Feeling the Heat

The recent DoT move especially targets handsets imported from China, which
lack the crucial IMEI numbers. The low cost Chinese and gray market handsets are
clearly going to feel the heat as current users would be forced to change the
handsets to ones having valid IMEI numbers.

The IMEI numbers emerged as a critical link for the Intelligence Bureau
during the investigations of the recent terrorist attacks. If the law enforcing
agencies had valid IMEI, they would have been able to track the origin to the
points of sale. The DoT order becomes crucial in this background.

Though the branded players like Nokia, Samsung, Sony Ericsson and others
mostly dominate the Indian handset market, Chinese manufactured goods have been
slowly and steadily making inroads in this growing segment. This is especially
true for the tier-2 and 3 cities. In the recent past Chinese handsets have been
eating into the share of branded handsets by claiming to provide the same or
similar features at a reduced price.

These handsets are flooding the Indian market despite the fact that it is
illegal to sell these handsets in the market since they don't come with any
valid documents However, Chinese handset markets such as ztE, Haier and Huawei
meet Indian Standards.

This is not the first time that DoT has come down hard on Chinese handsets.
DoT was earlier planning to include mobile handsets, parts, components and
accessories on the government's watchlist to counter dumping of cheaper products
from China. The industry has been wary for the last three years of the huge
parallel market emerging due to cheap imports from China.

As the popularity of Chinese handsets soared, branded handset manufacturers
have been trying to think of ways and means to find a solution to this problem.
Anti-dumping duty could have helped in solving the problem, but this was
unviable since many branded handset manufacturers also import handsets from
China. In fact, the entire consumer goods industry is dependent on China for
manufacturing of the products.

According to Voice&Data estimates around 90% of the market is controlled by
the branded players. Around 5% of mobile subscribers are using gray handsets and
approximately 20 mn would be using the handsets without proper IMEI numbers.

Welcome Move

In the background of the Chinese handsets eating into the marketshare of the
branded handset manufacturers, it is no surprise that the latter have welcomed
the move.

The move to restrict calls made to the Chinese handsets will give a fillip to
the business of branded handsets. Customers already using these handsets without
the IMEI number would then be forced to purchase a branded handset with an IMEI
number.

“It is a crucial step from the national security point of view and will
certainly serve to discourage consumers from using handsets without IMEI
numbers. This initiative will certainly move consumers away from unbranded
Chinese handsets toward branded handsets,” says Sunil Dutt, country head of
Samsung Mobile.

“We welcome the DoT's recent directive and feel that their step to set-up the
Equipment Identity Register (EIR) is a positive one toward consumer interest as
well as national security. Unbranded and counterfeit handsets without legal IMEI
numbers not only pose a severe threat to national security but also do not
incorporate all the safety precautions required to safeguard consumers. Calls
made from these handsets cannot be tracked by security agencies and hence are
used by anti-national elements,” says Nokia's director for corporate affairs,
Ambrish Bakaya.

“The use of unbranded handsets can also cause bodily harm to consumers as
these products do not follow stringent quality control or approved standards.
These unbranded handsets and batteries are manufactured in extremely poor
conditions with manual welding, poor slitting machines using non-standard
coating material. They also lack safety mechanisms such as Protection Circuit
Module (PCM). As a result these handsets deliver very poor performance and are
not safe to use,” Bakaya adds.

A mobile phone is still a capital investment for most of the subscribers in
the country and that to some extent explains the increasing popularity of
unbranded handsets. A GPRS-enabled Chinese handset costs around Rs 3,000 as
against Rs 4,500 to Rs 5,000 for a similar branded phone.

While there is no data to support this, it is not just the tier-2 or -3
cities that are the hubs for Chinese handsets, they are increasing in popularity
in the metros too. Customers feel cheated by handset manufacturers as the cost
feels too high when a phone offering similar features is available for half the
price in the gray market. That apart, a section of the customers also feel that
the cost of a particular cellphone continues to come down every month, so it
makes sense to buy a cheaper phone.

There is a lot of hue and cry on many blogs with users claiming that mobile
manufacturers should take a cut on their prices as the same features are
available in fake handsets at sometimes less than half the price.

“Every company is changing its models every month, in all possible segments.
They charge a lot of money for all the services they offer. And as an end buyer
wouldn't I feel cheated if the very next month I get to see someone using the
same mobile phone at a lower price and a better handset at almost equal price?
The important facts to be considered by companies are: Why are the prices so
high? Why do you change the models so frequently? And, why do you decrease the
price of a set every month?,” says one agitated reader in a blog.

It is in this space that the small Indian Players like Usha Lexus and Intex
are entering and making a mark. There are a number of Indian companies which
import phones from countries such as China or Taiwan, marketing the phones under
their brand name. The only advantage they offer is services not provided by the
non-branded Chinese products.

One reason that dealers and distributors are keen to stock Chinese handsets
is because of the high margins as compared to the branded ones. “The margins on
a Chinese handset is almost double of margins on a branded ones,” says Navneet
Kandoi, director of Kolkata-based HelloM, who also import handsets from China.

Not just Chinese handsets but small Indian players like Usha Lexus, Xtelecom,
etc, are also likely to feel the heat as customers shift toward branded
handsets.

“Nokia and other big guys were being hit by increasing sale of unbranded
handsets. Now they will benefit the most as a result of DoT's directive,” says
Vaidyanathan of Xtelecom.

Haier is the most prominent Chinese mobile brand in the country and it is
likely that this order might have some adverse impact on its sale. And this
despite the fact that the company offers branded products with valid IMEI
number.

“It is a known fact that most consumer durable products are manufactured in
China. So I don't think that all products manufactured in China are going to see
a drop in sales. DoT is targeting handsets which don't have IMEI numbers and our
products are legal in all respects. It is a positive step but it has to be
implemented properly,” says Sudhir Agarwal, CEO-mobile handsets, Haier.

Another company which imports handsets from China is Frio Mobile, which is
basically present in the NCR region. “We import only certified handsets from
China and have complete details about the IMEI registration number. It is
necessary for the government to come clear on this directive...they must make it
clear if they want to do it in phases or it is going to be blanket ban. On the
whole it is good for business and security,” says Ashish Bhatnagar, manager,
sales with Frio Mobile.

His view is echoed by Kandoi of HelloM: “The move will definitely increase
our sales as we are bringing handsets legally by paying import duties and with
registered IMEI numbers. Since the price range of our handsets falls in low- to
middle-price bracket, it will help in increasing sales.” HelloM retails under
the brand by the same name.

If there are advantages of buying cheaper Chinese or unbranded handsets,
there are disadvantages as well. Many a times, these handsets boast of features,
which are actually not present. Apart from this, the after-sales service is
almost non-existent. Model names and numbering on the handsets are almost
similar to that of the original branded products in the market.

There are also some issues associated with the implementation of this
direction. Many software to change the IMEI numbers are freely available on the
Net. It is not legal to change IMEI numbers in India, unlike in the US and the
UK. The dealers address the issue of absence of IMEI numbers by changing the
number if it all zeroes. The DoT order doesn't talk about these issues.

“Loopholes like changing the IMEI number, etc, can be plugged by DoT by
working with the operators and enforcement, since changing the IMEI number is
not even legal in the country,” says Dutt of Samsung.

Damp Squib

While handset manufacturers are rejoicing that Chinese handset manufacturers
might be barred from making calls, this is not true of service providers. In
spite of our repeated attempts, most operators refused to comment on the latest
order

“There are a lot of questions regarding the implementation of this order. The
first question is how to find the fake numbers. Moreover, anybody can apply any
permutation and combination to get a fake number. What is the mechanism to do
the same? As of now there is no clarity on how we are going to implement this,”
says an industry source on condition of anonymity.

The other perspective is that mobile networks might know exactly who all are
using the handsets with fake IMEIs but since disconnecting them would lead to
the loss of revenue, they continue providing connectivity to them. Analysts
believe that service providers have the equipment to block the handsets with
fraudulent IMEI numbers and they are not doing it because of the fear of loss of
business.

“The Government's move to ensure usage of handsets with IMEI numbers is
important since these numbers will help us to locate cellular customers. As an
organization which has some social obligation, we have been using handsets with
IMEI numbers. We source handsets from Samsung and Huawei and both the companies
are offering handsets with IMEI numbers,” says P Madhavan, chief sales and
distribution officer at Virgin Mobile.

Other service providers that we got in touch with refused to comment on the
issue.

“DoT has to be strict with the implementation of the directive simply because
service providers will not be willing to implement this. There should be clear
notification and the monitoring mechanism has to be very strong. It should
become mandatory otherwise it'll lose its meaning,” says principal Analyst with
Gartner, Anshul Gupta.

As of now, the Indian service providers are not maintaining any database of
the IMEI numbers, which are to be denied the service. In many countries the
service providers share the list of blocked IMEI numbers. GSM Association
maintains a global list of blocked IMEI numbers. While DoT's directive is a
positive step a lot remains to be done to ensure that the miscreants do not
misuse telecom services.

The Chinese handsets are likely to feel the heat as a result of this move.
The DoT, on the other hand, will have to come out with a strong monitoring
mechanism to ensure that the service providers block the calls originating from
handsets with fake IMEI numbers.

Gagandeep Kaur and Heena Jhingan

gagandeepk@cybermedia.co.in