ndia is one of the most prominent markets for mobile phones, surpassing the United States and second only to China. While the introduction of feature phones in the country during the last decade of the 20th century found good penetration, introduction of smartphones galvanized the market further. With the growth in Internet services, smartphones found high uptake among the urban/Internet savvy population.
Exhibit 1: Megatrends impacting the smartphones market
India’s demographic profile has undergone a characteristic evolution, which is highly beneficial to the mobile phone adoption. Gen Y, the working-age population, working women, and the great Indian middle class have evolved to be the most influential segments of the population triggering new social, technological, and economic trends. Urbanization will also affect the market such that 64% of the total Indian population will be urbanized by 2025, and cities will account for 70% of India’s GDP in 2030.
The intense competition among the mobile phone manufacturers is driving down the price of mobile phones, which is helping in increased penetration across the country. Smartphones are expected to outrun feature phones in the country by 2019.
Increasing Competition among Handset Manufacturers
Rising middle class incomes have led to an increase in purchase of premium smartphones. The intense competition among the mobile companies with several initiatives such as bundled offers, discounts and aggressive pricing is substantially driving growth.
Exhibit 2: Mobile Phone Market in India, by Units, in Million, 2015-2025
With the exception of a temporary dip in demand during the last quarter of 2016 due to demonetization, the demand for mobile phones in India remains undeterred. The concept of budget smartphones has been a growing trend in the country driving the volumes and also cannibalizing the feature phones market. Another key trend observed in the market is online sales of mobile phones. Consumers are extremely intelligent as they survey models in a brick-and-mortar retail outlet and compare the prices with the online portals. Price is still the top-most factor driving purchase in our country, and consumers prefer to buy from the platform that offers the lowest price.
The mobile phone market in terms of value will grow at a CAGR of 23.4% due to the increased adoption of smartphones. Burgeoning number of mobile Internet users in the country, estimated to have touched 300 million users by end of 2017, is one key reason driving growth. With increasing network infrastructure development and rising use of wireless technologies such as 3G and 4G, the overall Internet user base in India is expected to be around 600 million users in 2020, accounting for 27% penetration.
Exhibit 3: Mobile Phone Market in India, by Value, in Billion, 2015-2025
Smartphones versus Feature Phones
Functional benefits and durability of feature phones, such as a long battery life, have been the driving factors for the tremendous demand for the product. The larger part of the Indian consumer base especially in rural areas remains unexposed to the additional features of smartphones. Price is another factor wherein feature phones have an edge over smartphones. However, the advent of budget smartphones and the extension of 4G coverage even in rural areas have changed the dynamics of the mobile phone industry in the country.
Exhibit 4: Feature Phones vs. Smartphones, by Volume, in Million Units, 2015-2025
Shrinking Gap between Feature Phones and Budget Smartphones
The introduction of Reliance Jio disrupted the mobile industry, resulting in increased demand for 4G mobile handsets. Data usage surged and recorded 1.3 billion GB a month in March 2017 from 200 million GB a month in June 2016. This phenomenal increase in data has led to a strong partnership between telecom service providers and handset makers benefitting the end consumer by allowing them to afford premium phones at easy financing option, and thereby creating a win-win situation for all. Vodafone has teamed with Micromax to provide 4G handsets at INR 1,000 and Bharti Airtel has joined hands with Karbonn mobiles to launch 4G handsets at the price of INR 1,500. Reliance Jio is playing the lone ranger by announcing the launch of its own line of smartphones at the price of INR 1,500, which will be refunded after three years upon returning the device.
The average revenue per user (ARPU) provides the most valuable insights in this context. In case of a feature phone the ARPU is INR 90-100 whereas for smartphones it is INR 170-200, making smartphones the preferred choice for service providers. The handset makers have eliminated all the additional perks of a smartphone to create a budget smartphone, initiating the adoption of the latter to the large base of feature phone users. Consumers stand to benefit the most as they are able to enjoy the benefits of a smartphone at affordable prices.
Domestic Manufacturing Scenario
Domestic manufacturing accounted for only 35% of the overall mobile phone market in the country with most of the components being imported in 2016. Backed by the ‘Make in India’ initiative and the ‘Digital India’ push, the domestic manufacturing percentage increased to 38% in 2017 and will continue to grow at a fast pace. New investments announced by companies such as Lava, Micromax, Celkon, Gionee, Xiaomi are driving the local manufacturing market. Phased manufacturing programme (PMP) by Ministry of Electronics and IT (MeitY) has proved to be successful in promoting the use of locally made components in mobile phones.
Exhibit 5: Current and Upcoming Investments in Mobile Manufacturing, in INR Billion
Except Samsung, all other mobile phone manufacturing units in India are low value-add assembly units. The lack of indeginous ESDM manufacturers is one of the key reasons behind this lag. The country does not have adequate infrastructure, support and R&D budget to achieve complete manufacturing of mobile phones locally. The entry of several mobile phone makers in the country due to government initiatives and subsidies and duty exemption in special zones have led to the increase in domestic manufacturing.
The domestic manufacturing of smartphones is expected to grow at a faster CAGR of 48.4% between 2017 and 2025. India is also expected to surpass China as the preferred destination for manufacturing of mobile handsets. The entry of Jio and indigenous manufacturing plans of many other players will strengthen the smartphone industry, and enter the next level of manufacturing with components sourcing. Electronic Manufacturing Services (EMS) companies will play a significant role in the overall ecosystem. The likelihood of domestic manufacturing of smartphones exceeding demand by 2025 will enable India to emerge as an export hub for smartphones.