MOBILE HANDSETS: GSM Up, CDMA Down

I t was a year of mobile as wireless base has overtaken wireline base and is
also adding up a sizeable number every month. The overall number were not
attractive but GSM numbers were rosy whereas CDMA number was rather gloomy as
Monsoon Hungama' was missing. On GSM front, Bharti, BSNL and Hutch gave good
numbers whereas in CDMA is still Reliance which is the star attraction for
handset vendors but it could not create hungama in CDMA.

In volume terms, India witnessed a total addition of around 15.4 million
phones in FY 2004—05. GSM contributed around 79.5 percent, i.e., around 12.2
million whereas CDMA contributed around 20.5 percent, i.e., around 3.16 million.
For GSM there was growth of around 49 percent whereas CDMA had a negative growth
of around 44 percent.

In value terms, India's mobile market in FY 2004—05 was to the tune of
around Rs 8,805 crore in comparison to Rs 7,785 crores in FY 2003—04. Overall,
the market grew by around 13 percent. GSM contributed around 84 percent whereas
CDMA contributed around 16 percent. The overall handset market did not do very
well due to CDMA handsets not picking up in the Indian market. For GSM, growth
was around 76 percent whereas for GSM it was around -61 percent.

CDMA Versus GSM

In the handset category, GSM was the star attraction and Nokia the star
player. Nokia was the market leader in GSM with a market share of around 62.3
percent whereas in CDMA it was LG with a market share of around 59 percent.

For CDMA, the distribution channel is through operators though a few vendors
are also working on a direct model. But the significant portion of revenue comes
through offers bundled with operators' offerings. Vendors like Nokia opted for
both the models-operator driven as well as directly through Brightpoint.

For GSM, the distribution channel is through distributor followed by
retailers is the general practice. Some companies like LG have their own setup
for marketing of GSM phones in the country.

Companies like Siemens and Alcatel have lost their touch in the Indian market
and their space was taken by new players like BenQ, Bird, Philips, and
Panasonic. In GSM there were new entrants in very high-end category as well as
in the low end ones. In very the high end, some of the active companies were:
Blackberry, Krome, O2, and HP. In low- to high-end categories, new players
active and/or planning to be active are Haier, ZTE, Huawei. In CDMA, Chinese
players like Haier, ZTE, and Huawei made their presence felt and are planning to
launch models in all the categories.

The Players

Nokia leads the market in GSM as well as the overall handsets category but it
will have to do a lot on the CDMA front where LG has a significant market share.
Nokia has a market share of around 55 percent and is way ahead of its
competitors. The success of Nokia can be attributed to its large range of models
and a good channel strategy. The company launched more than a dozen models in
GSM and around six in CDMA in the last fiscal. HCL Info and Brightpoint are its
all India distributors for GSM and CDMA respectively.

On the distribution front, Nokia has more than 95 stockists, who cater to a
channel strength of around 35,000 in A, B, and C class cities. The company also
has around 450 Nokia Priority dealers, more than 50 Nokia care centers, and 100
franchisee-managed operations.

LG and Samsung ran neck to neck for the second position. LG had a market
share of 11.8 percent whereas Samsung had a market share of 10.5 percent. With
CDMA not doing well, LG's revenues were badly affected. As in the past,
majority of its revenue comes from Reliance Infocomm. In the GSM category, LG
focused on color and camera phones whereas in CDMA it was in all the segments.
In the last financial year, it launched four 3G models: U8110, U8120, U8130, and
U8138. These handsets can provide live video streaming, video conferencing, 3D
gaming, continuous video recording, auto launch browser, and 384 kbps download
speed.

Sasmung was in the third position with a market share of 10.5 percent. The
company did well in GSM and was placed second in that category. In last
financial year, Samsung launched phones with many differentiating features in
the in clamshell and slider categories. The phones launched were: E700-the
first multi-shot camera phone; SGH X600-first bar phone with rotating camera
and flash; E800-high-end slide phones. On the CDMA front, it launched world's
slimmest phones, which did well in the market.

Motorola came in at number four with a combined market share of around 8.6
percent. The company has to do a lot of catching up both on the CDMA as well as
GSM fronts. The company has to first rectify its distribution network: it is
based on regional/state basis and it does not have an all-India distributor. The
company has recently launched low-end phone in Rs 1,700 category, to cater to
the masses. Rugged in nature, these phones have long talk times as well as
standby periods so that they can adapt to the erratic power situation in rural
areas.

Sony Ericsson did extremely well on the high-end phones and is ranked at
number five, followed by Kyocera, which did well due to its Tata Teleservices
account. BenQ focused on color-, camera-, and PDA-phone versions. The company
also signed up with Adonis, a service arm of Onida, for providing after sales
support.

The Trends

Monochrome phones contributed 60 percent and 40 percent came from the
colored category. In terms of bar phones versus clamshells, the shift is more
towards the bars and they contributed around 85 percent. With changing times,
and with increase in data usage, one will see an increased usage of clamshell
phones in the country as they afford a larger viewing screen for the users and
larger margins for the vendors.

In terms of classification, the Indian market is divided into eight
categories-monochrome, basic color, color step up, color camera, color camera
step up, color camera video, color camera video step-up, and smartphones.

Phone prices are coming down by around 15 percent and in cases where prices
are not coming down, customers are getting more features at a lower price. The
catalysts for mobile phone growth are: color, camera, and music. And in music
specifically-FM and MP3 were the favored ones.

In order to compete in the Indian market, vendors are focusing mainly on
differentiating factor to promote their products in the Indian market. Price
cannot be a differentiating factor here as the market leaders drop their prices
to match those of any pretender. All this affected margin adversely, which were
in the range of three to six percent-depending on the handset category.

Drop in customs duty as well as slashing of airtime rates by operators helped
the explosion in GSM and fueled the market for future growth. Manufacturing took
a front seat due to PLC (product life cycle) reducing from 12 months to six to
eight months.

All these resulted in manufacturing of phones becoming attractive in India.
Local manufacturing helps the vendors to cope with fast-changing PLCs and also
helps in cutting handset prices. Local operations will also help in reducing the
product development cycle, which can be reduced to less than six months:
starting right from basic design through to industrial design, testing,
compatibility test, debugging, testing the product, commercial manufacturing,
and distribution. And this cycle will reduce further software customization
being done locally.

FY 2004—05 saw emergence of smartphones and PDAs in the Indian market from
brands like: O2, Krome, BlackBerry, and HP. O2 phones are sold in India by
Creative-e-biz.com, which currently has around 100 dealers. Blackberry is sold
exclusively through Bharti.

New Players

Chinese players: Huawei, ZTE, Utstarcom, and Haier are looking at the Indian
market aggressively, both in CDMA as well as GSM space.

In February 2005, Haier Appliances India has entered the Indian GSM market.
The company has launched around seven models in the country, ranging from Rs
3,500—1,400. The company is planning to launch 10 more models in FY 2005—06.
In India, the company launched the world's slimmest camera phone, pen phone
with camera and voice recording (ideally suited for doctors and journalist),
phone with MP3 and stereo speakers, phone with FM radio, and camera phone. In
the CDMA space, it is looking at the entire range. And is working closely with
the operators to get a substantial market share in India.

ZTE, the Chinese player, has opened its account and has bagged orders to the
tune of around Rs 20 crore.

Huawei is also planning to launch both GSM and CDMA handsets in the country.
The company is looking at all the segments-low, middle, and high. For GSM, the
company is talking to channel partners and for CDMA, it is in talks with BSNL
and MTNL.

UTStarcom is planning to launch phones in the all the categories: in the
low-end category phones like C1000, C1100, and C1222; and in the color and
camera categories phones like CDM7000, CDM7100, and CDM7200

Future Challenges

Mobile phones have moved to the masses in urban areas but the real challenge
is how to address semi-urban and rural areas and achieve the 250 million mark by
2007. It is not an easy task and will require the service providers, vendors,
and channel partners to work together so that India can achieve the high
telephone penetration levels.

The first challenge is to enhance the distribution channel, so that it is
able to cater to the semi-urban and rural environments. Second challenge is the
high level of localization as the power situation in these areas is erratic and
the interface of the phones will have to be in local languages. The third
challenge is to ensure that these phones are available at a cost that will be
within the reach of a large population in the semi-urban and rural areas.

Pravin Prashant

Methodology

The mobile handset analysis includes CDMA and GSM handsets and doesn't
include FWTs, which are now being included in the fixed phones category.

For V&D estimates, we have taken grey which is replaced by parallel
import, replacement market, and also churn plus duplicate SIM to get a true
picture of India's GSM handset market.

The good thing about FY 2004—05 was the sharp drop in grey market, from 25
percent in FY 2003—04 to almost around 15 percent due to drop in customs duty.
The 15 percent grey was basically parallel imports, which is a new phenomena in
the Indian market. The replacement market is around 10 percent of the total base
whereas churn plus duplicate SIM was around 15 percent.