestic manufacturers. The government has received over 250 investment proposals worth INR 1,260 billion for manufacturing phones and television sets in India.

Taxes on devices

Mobile devices are subject to a number of standard sales taxes for goods which are levied at the national or regional level. In addition to the taxes levied on the sale of handsets to consumers, manufacturers of handsets must pay excise duty of 12.5%.

Value Added Tax (VAT) and Central Sales Tax (CST): VAT varies among the states from 0% to 15%, and the states collect and keep the tax revenue. CST is imposed on goods that have been sold and moved between states, and the movement of goods not arising from the sale is not taxed. CST is levied at the same rate as the appropriate level of VAT of the selling state. Although CST is a central tax levied by the national government, the revenue goes to the government of the state of origin of the goods.
Customs Duty: Customs duty is applicable on import of mobile handsets into India. The average rate of customs duty on mobile phones is around 17%.87
Entry Tax: Entry tax is levied by states on the entry of mobile devices.
As the Indian government has increased duties on CBU and PCBA this quarter, going forward, the market will shift from SKD to CKD level manufacturing.

Other Key Market Trends

The telecom industry today is among the top five employment opportunity generators in India, creating over four million direct and indirect jobs over the next few years, according to data released by Randstad India.

Increase in smartphone sales and internet usage along with the government’s efforts to increase the penetration of technology in rural regions have made this possible.

Market Size and Forecast

The Indian telecom services market will likely grow by 10.3 percent annually to reach USD 103.9 billion by 2020. According to a report by Ericsson Mobility Report India, mobile phones subscriptions in India are expected to increase four-fold to 810 million users by 2021.

India currently produces 225 million phones valued at USD 18.97 billion a year, which amounts to 12 phones a second.

As per the latest report by Department of Industrial Policy and Promotion and the Department of Telecom, the current contribution of mobile industry to GDP (Gross Domestic Product) is 6.5 percent, the contribution amounts to be around USD 140 billion.By 2020, the industry is expected to contribute 8.2 percent to country’s GDP.

Market Outlook

By 2020, there will be 1.9 billion smart phone shipments worldwide that is growing at a CAGR of 1.2%.

The demand for electronics products in India is expected to reach USD 400 billion by 2020 from the current USD 45 billion. In India, 257 million smart phone volumes will be shipped by 2020 and the market will be growing at a CAGR of 20.8%.

According to IDC and the Ericsson Mobility Report, mobile subscriptions in India are expected to rise to 1.4 billion by 2021.

By 2020, almost 96 percent of mobile phones sold in India will be locally manufactured. The size of the domestic mobile manufacturing industry in FY 2019-20 is expected to be USD 19.40 billion as against USD 13.5 billion in FY 2016-17.

India mobile accessories market is forecast to grow at a CAGR of over 10% to by 2023, on account of increasing inclination of customers towards advanced, safe and secure accessories for their mobile phones.

Smartphone shipments in 2019 are expected to reach 160 million in India.

Globally, 8.9 billion smartphones will be shipped by 2023. Among which, around 6 billion phones will be LTE enabled while around 1 billion 5G-enabled devices will be used by technology innovators.

Distribution Chain Analysis

The mobile industry ecosystem comprises of telecom operators, handset manufacturers, content and service providers, and repair-maintenance service providers on the front-end as shown in figure 1. Telecom operators are responsible for the overall quality and reliability of the network which operates as the backbone of a mobile service.

Many Telcos have made heavy investments in the last decade for setting up the network infrastructure. Initiatives such as USOF levies and joint ventures between the government and the operators are focused on development in the rural areas. The target is to achieve a rural tele-density of 100 percent by the year 2020.

Handset OEMs

Leading handset manufacturers are launching Internet-enabled phones in the Indian market at affordable prices. The growth of Mobile Internet users in the coming years could ride on the back of increasing penetration of Internet-enabled devices, notably affordable smartphones and tablets. Compared to feature phones, smartphones tend to deliver a better user experience.

Technology providers

Mobile technologies form the backbone of mobile service delivery. Middleware infrastructure technology is crucial for driving the adoption of applications. For example mCommerce, mPayments applications depend on advanced technologies to deliver their true potential. Given the variety of devices in the market, middleware technology is playing a huge role in developing and integrating compatible application interfaces.

Telecom operators

During the last decade, heavy investments had been made to set up the mobile infrastructure in the country especially in the rural areas. The joint effort from the government and operators and initiatives such as the USOF levies are aimed at making the development of rural telecom infrastructure possible even when the investments may not be economically favorable for the telecom operators. FDI deregulation over the years with 100 percent permitted from last year has fuelled investments in the Indian telecom sector.

NTP 2012 Policy is another such initiative focused on investments in network infrastructure in the rural areas with the target to achieve rural Tele-density of 100 by the year 2020. Further, the operators are focussing on setting up the broadband infrastructure as ARPU from data services is witnessing growth. The uptake of Mobile Internet will likely depend on the development of mobile broadband infrastructure.

Currently, 96,000 of the 736,000 telecom towers in India are 3G enabled and most of them are restricted to urban areas. Despite the heavy investments, the sector does face few challenges.

Content and service providers

Content and services refer to the delivery of content (audio, video, etc.) and services over the Internet with telecom service providers having limited distribution control, rights and responsibilities in terms of content delivered. The content market comprises communications, social networking, information, chat, gaming, and other entertainment-based content. Relevant content is a key driver for adoption of content services.

The adoption of smartphones which enables access to rich content has played its part in revolutionizing data usage. Demand for localized content may drive the next phase of growth as Mobile Internet reaches deeper rural pockets. Content and service providers/ aggregators are endeavouring to offer content in these languages to meet the needs of the expanding mobile user base in India. About 42 percent of total Internet users in India access local language content.

While on the back-end as shown in the second figure, Original Equipment Manufacturers (OEMs) do meticulous Research and Development for the equipment innovation. IN the second phase, Original Design Manufacturers (ODMs) take the ownership of their innovative designs. After that, various suppliers supply component parts to manufacturers.

This stage is followed by system assembly, configuration & Testing, and distribution respectively. These activities are performed by Electronic Manufacturing Services. And then there is unorganized market of repair service providers which comes after the post purchase of the devices.

Competitive Landscape

Xiaomi maintained its lead in the market with 30% market share in a row with further expansion in the offline channel and popularity of its models such as Redmi 5A and Redmi Note 5. Samsung remained at the 2nd spot in smartphone ranking contributing 25% market share with flat annual growth.

Samsung’s two-pronged approach with the focus on low-to-mid range J series and the latest flagships Galaxy S9 series along with Galaxy S8 series and Note 8 in the premium segment drove shipments for the vendor. Oppo climbed up with just over 6% than that of Vivo.

On the offline front, Transsion continued to drive growth achieving 4% market share through its brands itel and Tecno by expanding aggressively to Tier II and Tier III towns & cities by focusing on channel management and after-sales service.

Reliance Jio is the disrupter in Indian mobile phone and telco industry. Within a year of its entry, it had gained 38.40% market share in feature phone segment by providing bundled low-cost internet service. Samsung’s low-end phone segment covered 10.80% market share overtaking 7.90% share of Transsion. Other players in the segment are Lava with 6% and Micromax with 4.70% market share in the feature phone segment.

This is the first time that the top five smartphone brands accounted for more than 70% market share in a single quarter, which could accelerate exits and possibly consolidation. Xiaomi and Samsung alone captured 58% of the total smartphone market. Xiaomi’s performance is driven by rising product-pull in the offline market, building upon its strong presence in the online channel where it captured a record 57% share.

The 4G feature phone market continued to grow at more than 50 percent quarter-on-quarter, driven primarily by Jio Phone. The operator disrupted the market by introducing aggressively priced data plans at USD 0.7 in the initial weeks of the quarter acting as the catalyst for growth.

The race at the top of the market continues to be a heated one as Huawei once again slipped past Apple to the second position.

Migration from feature phones to smartphones: A steady decline in the prices of smartphones because of an immensely competitive Indian market seems to be narrowing the price gap between smartphones and feature phones and is making smartphones affordable to larger Indian population. As a result, feature phone shipments are on a slow but steady decline.

Reliance Jio’s aggressive pricing and promotions of its 4G feature phone have resulted in growth in this segment outpacing that of the smartphone for two consecutive quarters.

Apple has begun local production in India in early 2017 and saw 900,000 iPhone shipments in the third quarter.

The premium end of the market (USD 500 and above) grew almost two times year-on-year mainly due to continued strong shipments of Samsung Galaxy S9 series and OnePlus 6.

Reliance Jio, the main driver of the 4G feature phone segment with its JioPhone range of phones, remained the top vendor in the overall feature phone market.

Samsung’s midtier smartphones faced continued competition from Chinese brands, which led to unit sales contraction year on year. This is despite the earlier launch of its flagship Galaxy S9/S9+ compared to the S8/S8+ in 2017, and despite the Note 8 having.

Android covers majority of market share among all mobile phones sold in India. During 2017 and 2018, Android captured more than 85% market share. iOS is a slow gainer in mobile operating system race. It had less than 15% market share of all the shipments in India.

OnePlus has emerged as the market leader in premium smartphone brand; with a market share of 28% in the third quarter of 2018. It has outnumbered Apple’s share of 27% in 3Q18 in India. Samsung was the third largest players in the high-end smartphones segment with 25% market share in Q3 2018.

Smartphone shipments in India touched an all-time high of 42.6 million units in Q3 2018 quarter, registering a year-on-year growth of 9.1 %.

Competitive Factors

Affordability

While the mobile market is characterized by relatively low prices, the socioeconomic characteristics of the Indian population mean affordability of services remains a key issue. India is a lower middle-income country with GDP per capita at USD 1,940 in 2017 and 22% of its population living at bottom of the pyramid.

While price competition has resulted in relatively low prices and a significant proportion of the Indian population has become connected, there are still areas where incomes are very low and as such mobile services have remained unaffordable for many at the bottom of the pyramid.

The primary reason for the success of Xiaomi is the low-end phones packed with incredible features. Indian customers always look for a good bargain, so the same features that Samsung offers at the USD 285 – USD 430 range are offered by Xiaomi at the sub-USD 215 segments.

Discounts

Where online brands are concerned, customers are always in for huge discounts and deals. There are festive offers, inaugural offers, end-of-season sale, and low-cost EMIs that enable even the lower middle class to own a smartphone.

Services necessary services have rolled out smartphone apps, driving people to learn more about technology in order to be able to use certain services. The convenience offered by app cabs and food delivery apps are also major drivers among the educated middle class for getting smartphones.

Key Market Players

Top 5 smartphone vendor

Xiaomi Xiaomi continued to lead the smartphone market in the 2018 by doubling its volume year on year. Also, its continuous efforts to expand offline footprint has helped get visibility for the brand, thus ensuring availability in more places.
Samsung Samsung remained at the 2nd spot in smartphone ranking with flat annual growth in 2018. Samsung’s two pronged approach with the focus on low-to-mid range J series and the latest flagships Galaxy S9 series along with Galaxy S8 series and Note 8 in the premium segment drove shipments for the vendor.
OPPO Oppo climbed to 3rd position from 5th in 2018. While it launched F7 in later half of 2018Q1, bulk of its shipments came from mid-ranged A series with upgraded variants in 2018. The channel realignment to focus on channel partners primarily with high sales contribution continued to build deeper relationships in those channels.
Vivo Vivo slipped to 4th position as its shipments declined by 29.4 percent year-over-year in 2018Q1. However, the brand grew by 2.1 percent as compared to previous quarter. The Y series of Vivo continued to generate close to 70 percent demand.
Transsion Transsion made its debut in the Top 5 with more than threefold annual growth in shipments in 2018Q1. The China based group has four brands under its umbrella – namely itel, Tecno, Infinix and Spice. With its primary focus on offline channels, itel and Tecno branded phones are doing well in the highly price sensitive India market.

Samsung Electronics has formally opened a new factory in India, which the South Korean tech group says is the world’s biggest mobile phone manufacturing plant, part of its plans to expand production in the world’s fastest-growing major mobile phone market.

Huawei surpassed Apple to become the world’s second-largest smartphone seller in the world first in the second quarter of this year and then again in the third quarter with a global market share of 14.6 percent, according to data from the International Data Corporation (IDC). In the past eight years, Huawei’s smartphone shipments have increased from three million units in 2010 to 200 million units in 2018, reflecting approximately a sixty-six-fold growth.

At present, more than 500 million consumers in more than 170 countries around the world are using Huawei smartphones, it added. Compared to 2017, Huawei sold around 50 million more smartphones this year.

Apple’s newest iPhones helped push third-quarter shipments to 46.9 million units, up 0.5% from the 46.7 million units last year. Apple once again launched three new devices at its Fall event, as the new 6.5-inch iPhone XS Max and 5.8-inch iPhone XS were joined by the more affordable iPhone XR in the Apple line-up. The new XS Max and XS continue off the success from last year’s iPhone X but bring a new screen size option with more power and increased performance to the table.

OnePlus has once again topped shipments in the premium smartphone segment in India, in Q3 2018, for its second successive quarter with about 30 percent of market share. This success owed mostly due to the sales of the company’s OnePlus 6 smartphone.

In fact, OnePlus 6 became the phone maker’s highest selling flagship smartphone within five months of launch. Other than that, the overall premium smartphone market in India (above Rs. 30,000) reached an all-time third-quarter peak during Q3 2018.

Strategic Conclusion

Smartphone sales is shrinking down in major markets, including the U.S., China and mature Western Europe but in contrast, India represents the second-largest mobile phone market after China.

In addition, demonetization coupled with various government initiatives such as ‘Made in India’ and ‘Digital India’ coupled with the reduction in internet tariff rate is bringing a new use case for smartphones, which, in turn, is set to trigger higher demands for smartphones.

This opens the opportunity for service providers to launch mobile wallet solution or even vendors to launch their exclusive mobile payment solutions like Android Pay or Apple Pay to build an ecosystem.

While the sector faces challenges, the opportunities present outweigh the issues. Better collaboration, right partnership, and the right service package can trigger the market growth and help in evolving the ecosystem further. Collaboration between telecom operators and handset manufacturers to offer bundled services could prove beneficial to the customers.

A hyper-local smartphone manufacturing ecosystem focused on producing low-cost but high-feature smartphones will play a vital role in meeting the needs of local consumers in Tier II and Tier III cities.