India’s third largest telco Reliance Jio Infocomm is reportedly in talks with the US-based contract manufacturer Flex Ltd. to manufacture 100 million smartphones for India.
An Economic Times report, citing insider sources, claimed Flex is seeking government nod to sell Jio handsets in India at rates on par with those under FTAs (Free Trade Agreements). The smartphone manufacturer has a facility in Chennai SEZ (special economic zone).
Last month, Indian Cellular Association (ICA) representing Apple, Xiaomi, Oppo, Vivo, Micromax and Lava, wrote to the Ministry of Commerce and Industry to protest against a move to permit manufacturers in SEZs to sell products in the country at “favourable FTA duty rates”. The association said such tax relaxations could spell “immediate existential crisis” for companies manufacturing handsets outside SEZs, much to the detriment of Chinese firms which boast of almost 67% market share.
The move has caused widespread concern in the industry. Jio's aggressive push will lead to the consolidation of the entry-to-mid-level phone market, both feature and smartphones, in India, analysts said.
Jio, the pet project of India’s biggest conglomerate Reliance Industries, started operations in December 2015 and rolled out their services to the public a year later in September 2016. The disruption wreaked by Jio has forced Vodafone India and Idea Cellular, the erstwhile second and third largest players respectively, to merge.
Jio became India’s third largest network provider in two years, posting a profit in the last quarter of 2017. Moreover, predatory tariffs, freebies and a favourable government policy helped propel Jio to dizzying heights. Jio benefited the most from the government decision to slash interconnection usage charges (paid by telcos for receiving calls from other networks) by 57% in September 2017.
Reliance Jio made forays into the mobile market as well. The company launched LYF smartphones in January 2016 and 4G feature phones in mid-2017.
If the Reliance Jio-Flex deal goes through, the telco is primed to turn the Indian smartphone market upside down.
“In 2019, we expect the market to consolidate in this segment. If the government gives special advantage to one specific player, it will have a severe impact on other players. Some of the players in the top 10 list will be wiped off, and the top 5 will consolidate,” said Jaipal Singh, Associate Research Manager, Client Devices at IDC India.
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In the mobile space, Reliance Jio is likely to replicate the same strategy: low-priced devices, affordable services and freebies. Add tax benefits to the mix, and it’s not hard to imagine Jio shaking up the sector.
“A 100-million device deal can easily reach economies of scale,” said Jayanth Kolla, founder, and partner at Bangalore-based research firm Convergence Catalyst. “Local manufacturing, local sourcing and push towards reducing and nullifying taxes would further drive down prices.”
The devices could also come with a bundle of Jio’s services.
“That would make the entire proposition - mobile device plus data and network services - very attractive to consumers,” added Kolla.
The purported deal is not good news for Chinese smartphone companies in India.
“This is definitely a strong proposition against the Chinese manufacturers. Chinese players will still have to import devices and most of the components, unlike Flex, which has end-to-end manufacturing capability. They will also have to pay taxes and spend money on retail distribution and margins. And they do not have the kind of volumes that Reliance Jio-Flex has. So they won’t have the economies of scale either,” explained Kolla.
Simply put, it would cost Chinese device makers more money to produce handsets in India as compared to Reliance Jio.
“Chinese players recently increased the device prices due to currency fluctuation. If Reliance Jio can produce devices at low cost and sell it without paying the customs duty, it would be a big advantage for them,” said Satish Meena, a senior analyst at Forrester.
According to Forrester, India has around 300 million feature phone users and 416 million smartphone users at present.
“The priority would be to lure in non-Jio subscribers. Jio is in the business of telecom services and not devices. Jio would use the phone as an attractive proposition to attract Airtel and Vodafone users onto their network,” Kolla said.
With the mobile push, Jio is targeting the market shares of handset makers as well as rival telecom companies in India.
Be that as may, South Korean electronics behemoth, Samsung (one of the market leaders with 22% share in third quarter of 2018) stands to gain from Jio’s deal.
“If Flex gets concessional tax rates from the government, Samsung could use a similar argument to get tax benefits. It is the only company at par with Flex in terms of end-to-end manufacturing capability and scale. In that sense, Samsung is capable of rising to Reliance Jio-Flex combo,” he added.
Jio, the dragon slayer
Chinese players would be compelled to lower prices and blow their profit margins or risk losing the market share.
“It’s either profit margin or market share,” said Kolla.“It makes sense for Chinese players to partner with Jio’s competitors to offer bundled services and use the combined brand value and reach to stand up to Reliance Jio-Flex." Then again, he added, it’s not a sure-fire strategy.
“Chinese companies such as Xiaomi, Oppo and Vivo have sales, marketing and brand building cost associated with them. If they bundle with an operator, they would want their brand to go along with the operator’s, and that is where things may fall apart. To make it work, the operator would need to subsidise the devices, which it may not be ready to,” said Kolla.
Reliance Jio, on the other hand, works very closely with manufacturers maintaining a tight control over everything from product design to development to cost.
“Essentially, the cost would be high for Chinese companies, and they would never be competitive,” he added.
India has become the decisive market for Chinese players amidst the ongoing US-China trade war.
“India is going to be their main market in years to come. There are not many markets where they can expand. Africa will take time and Europe and the US do not have space for these companies,” Meena said.
Pulling out all stops
Chinese smartphone makers are diversifying their portfolios to keep their head above water in India. While Xiaomi has ventured into television, air purifier, content and credit markets, Oneplus has plans to enter the television space by 2020.
“Chinese smartphone makers are going to use the brand value to disrupt other sectors like television. They will also keep investing in partnerships to expand their ecosystem of services,” said Meena.
Reliance Jio also has an ecosystem of devices, network and apps offering content, music, videos and entertainment services.
“Chinese firms might still stand up to the competition through the combination of brand equity and portfolio management by focusing more on high-end devices to make profits,” said Kolla. “But for Indian players, it could mean a death knell.”
“It’s bad news for Indian players. Indian mobile makers are hoping to get new feature phone users are going to take a hit because ultimately Jio is going to be able to provide superior devices at a cheaper cost along with network subsidies,” he said.
But there’s a silver lining for Chinese players.
“The device strategy is not a long-term play for Jio. It is only for acquiring users for the network. It will hurt Chinese device makers only in the short term. A lot of Reliance Jio feature phone users and smartphone users will shift to Chinese smartphone users at some point of time because Jio is not a pure smartphone company," Meena explained. "It won’t be able to compete with Chinese companies in terms of features as it lacks R&D capabilities. The company is going for the ecosystem strategy to provide more services to users so that they can retain them on their network, if not devices."
Tarun Pathak, Associate Director at Counterpoint, believes Reliance Jio deal may attract other component makers to India.
“Over 95% of the handsets are now being assembled in India. The value addition is still low and this year might end around 15% (value-wise, only 15% of components are made in India, rest are imported). There are a couple of bigger players who are looking to scale up their investment as India offers not just a great domestic demand but an export opportunity too. So any such scale or investment will give a positive signal to other component players to invest or ramp up their investment if some strong policies are being communicated,” Pathak said.
With Jio’s prospective entry into the smartphone segment, the battle lines are drawn. The price wars are, however, good news for the Indian consumer, especially from tier 3 and tier 4 cities, looking to upgrade to a smartphone lifestyle.
While Xiaomi, Flex and Samsung declined to comment for the story, Reliance Jio did not respond to the email sent by The Passage.