COVID 21. CATCH 22.

Let’s rewind to April 2020. Everyone, including me, were giving our opinion on a rebound in H2 post a bad H1. It did turn out to be true with the final figure of 2020 showing a marginal decrease over 2019.

Cut to April 2021, we are in a kind of a similar scenario with a much stronger resurgence of COVID-19 forcing state governments to enforce night curfews, complete or weekend lockdowns, affecting people and industries.

With mobile phones not falling in the list of essential items, the demand is bound to be impacted for whatever period these restrictions are in place. I am praying that the situation improves fast and things return to normal quickly. However, this is easier said then done with the number of cases going up every day, and more and more states enforcing measures like night curfews, lockdowns etc..

So what are we looking at in 2021?

My take:

1. Q1 2021 shipments were not only higher than Q1 2020 – which is logical considering that end of March 2020 was heavily impacted by the lockdown – they were higher than Q1 2019 too. However, as per market reports, the demand did not maintain the same momentum as in Q4 2020 which meant that the inventory in the channel and the brands as of Q1 ending was reasonably high. With the restrictions coming in force in April, the demand is bound to go down. The brands will take a hit in production be it due to existing inventory or labour migration.

2. The migration of labour back to their home states, though not in the numbers similar to last year, may have limited impact with the factories looking at production cuts. The issue is with this second shock of uncertainty, whether the returning labour will be lesser than last year leading to worker shortages once the demand picks up.

3. It is at this time that brands will change focus to mainline and try and push the inventory they carry on to their distributors. The mainline distributors may not be very keen to stock up at this time with the uncertainties around and will have to bear the pressure from the brands in terms of appointment of more distributors if they do not buy or addition of retail base which comes at a cost.

4. While the pent up or revenge demand and the need for smartphones for the education industry gave a boost to the demand last year, we should not expect that to happen again with more job losses, the fear of a third wave which will lead to cut on expenses and a much less demand from the education sector now that most of the parents would have bought computers or phones for their children.

5. The only respite I see is that while the industry struggles with component supplies, this lowering of demand, if for a short period, could support the ramping up of the supply chain and as and when the demand picks up the supply chain may not be an issue.

6. One could see a rise in the sub Rs. 7k price segment with the #Jio #Itel tie-up as Jio Smart feature phone customers migrate to smartphones and the factor of affordability ignites some demand.

7. While Q1 globally has shown a higher jump as compared to the jump in India, it is primarily due to 5G device adoption which is not so relevant for India with 5G services at least 9 months away, if not a year.

8. The smaller brands, including the Indian brands, that have not shown the traction as expected will suffer in the present due to high pressures in the channel from the big 5. These brands are already complaining of component supply shortages affecting their existing production and hence the sales.

9. India’s strength has been its large middle class which is a major contributor to the economy. They are therefore the major contributor to the purchase of smartphones. Such has been the impact of COVID-19 in 2020 that the size of this class has gone down to 2/3rd its original size of 98 million to 66 million. Just to put facts to paper, this is much higher than the 57 million people in India who have moved up to the middle class in 8 years between 2011 and 2019. This is bound to have an impact on the sales of smartphones. This is the highest slide globally. Even China which has approximately the same population as India saw a decline of only 10 million in the middle class in 2020.

10. As and when the restrictions reduce and both online and mainline start functioning, online like last year will again be a gainer followed by Large Format Stores or Modern Trade. It’s not going to be an easy ride for the Brick and Mortar Stores – especially the smaller ones, for sure unless they decide to tie-up with the online players in the much talked about but not so visible omni channel model as last mile delivery points. Or become a franchisee or part of a LFR/Modern Trade.

11. With 80% of the sales being in the sub Rs. 15k category, 5G in India may not be the driver it is globally. Same would be the case with foldable Phones which not only fall in the premium segment which is very small in India, but for which even the global projections are pegged at 18 million only. To put things in perspective, India is a little more than 10% of the global market in size.

12. The rise in the component prices which is putting pressure on brands to increase their prices could also hurt demand in these trying times.

From a very optimistic view in my blog last year I am inclined to revise my projections downwards. Quantifying the drop would come later, completely based on the COVID wave behaviour.