CELLULAR HANDSETS: The Second Coming



The Indian cellular market appears to be on the verge of an explosion. With a
growth rate of 1.5 lakh subscribers each month and a 1000 percent growth rate
forecasted over the next five years, the stage is set for handset vendors to
flex their muscles in the market place. Over the last month-and-a-half, several
cellular handset manufacturers announced their intent to strengthen their
presence in India. While the market has, till now, been dominated by the likes
of Nokia, Ericsson, Motorola and Siemens, the recent announcements by Alcatel,
Sony, Philips and Mitsubishi indicate that the market is set to witness some
interesting trends. The move by these vendors assume more significance in light
of the fact that they have been dormant even after setting up shop in the
country, years ago.

The low-key presence of these players was due to several reasons. Vendors did
not expect the stagnation which the sector witnessed until 1999. It was only
after the government announced the revenue-sharing formula that things looked
bright again for the cellular market. The high license fee that operators had to
shell out resulted in passing on the burden to users. Besides, the operators
also did not have surplus cash to invest in market-building exercises. The
market therefore was sluggish and did not warrant attention by the handset
vendors. Other factors like the overwhelming grey market and the price-sensitive
Indian buyers added to the woes of the handset vendors. With grey market figures
as high as eighty percent, vendors had to take a beating and withdraw their
operations.

The New Contenders

Now things have changed and the market appears attractive. Says Bob Pillay,
general manager, Philips Consumer Communications (PCC), South and South East
Asia, “I can state three reasons why we find the cellular market attractive
just now. We see consolidation taking place among operators, the fast roll out
of networks and the conducive regulatory environment.” While admitting that
the last time PCC made its appearance in the country, some of its projections
did not materialize, this time round the company is confident of the market
growth. As if to prove its commitment, PCC has appointed a new general manager
in the country, Bob McDougall, who is expected to spearhead its offensive in the
handset market. It has also marked the occasion by launching three handsets
targeted at different segments.

Mitsubishi, another market driver in the East, particularly in Japan, and
Europe, is also on the offensive. It plans to target ten percent of the
marketshare in the current fiscal by focusing on the lower end of the market.
The Mitsubishi chief representative in the country, Issac Waldman, has said that
the company would emphasize on fighting the grey market and increasing its
exposure in the lower end. It would also target the medium and higher end of the
cellular phone user segment. French telecom major, Alcatel, which has a six
percent marketshare in the worldwide handset market, has negligible presence in
the country. According to the recent plans of the company, this anomaly will be
corrected with the launch of its three new models and an advertising campaign to
create a marketspace for itself.

Sony Corp, the Japanese major in telecom and electronic products, is also
planning a re-entry into the Indian market with the launch of its WAP-enabled
phones. Despite its presence in the country, Sony had discontinued the sale of
its handsets in the country by the end of 1999-2000, in view of the growing
demand for cheaper products. At the same time, the tremendous growth of the
European market forced the company to rework its strategy to exclude India from
its list of destinations.

Samsung, a player which made its appearance in the handset segment sometime
in the latter half of 1999, claims to have established its presence in the mid
and high-end of the spectrum. This year, the company plans to launch GPRS and
WAP-enabled phones. Banking on the growth of the replacement market, Samsung
expects the high-end products to do well.

The Target Segments

Most vendors have identified entry-level subscribers or first-time users and
the replacement market as major market drivers. Since the volumes will be in the
low-end, most vendors will be gunning for this segment. "India is a
price-sensitive market and we shall try to tap the low-end with products priced
as low as Rs 3,900," said the Mitsubishi India representative, Issac
Waldman. Not everyone is lucky to make it below the Rs 5000 mark though. Says
Alok Bharadwaj, Motorola head of channels in the country, "Under legitimate
pricing, it will not be possible for vendors to push the product pricing below
the Rs 5000 mark." He opines that the only way prices are likely to be
pushed down is when new models hit the marketplace, older models will get pushed
into lower price brackets.

Tech-savvy customers who will essentially lead the replacement market are
also expected to drive the market. Thus, players like Sony will essentially
pitch in the high-end feature driven segment of the market by launching WAP-enabled
phones starting from Rs 18,000. It is a segment in which every player has at
least something to offer whether it is Nokia, Motorola, Philips or Samsung. The
middle level segment in the range of Rs 8-12,000 is also a sizable market and
players here will try to undercut prices to gain marketshare.

The Grey Market

A story on the cellular handset market in India would not be complete without
referring to the grey market. "No vendor can contend with the prices of the
grey market," is the unanimous outcry of handset vendors. The problem is
acute in the country as rarely are handsets bundled by service providers.
Operators here have the issue of revenue share and therefore shy away from
bundling handsets with their service. "Since there is no clarity on the
issue of as to what constitutes seventeen percent of the revenue share,
operators are reluctant to bundle handsets into the service costs," says
Sanjeev Sharma, country manager, Nokia.

Vendor strategies to fight this phenomenon would range from strategic
alliances with service providers to creating awareness about the benefits of a
legal purchase. Adds Sharma, "The grey market will continue to be a threat
as long as the high customs duty exist. Our endeavor here would be to create
awareness amongst users and lobby with the government." To bring in the
benefits of a legitimate purchase, both Nokia and Ericsson have set up dedicated
service centers.

Another factor fueling the grey market in India is that it has become a
dumping ground for European dealers. A lot of second hand instruments find their
way into the Indian market since the replacement market is the major driver in
Europe. The feature-driven European customer gets swayed by new models, with the
outdated models finding its way into the gray market here. Another related issue
is the bundling schemes in Europe. Cellular operators offer handsets at
throwaway prices to woo customers into entering into airtime contracts with
them. Dealers in Europe buy them from service providers and sell them here as
unbundled handsets. If established players have to contend with this
overwhelming phenomenon, new players have an even more daunting task. Sony,
Mitsubishi and Philips are all wary of this problem.

The Drivers

Despite the grey market, vendors see an overwhelming market. According to a
recent study by Salomon Smith Barney, India’s subscriber base is expected to
grow by more than a 1000 percent from the current figure of 3.1 million to 45.9
million by 2005. Of the total subscriber base in the top ten countries in Asia,
India alone will have 11.3 percent of the share by 2005 as against the current
figure of 2.2 percent of the total Asian subscribers. The forecast assumes
significance in light of the fact that currently China, Korea, Taiwan and
Philippines are way ahead, with a subscriber base of 72 million, 26.9 million,
14 million and 4.9 million respectively.

The real addressable population in India is expected to grow from 86.5
million to 205.7 million. This means that by 2005, India will have 160-million
people who will have the potential to possess a mobile but will not possess one.
The penetration level is expected to increase from 0.3 percent to 4.2 percent
during the period.

Meanwhile, the regulatory scenario in the country has also eased up
considerably. The entry of MTNL in the metros and BSNL in the circles and the
finalization of the guidelines for the entry of the fourth cellular operator
have fueled the potential of the market. With the entry of MTNL came the
slashing of airtime and rental rates. This is further expected to spur the
growth. So much so, according to COAI’s figures, that the number of cellular
connections in the country is expected to cross the fixed line connections by
2008.

Balaka Baruah Aggarwal

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