Straight From The Oven
My take on the three of the latest hottest news from the world of smartphone market.
Let’s start with today’s FIRST hot news which featured in ‘The Economic Times/ETRetail’.
“Centre revives plan to check e-tailers’ discounts, freebies:
i. A draft e-commerce policy had proposed a sunset clause defining the maximum duration for differential pricing strategies such as :deep discounts”
ii. A growing view in the government is that e-commerce giants, like Amazon and Alibaba, have deep pockets and are willing to lose money for years till competition from small players is nearly wiped out.
I have been seeing a lot of messages in various groups; some calling it a welcome move, while some say this was said even earlier but meant very little.
Heavy discounting and freebies by online portals have been a burning topic in the industry, and out of my 8 Blogs, 2 are dedicated to offline vs. online.
With the number of brands and frequency of festive sales increasing in the online space, and price:spec ratio being the only driver, I expect the response to online sales to weaken, with or without government’s immediate intervention.
1. Let us take the example of the No. 1 brand Online – #Xiaomi. It is alleged that more than 50% of Xiaomi phones being sold online are being bought by offline channel for sale in GT.
Xiaomi sells the same models both online and offline through its official channel of distributors, Mi Preferred Partners,Mi Homes and now the exclusive Mini stores in rural areas. Pointing out specifically to the official distributors and Mi Preferred partners, it seems the market is not responding the way it used to for Xiaomi where the distributors started with advance payment from retail, then down to a week’s credit. What I’ve also heard from many partners is that the credit exposure has gone up to 15 days already.
Credit for older models and advances for new launches is a natural derivative. Launching new models while carrying old models stock is an offline nightmare and not something a company like Xiaomi, which is genetically an online company, will find hard to balance. The slackness in offline demand would have an effect on the 50% online buying, as mentioned earlier, bringing Xiaomi down to some extent in Q1 2019 – both online and offline. #Realme, which is currently available online, would only add to Xiaomi’s woes.
For Realme there may be a lag of 3 months for the same effects to take place, and I am already hearing that not all models of Realme picked up from online are moving fast enough offline. However they may gain in Q1 as they will be opening the official offline channel by then. But this traction offline may not be as long as the one for Xiaomi and they should expect issues starting Q2 2019.
If the offline executes even some of my ideas mentioned in my last blog, we could see the offline rejuvenate and the other top 10 brands gain. Read about offline rejuvenation here: https://www.sharmaajay.com/home/rewriting-rewiring-reviving-offline
2. Online-first brands entering offline with low margins.From what I hear the percentages are as down as 1.5% for 2 tier and 2.5% for 3 tier. The trend was started by Xiaomi and then carried forward by Realme.
These are extremely low margins and are being justified through the rotation of distributor funds 3-4 times. I am seriously doubtful about this as well as the fixed costs to run the business itself would add up to 1%. Whether the projected turnover based on potential, product price positioning, office setup and manpower costs can bring a justified return even initially is a BIG question. If yes, then for how long? Xiaomi is already down to two rotations. Remember it is the No. 1 brand which has been in the market for years.
If one is fine raking in the moolah initially when the going is good, it may be a good option, but for a long term association it needs to be thought through.
My sincere advise– Do a check with the channel on what is happening with a comparable brand like Xiaomi before you jump into it. But with all the desperation seeping in, the brands are taking advantage of it. Do remember: Any exit plan later in this business comes at a cost. Well I have even heard of some Xiaomi offline distributors and Mi preferred partners planning to give up Xiaomi for reasons of low tertiary sales vis a vis the stocks they carry and low returns etc. With the entry of #Meizu and Realme, the offline supplies of Xiaomi, to start with, are bound to increase and so will the pressure. Is Xiaomi bringing down the price of its #Redmi6A – its lowest priced model – the first sign of panic?
Let’s talk about the SECOND hot news. Sourced again from ET.
#Jio is in advanced discussions with US handset maker Flex for 100 million smartphone production. 100 million is not too large a number, considering the huge pool of 500 million odd feature phone users who are potential 4G feature phone customers. Well that on its own is fine, but with the sheer size of the order, Flex is seeking tax benefits to produce handsets in SEZ unit near Chennai and sell them in the domestic market without attracting any duties. This will have the following fallouts if approved:
1. The upper price segment of the feature phone segment would get wiped out and so does the lower end 4G smartphone market. 2G feature phones are still an integral part of the Indian mobile phone ecosystem with global brands like #Samsung and #Nokia, and Indian MILK brands along with certain other local brands, who are still playing in it. I have seen a revival of the 2G phones’ market in the last quarter after Jio slowed down. Brands/distributors may face a challenge here.
2. The nascent mobile and component manufacturing industry would lose the advantage they are getting for local production as they are still liable to pay custom duties on key components and completely built handsets. In fact, as per a statement of Mr. Pankaj Mahendroo of ICEA, the relaxation in supplies from SEZ’s can result in “immediate existential crisis”for the local Industry. It would be worthwhile to note here that approx. Rs. 5000 crores have already been invested in 268 units under the PMP (Phased Manufacturing Programme). The PMP as planned would be disrupted and all the hard work that has gone in, will be wasted. I believe it is very premature to say whether this decision will be taken, but I am happy to see that the ICEA, led by Mr. Pankaj Mahendroo, is taking up this issue strongly with the government. In fact, in October, ICEA has sought a 10 year tax holiday on the export of mobile phones to supplement PMP, saying it would give India a competitive edge.
The business of distribution, as well, would go down to a select few with Jio’s distributors getting the preference – some of whom I believe are pitching for Realme and #Meizu (A brand which is trying to make its third comeback both online and offline.) The CEO of Meizu has gone on record today saying that they would like to leverage Jio’s retail base of 3,00,000 retailers. Thus looking at a massively consolidated, supremely strengthened distribution. Whether the small distributors/retailers will survive is a question which comes up.
The THIRD hot news – Danish Khan from ET says that the Chinese makers like #Oppo and #OnePlus are setting up their R&D centres in India to improve their offerings of localised products and services for the fast growing smartphone market and create hubs for global innovation. Oppo has already launched its R&D centre in Hyderabad on Saturday with an Indian as the head. #Samsung and #Huawei already have their R&D centres.
I personally believe that sooner than later the game will shift from pure hardware and price:spec ratio to customer experience with the discerning customer more than happy to pay a higher price for something that infuses the global with the local flavour of latest technology, and carries a brand name.
A brand with its own R&D setup should be a must in every distributor’s checklist while picking up distribution of any brand. You will see that most brands mentioned by me in the Green Zone also meet this parameter.
I would like to do an exclusive blog on how 2019 looks like by the end of this month, and would be more than happy to include inputs by partners. All of us need to be well prepared in advance for a prosperous 2019.