Telecom Channels: Rural Thrust

Riding high on the telecom growth and with focus to cater to
customers of every category, mobile handset manufacturers have left no stone
unturned to reach them. While service providers come up with innovative ideas
and various tariff plans that would suit everyone's pockets, handset vendors
pick up new ways to ensure that customers get a handset at their doorstep. And
now, as the focus has shifted to 'B' and 'C' category circles as well as
rural India, handset-manufacturing companies have redesigned their distribution
strategy. The companies are getting a boost with the fact that the mobile users
are expected to cross 220 mn by the year-end and 500 mn by 2010 with an addition
of about 6-7 mn subscribers every month. On top of that, almost 50% of India's
population is still untapped by this industry. And this figure refers to rural
India, as 65% of the Indian population lives in villages. So the real growth is
expected from this geography.

Market Opportunity

The set target of reaching around half a billion customers by 2010 and the
teledensity of 45% seems achievable. What gives the industry confidence of
achieving these numbers is the investor friendly government policies, a
consistently strong GDP growth, the exploding young population, and the Indian
business model of being profitable despite having the lowest tariff in the
world.

Analyzing the NCAER IMDR 2002 data, and in the current scenario,
it can be said that roughly 60% of rural households may be too poor to afford
telecom access but the remaining 40% are in a position to afford, provided the
handsets are low in cost. According to World Bank "Wherever they are given
a choice, poor communities often spend on communications as much as urban
communities, in terms of percentage of available income." Moreover, the
bank also emphasizes "There is evidence to suggest that people will spend
up to 2% of their income on phone calls if a phone is available to them, even in
rural communities."

In reality the demand of mobile phones is increasing very fast
today, even in small towns. Category C circles have, on average, 85% rural
population, while category 'A' and 'B' comprise of 67% and 75% of the
rural population respectively. Further, category 'C' circles, which includes
Himachal Pradesh, Bihar and Jharkhand, Orissa, North East and Jammu and Kashmir,
have on an average lower per-capita incomes than states in other categories-approximately
Rs 8,000 as compared to Rs 10,000 and Rs 13,000 for 'B' and 'A' category
states, respectively. Yet, category 'C' circles have outperformed the
national and other category averages for percentage growth over multiple
quarters, in terms of both GSM and CDMA subscribers. And it indicates great
potential in these areas.

Lower income rural households may perceive mobile handsets or
access devices as expensive. The cost of handset constitutes an entry cost and
is therefore an important barrier for growth of mobile services. Recently,
single chip cell phone solution was launched in India this will bring down the
cost of handsets, making the Rs 1,000 mobile a reality. Such single chip
solutions are expected to reduce power consumption by 50%.

Hence, the above statistics suggests that the target of 500 mn
mark and a rural teledensity of 17% is not far away. According to D Shivakumar,
VP and managing director, Nokia India, "In 2011, the Indian mobile market
will overtake the bicycle population as it presently covers 45% of all
households. It has never happened anywhere else but we are sure it will happen
in India."

Retail
Strategy of Handset Makers

To provide post-sales
service to customers, BenQ has a partnership with Onida. Adonis, the
service arm of Onida, which takes care of the service and repair part of
BenQ phones. They have more than 210 such centers in 170 cities across
India.

LG

The unique strategy of LG is that it does not have a national distributor.
LG GSMs sell directly through dealers, as they believe in maintaining a
direct relationship with channel partners. Presently, they have 18,000
dealers in 550 cities and plan to expand it to 25,000 by the end of 2007.
To maximize sales volume, LG has initiated setting up of experiential
stores called 'Fone&Fun' in the metros. LG has branch offices in
larger cities, central area offices in smaller towns. These branches in
turn reach out to even smaller towns and villages through remote area
offices. LG already has got a stronghold in these circles, which has
further got strengthened by its association with Airtel.

In providing post-sales
service, LG has introduced a unique initiative called "One—Hour
Service" ie handsets are serviced in one hour and if can't be fixed
in an hour the company provides a temporary replacement till the original
is repaired. They have 650 company owned service centers.

Motorola

Motorola has two national distributors-Bharti Teletech for GSM handsets
and Brightpoint for the CDMA model. With these two national distributors,
Motorola handsets are available in 32,000 retail outlets covering 200
towns across the country. The company also has tie-ups with all major
service providers like Airtel, BSNL, Hutch, Tata Teleservices and Idea
cellular. The company has three exclusive showrooms called Motostore where
the company's handsets and accessories are available. Currently, these
stores are in Mumbai, Bangalore and Chandigarh. Also, the company sells
its products through a number of retail chains like Mobilenxt, Mobile
Magic, Mobile Store and HotSpot.

On post-sales service and
repair front, the company has service centers in all the major cities.
They have Motorola owned service centers as well as Motorola authorized
service centers across the nation. Also the company has 300 collection
centers in small cities where faulty handsets are being collected and sent
to authorized service centers for repair purposes. For high-end phones,
the company appoints Motoassists, who, upon getting a call from the
customer, would go to his doorstep, and collect and send the handset to a
service center. Once the handset is repaired, they get back to the
customer with the repaired handset at his doorsteps.

Nokia

The brand Nokia is used by 800 mn customers globally and India contributes
around 9%, which means around 75 mn phones have been sold in India. For
handsets, Nokia is opting for a TIER strategy and it focuses on four key
things-telecom, Internet, entertainment and retail.

Till date, the company
has done extremely well and according to VOICE&DATA, it has a combined
market share of 55.4%, whereas globally it is at around 36%. On the
accessories part, it is still a small business and is not picking up due
to high duties. In terms of distribution, the focus is on increasing reach
by developing strong distribution points and developing branded retail
through Nokia Priority Dealer (NPD) and Nokia Concept Store (NCS).

The mobile leader has a
three-tier distribution model. It starts with HCL and Bright Point as
national distributors followed by redistributor stockists and, finally,
retail outlets. The company has a wide reach in terms of retail
distribution as it is available in 90,000 retail outlets across India and
is catered by around 800 distribution points. In terms of coverage it is
present in around 5,000 plus towns. The company is also planning for a
massive expansion in towns and villages and is at par with the massive
expansion plans of service providers. On the post-sales service front,
Nokia claims that around 95% of their complaints are resolved within 24
hours.

Samsung

Samsung, as part of its global strategy does not cater to the cheap, low
end Indian market. It has two national distributors, Telemart and United
Telelinks which in turn cater to 10,000 retail outlets covering 2,000
towns. Also, this handset manufacturing giant has partnership with service
providers to expand its business of CDMA phones, where the customers get a
handset when they go for any of these service providers. As Samsung
targets the urban youth, its brand promotion strategy is youth oriented.
Their branding strategy includes coming up with new, feature rich and slim
phones, which are glamorous and handy.

All types of post-sales
service are provided at Samsung service centers. Depending upon the
service requirement, which can be as simple as the demonstration of phone
usage to PCB related problems, the company categorizes the services under
various levels (between Level 1-Level 4). In case of extreme cases, the
company also undertake full replacements of the handset. Currently,
Samsung has 20-customer service plaza, which are company operated service
centers, and 250 authorized service centers across160 cities.

Sony Ericsson

Sony Ericsson's distribution system starts with its national
distributors, Salora International, Sony India and Ingram Micro. And these
national distributors supply Sony Ericsson's products to 25,000 retail
outlets covering 784 cities spanning the whole nation. The company's
retail presence is also noticeable through 375 shop-in-shops, which have
dedicated corners for Sony Ericsson's products. The company also has
nine Advantage Stores-the Sony Ericsson exclusive stores-in all the
metros to give consumers a complete feel of the Sony Ericsson products.
The mobile handset maker has also gone one step ahead in making the
customers know what they are buying and what the handset features mean to
them by taking the customers to their Experience Stores. There are
currently 15 such stores in metros and some 'A' category cities, and
the company plans to expand the number to 100 by the end of this year.

The company's after
sales service network is spanning over 270 service centers in 166 cities.
Also the company has a dedicated customer help line. Some of the issues
that are related to handset uses can be sorted out over phone, and if the
issues are related to handset malfunctioning, then the customers are asked
to drop their handsets at the nearby service centers; alternatively, an
executive can come to the customers place and pick the faulty handset, get
it repaired and deliver.

Spice

Spice Mobile has a reverse distribution system. Unlike others, Spice's
distribution starts with retailers and on the way reaches micro
distributors at the district level and at the end reaches regional
distributor, which could be at the state level or national level.
Currently Spice has 36 regional distributors and 375 micro distributors
catering to 20,000 retail outlets across India. Spice handsets are also
available in Hotspot, the retail arm of the Spice group. Currently Hotspot
has 50 stores in Delhi and their plan is to reach 1,500 outlets in 200
cities over the next two years.

Spice has nearly 100 after sales service
centers across India. These centers are actually the franchisee of Spice,
as Spice has no authorized or company operated service centers of its own.
They have four levels of post sales service centers, from L1 to L4. L3
service centers are the ones where the main activity takes place, where
issues related to hardware and software malfunctions can be fixed. L4 is
the highest level of service options that is available to customers where
issues related to component changes can be done. Presently Spice has only
one L4 service center in New Delhi and they are planning to open three
more L4 centers. On the expansion note, Spice is planning to add another
50 numbers of L3 centers and 10 company owned service centers by 2007 end.

Expansion Strategy

Almost all handset manufacturers have a well-planned distributions system,
starting with national distributor and ending with the retailers. In terms of
distribution, there is a clear demarcation between CDMA and GSM phones. CDMA is
distributed directly through operators, except Nokia and Motorola, which
distribute handsets through Brightpoint, whereas in GSM, it is through open
market. Nokia phones are distributed through HCL Infosystems, but with the
market expanding, the company is looking at direct sale of handsets. The company
has a wide reach in terms of retail distribution, as it is available in 90,000
retail outlets across India and is catered by around 800 distribution points.
And, in terms of coverage, it is present in around 5,000+ towns. The company is
also planning for a massive expansion in towns and villages, and is at par with
the massive expansion plans of service providers.

Motorola has two national distributors-Bharti Teletech for GSM
handsets and Brightpoint for the CDMA model. With these 2 national distributors,
Motorola handsets are available in 32,000 retail outlets covering 200 towns
across the country. "In order to achieve success in India, we need to go
where India lives-the villages," says Lloyd Mathias, director marketing,
Motorola India. The company also has a distribution system through various rural
retail initiatives like Haryali Bazaar stores of DCM Sriram, ITC e-choupals and
Godrej's Aadhar store. These stores mainly cater to needs of rural people.
"For rural areas, one has to set up a viable model by piggy-backing on the
existing distribution model where focus would be on cross player tie-ups, use of
existing channels like the postal department, public distribution system and
others," opines James V Abraham, VP and director, The Boston Consulting
Group India. Some manufacturers have already started taking steps towards this.
According to Payal Gaba, head marketing, Spice India, "We are in talks with
the postal department to sell our products through them." Also, Spice group
follows a reverse distribution system, unlike other players in the same field
where the company's distribution system starts with national distributors and
reaches the retailer at the end of the string. Spice started with retailers and
on the way reached micro distributors at the district level and at the end
reaches regional distributor, which could be at the state level or national
level. Currently, Spice has 36 regional distributors and 375 micro distributors
catering to 20,000 retail outlets across India.

With the kind of growth that is expected from rural India, with
metros and 'A' category circles reaching the saturation point, almost all
handset vendors are heading to cater to the rural mass. A Boston Consulting
Group report suggests a huge number of retail outlets are going to be set up in
these geographies by 2010. In terms of retail outlets, the metros presently have
around 45,000 outlets and rural India have around 30,000 outlets. But in 2010,
the metro outlets will increase to 60,000 whereas in rural India, it is expected
to increase to 140,000 outlets. The reason for this tremendous increase is that
60% additions are planned from rural India, adds Abraham.

Chinese handset vendors are heading towards India, equipped with
low cost low-end phones with an eye on rural Indian markets. So this is going to
see cut throat competition among other players too, which is a good sign for the
people in rural India, as it would propel the cost reduction of handsets.

Future Challenges

One area of concern has been the slow progress on the rural mobile telephony
front. Rural teledensity continues to remain at around 2%. Most of the growth
has been in urban areas and if the target of 500 mn by 2010 is to be achieved,
the private operators need to extend their urban success story to rural areas.
Meanwhile, the government also aims to provide mobile access to all villages
with population of more than 1,000 by the year 2007. These targets are not
difficult to achieve but depend on whether private operators will be willing to
cooperate with state telcos on this.

Handset manufacturers are looking at how to increase
localization of components as it will help in reducing costs and will open up
new markets in B and C category towns. On the distribution front, the vendors
have to increase their coverage area from present 5,000 to 6,000 cities, towns
and villages. Not an easy task, as one has to also provide after sales service
in all these cities. All this if properly tackled will help India to achieve 500
mn by 2010 and bring smiles to the mobile handset industry in the country.

Gyana Ranjan Swain

gayanas@cybermedia.co.in

(with inputs from Pravin Prashant)