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 per cent 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 assumes 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 market

share 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

market share 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 market space 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.

Continued...

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 market share.

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