KEY POINTS
Local smartphone manufacturers in China and India are becoming highly competitive with Apple and Samsung in the big emerging markets. Lenovo, Micromax, Coolpad, and Xiaomi now account for two-fifths of China's smartphone market, and one-fourth of India's. Their share will grow. Xiaomi already sells four of the top 10 best-selling Android devices in China. Any consumer-focused Internet or mobile company active in these countries will need to learn to work with these manufacturers.
We've created a category we're calling the "Local 7," made up of the top five Chinese smartphone manufacturers, along with the the top two in India. Combined, these seven manufacturers are now shipping about 65 million smartphones every quarter, more than Apple and coming close to drawing even with Samsung. (See chart, below.)
These local manufacturers wield influence in various ways. They run their own successful app stores, mobile operating systems, and mobile services. They also hold the keys to which apps are preloaded on their phones. Finally, they are savvy about playing to specific local needs. They pick the hardware features, like dual SIM slots, which help differentiate local mobile markets.
The local manufacturers are not provincial outfits producing knock-offs, as some might be inclined to assume. They have been very innovative in product and strategy. Micromax, for example, has been shrewd in producing devices perfectly adapted to local market conditions, and creating a world-class supply chain. Xiaomi has become an Amazon-style purveyor of hardware that it sells at cost in order to hook consumers on their platform.
However, overall, their main competitive tool, for now, remains price. Local manufacturers in China and India match the feat»ures of more expensive devices and manage to produce comparable hardware at a fraction of the price. This is helping local wireless carriers wean their customers off feature phones and nudge them into the smartphone economy.
These manufacturers will continue to expand overseas, in search of new growth opportunities, especially as the Chinese smartphone market matures. The first wave of expansion has taken them into neighboring countries: Malaysia, Indonesia, Bangladesh, and Vietnam. But we expect Chinese and Indian manufacturers to eventually thrive globally, across Latin America, Asia-Pacific, and Africa.
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Introduction
The mobile industry's future will no longer be decided in Silicon Valley or Korea.
It's being determined at the Beijing headquarters of Xiaomi, often described as the "Apple of China," and at Micromax's campus on the outskirts of India's capital, New Delhi.
Xiaomi and Micromax are arguably the most innovative among the domestic manufacturers in these countries. They have emerged from nowhere to capture significant shares of the local smartphone markets in India and China, on the back of attractively priced Android phones.
These local players control 40% of China's smartphone market, and 26% in India, according to market research data compiled by BI Intelligence.
Apple co-founder Steve Wozniak recently visited Xiaomi's headquarters and declared, "They’re good enough to break the American market.” For now, the company's phones are available only in Singapore, Hong Kong, and Taiwan, besides mainland China, but there are plans to introduce Xiaomi phones in Malaysia, India, Brazil, and elsewhere.
Xiaomi's devices are well-designed, relatively high-quality phones built on a distinctive and proprietary version of Android. Xiaomi has been shrewd in using its own website and e-commerce site as an efficient way of getting its hardware directly to end users without becoming overreliant on carriers.
India's Micromax, meanwhile, has been described in Forbes India as the "Zara of smartphones," because it tests devices before speedily flooding the market with products that prove to be popular. (Zara follows a similar approach with fashion.)
The five largest Chinese handset-makers — Lenovo, TCL, Coolpad, Huawei, and ZTE — are also extremely active in overseas markets. Combined, these five companies shipped about 50 million units outside of China in 2013, according to Digitimes Research.
Chinese handset manufacturers are also busy acquiring smartphone companies abroad as a shortcut into international markets. Lenovo acquired Motorola Mobility's global smartphone business and brand earlier this year from Google for $2.91 billion, a move widely seen as a play for smartphone market share in the Americas and Europe, where Motorola is already well established.
The smartphone boom in emerging markets hasn't peaked yet.
In 2014, 500 million new smartphones will be sold in China and India alone, with a majority of these going to new users who have never owned a smartphone, according to Mediacells data published by The Guardian (see chart, above).
Brazil will be the world's fourth-ranked smartphone market, going by the number of sales to end users in 2014, three times larger than Italy's.
Indonesia will see 2.5 times more smartphone sales than the U.K.
The first smartphone wave from 2008 to 2013 centered on Europe, East Asia and North America. The second wave, which will shape the next five years, will center on Latin America, emerging Asia, and Africa. We believe local manufacturers from India and China will account for a growing share of smartphone sales in those regions.
They will produce cheap phones that meet basic consumer needs. They will run customized versions of Android, or the Firefox operating system, based on HTML5.
The $25 smartphone is already on the horizon. Developers, app publishers, and global consumer Internet companies need to understand the rise of companies like Xiaomi, Lenovo, and Micromax, which are responsible for popularizing inexpensive smartphones. What are the reasons that they became big, and how big are they? Who are their customers? What is the user experience like on their handsets?
An Overview Of Emerging Mobile Markets
First, it will be useful to review some data about just how important developing economies are to mobile's present — and future. This goes a long way to contextualizing the rise of local manufacturers in China, India, and elsewhere.
China already has well over 700 million active smart devices (including smartphones and tablets), according to Umeng, a local app analytics company.
But China's smartphone growth is slowing down. China's year-over-year shipments growth in the fourth quarter of 2013 was 71%, compared to global smartphone market growth of 28%. But that's down from triple-digit growth in the past.
Other markets — Indonesia, Brazil, and India — are growing faster. In fact, India's year-over-year smartphone growth in the fourth quarter was 166%. An amazing 92% of India's smartphone sales this year will be to first-time users (see chart, below). Eighty-two percent of smartphone purchases in Brazil will go to first-time users as well.
The aggressive expansion of Chinese smartphone companies into neighboring countries and even farther afield, into Europe and the United States, is a byproduct of tapering growth in China. Companies like Lenovo and Xiaomi know they won't see impressive revenue and profit growth if they stick to the increasingly saturated home market.
Specifically, India's potential has been noted again and again. In November 2013, Google Chairman Eric Schmidt said India remained an "Internet laggard," saying it was about 20 years behind countries like the United States. But he also said the world's "next Google" could emerge from Indian tech entrepreneurship, as millions of Indians come online — if the country "plays its cards right."
Mobile analyst Tomi Ahonen sees Indian smartphone-makers Karbonn and Micromax — small as they are now in comparison to their Chinese peers — as likely candidates to crack the elite list of the world's top 10 global handset-makers, following in the steps of the Chinese manufacturers.
"So where we saw Chinese domestic makers like Lenovo and Coolpad ... emerge as Top 10 global players while selling almost exclusively only to their home Chinese market, expect this to now happen with India domestic handset makers like Micromax and Karbonn," he writes on his site.
In addition, Indonesia, Malaysia, Thailand and Vietnam also boast their own homegrown smartphone manufacturers.
India As A Case Study Of New Mobile Markets' Strengths And Weaknesses
Schmidt and Ahonen may be right. The next tech or smartphone giant, on the scale of Google or Apple, could come from India, as its population quickly embraces the world of smartphones, mobile services, and apps.
But any global tech company to emerge from India will be different from Google in one fundamental way: It won't grow out of the desktop computer world like Google did.
It will be a truly mobile-focused company.
India's Internet and tech markets are radically different from those in East Asia and the U.S., which gave birth to Google, Apple, and Samsung. It's important to bear these very different local conditions in mind to understand how the broader mobile industry will develop.
Smartphone penetration is still relatively low, around 13% in India, according to Google (it's a similar 14% in Indonesia). The reason? Mainly it's because of cost. The first generation of smartphones by major manufacturers like Sony, Nokia, and Samsung were simply too expensive for many mobile users. People preferred to stick to their flip phones rather than have to disgorge a huge up-front payment for a shiny new smartphone. That's why local manufacturers selling smartphones at low prices have found fertile ground for their handsets.
But these are still mobile-first markets. India, like many countries in Southeast Asia, Africa, and elsewhere — has leapfrogged the PC era. There are hundreds of millions of feature phone users. That's a promising foundation for a smartphone economy. In India, mobile broadband connections already outnumber fixed broadband connections by a factor of four-to-one (see chart, above right). In other words, Indians are already four times as likely to be connected to the Internet via a phone than at home.
Credit cards and debit cards (and bank access in general) aren't universal, which makes it hard to collect any money at all from mobile users. That's definitely a weakness in terms of mobile monetization. But it's also an opportunity for new mobile payment tools. Carrier billing, which allows customers to pay for mobile purchases on their phone bills, is one solution we detailed in a recent report. Specialized payment apps are also stepping in to fill the vacuum. Weak banking infrastructure and high interest rates also make it difficult for carriers to subsidize phones, since subsidies are essentially a loan to their customers. Post-paid mobile contracts are also fairly rare.
Carriers and manufacturers still run the show. In the United States we're used to thinking of carriers as big lumbering companies that don't have much influence anymore. They just run the wireless infrastructure. In emerging markets, carriers have much more of a say in what software gets preloaded and used on devices, and they also control access to users' wallets. An Indian carrier like Bharti Airtel has more than 190 million customers, in a still largely rural country where a relationship with a mobile carrier is the single commercial relationship many people will have.
Once these conditions are understood, the success of local companies like India's Karbonn and China's Coolpad come into clearer focus. So do the efforts of Samsung and Nokia to introduce entry-level smartphone lines like Asha and Rex.
Meeting The Needs Of Carriers
In this context, carriers need one basic thing from their smartphone suppliers: a pretty good product, at a great price. Carriers are interested in increasing the revenue they can obtain from each of their users, and in emerging markets these days, that means attracting them to smartphones and away from feature phones.
Why? Because that means they'll likely pay for faster mobile broadband, and consume more data. The problem is that these are relatively low-income consumers, without access to financial services, and they can't manage a large up-front payment for a new smartphone (it bears repeating that contracts and subsidies aren't as common as they are in the U.S.). But if they can get smartphones, these customers will certainly be downloading basic apps, checking Facebook, watching video clips, playing games, and sharing photos.
All these activities translate to more revenue for the carriers.
That's why local manufacturers can play such an important role. They supply cheap hardware that allows carriers to migrate their customer bases to the smartphone economy at a relatively low cost to themselves and their customers. Samsung will demand a heavy price for its devices, while a local manufacturer will supply a decent product at a much lower cost.
In immature mobile markets like India there's also often a great deal of carrier fragmentation (see chart, right). There is a long-tail of small or regional wireless carriers, which means that the smaller players may not be able to marshal the resources to buy up very large volumes of premium smartphones from a Samsung or an Apple on attractive terms (nor can their customers necessarily afford these).
That makes it even more important for there to be local manufacturers that can supply a no-frills product at the right price.
Local manufacturers are also often more sensitive to local needs. Micromax is famous for its dual SIM card slots on its phones. These allow users to toggle between phone accounts, depending on which offers the best reception and prices at the time, or to toggle between a personal and a business line.
How Big Are These Companies?
Lenovo is now the gorilla in the room when looking at emerging market-based phone-makers.
Lenovo is a global giant. It shipped almost 14 million smartphones in the fourth quarter of 2013, according to IDC data, for a 4.9% share of global smartphone shipments. That means Lenovo was already the No. 4 smartphone maker in the world when it purchased Motorola Mobility early this year. If Motorola's phone shipments maintain their current volumes under Lenovo, the acquisition instantly catapults Lenovo over Huawei for a clear third place, with only Samsung and Apple ahead of it.
Lenovo is growing faster than any of the other top-five smartphone vendors: In the twelve quarters since the first quarter of 2011, Lenovo's smartphone shipments have grown an average of 150% per quarter.
2013 was a great year for Lenovo. The impressive fourth quarter, when it overtook Korea-based LG to climb to fourth place, capped a watershed year for Lenovo's mobile business — Lenovo shipped 45.5 million handsets during 2013 for 92% year-over-year growth.
Lenovo has been investing aggressively to continue its growth spurt. In December 2013, after five years of construction, Lenovo opened an $826 million new factory complex in central China solely devoted to smartphones and tablets.
ZTE and Huawei, Lenovo's largest China-based competitors, combined for 94 million smartphone units shipped in 2013. For comparison, Apple shipped 153 million smartphone units in 2013.
And Lenovo hasn't been the only Chinese manufacturer to acquire mobile companies abroad. TCL, another Lenovo competitor, acquired the mobile handset business of French company Alcatel in the mid-2000s.
Some of the other local manufacturers in China and India are also starting to register on the global scale.
One of the Chinese companies' strengths is that they are also active in other device markets, giving them power to shape computing on a broad scale. Analyst Ahonen has come up with his own estimates for unit shipments globally that combine tablets, phablets, PCs and smartphones, for a list of the top-10 smart device-makers.
In the combined Internet devices list (tablets, PCs, and smartphones), four Chinese manufacturers make up the top 10: Lenovo is at No. 3 (even without Motorola), while Huawei is in the No. 4 slot, ZTE is at No. 8 and Coolpad (also known by the name of its corporate parent, Yulong) rounds out the list at No. 10.
There's plenty of opportunity for these local players to expand their overall computing market share, especially since a couple of other companies on Ahonen's multi-device top 10 list — Sony, HP and Dell, for example — are vulnerable, tied down by their dependence on the PC market.
Huawei is already active in the U.S. smartphone market. One of its 4G LTE-compatible phones is offered by MetroPCS.
But Are These Phones Any Good?
How good are the local manufacturers' devices? The cheapest sub-$100 devices like the Micromax Bolt A66 deliver a basic smartphone experience to a population that's likely new to Internet technology, according to Naren Gupta, co-founder of India-focused Nexus Venture Partners, a venture capital firm.
"I would say they are good enough for what people are going to do initially with smartphones," he says. "The performance is reasonable."
But local Chinese and Indian manufacturers are also aiming higher. They are launching mid-tier and top-tier devices with the clear intent of competing head-to-head with Apple and Samsung, by undercutting them on price.
For example, the Micromax mid-range A93 Canvas Elanza smartphone has a five-megapixel camera and a dual core 1.3 GHz processor (1.3 GHz refers to how fast the processor is), 1 GB of RAM (memory), and 7 hours of talk time battery life. It runs Android Jelly Bean and works on 3G networks (India's 4G infrastructure is pretty limited anyway).
Compare that to the Apple 5C, which also has a 1.3 GHz dual core processor and 1 GB of RAM. The 5C has an eight-megapixel camera, and gets 10 hours of talk time, according to Anand Tech. The 5C is compatible with 4G LTE.
In other words, in terms of specs, they are comparable phones. The 5C just has a better camera and battery, and more connectivity options.
But the price?
Micromax's Elanza is $145 (8,850 rupees). The 5C will set you back four times as much: $647 (39,600 rupees).
The Xiaomi Model
Xiaomi sells four of the top 10 best-selling Android devices in China. (See chart, right.)
It has often been described as the "Apple of China" because of its well-designed, spiffy phones tightly integrated with its own software and cloud services.
But in many ways it's more akin to Amazon. Like Amazon, Xiaomi has disrupted traditional hardware distribution by disintermediating carriers and platform vendors: It sells from its own site. It also understands the value of inventory management to lure customers.
Amazon does this with its "Only x Item(s) Left In Stock" notices, while Xiaomi does it with its micro-managed new phone launches — releasing inventory bit-by-bit — so as to create the perception of scarcity, stoking enthusiasm and demand.
Also like Amazon, Xiaomi has been willing to sell hardware at cost or for a slim margin in order to drive revenue from its broader software and media sales business.
Inventory management: In late October, Xiaomi launched a new flagship phone, the Mi3. In one of the company's highly stage-managed launch sales, in which it sells batches of 100,000 devices at a time, it sold out of 100,000 Mi3 units in 86 seconds according to Xiaomi's Twitter account. Earlier in the year, 100,000 units of its lower-priced Hongmi smartphone had sold out in 90 seconds.
Heavy control over sales and software: More than 70% of Xiaomi's sales are driven by its own website. Xiaomi doesn't rely on carriers to sell its phones. It does an end-run around them, using social media like China's Sina Weibo to drum up enthusiasm for its releases, and drives customers to Xiaomi.com. That means it has greater pricing power since it doesn't have to beg carriers for good terms on its distribution deals. Xiaomi has also broken free of Android. Its devices operate on a heavily customized version of Google's Android operating system, and only run apps from Xiaomi's own store. Earlier this year Xiaomi announced that it had 30 million Miui users (Miui is the name of Xiaomi's operating system).
Openness to customer feedback: Xiaomi also uses Sina Weibo to solicit feedback and suggestions on what features its phones and the Miui OS should include. Essentially, it runs an endless focus group on what its operating system should do.
Reliance on app, media and software downloads for revenue. Xiaomi executives have acknowledged that they sell hardware at very slim margins, in order to push sales of apps and services.
Miui is a forked version of Android (now up to version 5), which has evolved into a proprietary operating system (it does not include Google services or the Google Play app store). So Xiaomi has a great deal of freedom to develop its own apps and features, much as Amazon does for its Kindle line of devices with its Android-forked Fire OS.
Xiaomi has entrusted its international expansion to Hugo Barra, formerly an executive handling Android at Google. In a recent interview with Mobile World Live, Barra laid out Xiaomi's roadmap for entering markets in Southeast Asia and the rest of the world.
“We’re starting by exploring markets that are near — geographically near mainland China,” he said. "So we’ve been in Taiwan and Hong Kong for a few months now, we’ve just launched in Singapore, we’re going to Malaysia next, and after that we’re looking at the rest of Southeast Asia and possibly India as well."
Interestingly, Barra noted that Xiaomi has been far more reliant on carriers in Taiwan, Singapore, and Hong Kong, than it has been in mainland China. While Xiaomi is an exception to the rule in emerging markets that everything goes through carriers, it is the exception that proves the rule.
Outside of its Chinese home base, with its thriving e-commerce scene, Xiaomi has had to sit across the table from carriers to find a way to get to consumers.
Other Strategies
Micromax, true to its moniker as "the Zara of smartphones," also has an interesting strategy.
Like fashion brand Zara, Micromax is lightning-quick in responding to opportunities with new products.
When it spots a gap in the market, Micromax quickly puts its well-oiled supply chain into action and launches products very quickly to meet the consumer need. For example, when Nokia launched its Asha line of phones that straddled the line between smartphones and feature phones (and Samsung followed up with a similar line, called Rex), Micromax realized it could one-up its competitors — it could launch a full-fledged smartphone, at the same price.
It figured out a way to get Android to run on very basic phones with 256MB of RAM (the phone was slow, but it worked), and very quickly launched a new, very successful line of entry-level Android devices known as the Bolt series, which sell for as low as $60.
Micromax isn't always able to fend off Samsung's new product launches and more extensive device lineup. It lost market share in last year's final quarter (see chart, above). But its success is especially notable considering how new it is to the smartphone game. It was still exclusively a feature phone manufacturer as late as mid-2011.
Multinational carrier Telefónica is thinking that ultra-cheap phones powered by Mozilla's Firefox OS will help it win over new smartphone users in Latin America. Telefónica has been unique among carriers in betting so big on the Firefox OS, and pressuring partner manufacturers to develop these inexpensive phones.
Why App Developers And Publishers Need To Take Note
App developers and publishers, and providers of Internet services in general, will find it very difficult to penetrate markets like India and China unless they nurture relationships with carriers and manufacturers who are the local gatekeepers.
In the U.S. market, consumers have resisted the apps and services that carriers and manufacturers load onto phones, calling it "bloatware," and complaining when these apps can't be deleted from their devices.
In emerging markets, carriers and manufacturers remain more influential than platform operators like Google and Apple (in part because of local Internet and telecommunications restrictions and regulations that favor local players). Local manufacturers and carriers run their own successful app stores, pre-load software into low-cost phones, and importantly, are effective in getting users to actually use those apps and services.
Foreign app publishers and global consumer Internet companies are finding it increasingly necessary to partner with the locals. For example, in India, when BlackBerry wanted to promote its multi-platform BBM messaging service for Android devices, it turned to Micromax. BlackBerry struck a deal so that BBM would be pre-installed on Micromax's flagship Canvas smartphone line before the devices are shipped out.
Micromax also preloads its hardware with proprietary apps (branded as M! apps) and games.
Xiaomi's app store, which is already one of the top five app stores in China, is surprisingly effective in driving downloads, according to an analysis of Xiaomi data performed by Sameer Singh. It should be considered by developers wanting to crack the Chinese market.
In late 2013, Xiaomi was driving 5 million downloads daily, among a daily active user base of 17 million.
That means that Xiaomi was seeing 26.5 app downloads per device on a quarterly basis. That's twice as many as the download rate at Google Play or Apple's App Store (13 to 15 apps per device every quarter).
It remains to be seen whether Xiaomi's software and services-driven revenue model will succeed, but it has persuaded investors to bet that it will. A late 2013 round of financing put its valuation at some $10 billion.
THE BOTTOM LINE
Local manufacturers in China and India — companies like Lenovo, Micromax, Coolpad, and Xiaomi — now account for two-fifths of China's smartphone market, and one-fifth of India's. Their share will grow.
Combined, the top local manufacturers in India and China are shipping more phones than Apple every quarter, and coming close to drawing even with Samsung.
These local manufacturers wield influence in various ways. They run their own successful app stores, mobile operating systems, and mobile services. They also hold the keys to which apps are preloaded on their phones.
The local manufacturers are not provincial outfits producing knock-offs. They have been very innovative in hardware, distribution, and services.
However, overall, their main competitive tool, for now, remains price.
These manufacturers will continue to expand overseas, in search of new growth opportunities as the Chinese smartphone market matures.
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