Group

D10, Competitive Strategy Case Report

Micromax: Profiting from the Bird of Gold

How Micromax built itself a market in rural India
Group D10 1. Soumya Shukla 61210465 2. Parul Shali 61210449 3. Apurba Mukhia 61210631 4. Sumit Khemani 61210536 5. Dheeraj C Reddy 61210011

Term 2, Competitive Strategy Submitted to: Raveendra Chittoor 17th July 2011

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Table of Contents
Micromax: Harvesting the Bird of Gold ................................................................................................................................... 1

Executive Summary ...................................................................................................................... 3 The mobile handset market .......................................................................................................... 4 Barriers to Entry ................................................................................................................................................................................... 4 Consumer Power .................................................................................................................................................................................. 4 Rivalry ....................................................................................................................................................................................................... 5 Threat of Substitutes .......................................................................................................................................................................... 5 Supplier Power ...................................................................................................................................................................................... 5 Overall ...................................................................................................................................................................................................... 5 Understanding where the real value lies ...................................................................................... 6 Market growth Communications ................................................................................................................................................ 6 Shift in the Income Pyramid ............................................................................................................................................................. 7 New game strategy ...................................................................................................................... 8 Strategic Gameboard .......................................................................................................................................................................... 9 Cost Advantage ..................................................................................................................................................................................... 9 Disruption: ........................................................................................................................................................ 11 IPO: the Future ............................................................................................................................ 13 Exhibits: ...................................................................................................................................... 14

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Executive Summary

How did a company that started manufacturing mobile phones in 2008, capture 6% of the market share by 2010? Samsung, a global player is struggling with 8% market share and Nokia, the dominant brand, is losing its 60% market share. The Indian mobile phone (or mobile handset) market is a crowded place. High marketing spends and price sensitive consumers further reduce the market attractiveness. Despite this, new players are entering the market regularly. This is because India is the worlds second largest market for mobile handsets and expected to become bigger at a CAGR of 11.4% between 2010 and 2016. Micromax, a domestic producer of Mobile handsets entered the market on its own rules. They focused on the burgeoning rural markets with pricing advantages and focused feature sets. They put in processes to minimize overhead costs and reduced inventory levels to ensure quick turnovers. These advantages helped them quickly become Indias 3rd largest mobile handset seller. As of March 2011, Micromax announced its initial public offering, the proceeds from which are to be utilized to help Micromax enter the mainstream markets, while sticking to their rules. The title, Micromax: Profiting from the bird of gold, is justified because the main ideas about the market size have been derived from Mckinseys report titled The Bird of Gold: the rise of Indias Consumer Market, May 2007.

Group D10, CSTR Report Micromax: Harvesting the bird of gold

The mobile handset market

The mobile phone industry in India, from a Porters 5 forces point of view:
Figure 1: Porters 5 forces, Mobile handset industry, India

Threat of Subsftutes

Supplier Power

Barriers to Entry

Consumer Power

Rivalry

Very low

Low

Medium

High

Very high

Barriers to Entry
With huge marketing budgets like $127 million just to launch a new MS Windows based mobile phone, Nokias sends strong signals to all new entrants that the mobile industry is an expensive prospect. Nokias branding and perception is also quite impressive - Ranked #9 on the list of Asia's Top 1,000 Brands 2009 (published by TNS). In 2009, Nokia was the most trusted brand in India according to the Brand Equity survey. New entrants are fighting against a behemoth of marketing. Samsung, the #2 in the industry, invested $5 million at its manufacturing facility in India, in FY2009, over and above the $24 million1 already invested in the Noida facility. Such investments are further deterrents to new entrants. It sends out clear signals of Samsungs seriousness of tapping the Indian mobile handset market.

Consumer Power
246 new GSM models were introduced in the quarter ended March 31st, 20102. The consumers are spoilt for choice. If they dont find a feature in a particular model, they are bound to find another model, from another brand, that meets their requirements. Add to this, the price sensitivity on the Indian mobile handset consumer. Overall, the customer is king.
1 Datamonitor: Company reports Samsung Electronics Co. Ltd. 2 IDC India, 2010 4

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Rivalry
For Nokia, India became the second largest revenue contributor to the companys total revenues in FY2007, replacing the US. In FY2008, accounted for 7.3% of the total revenues. Revenues from India $5,471.9 in 2008, compared to E3, 684 million ($5,420.4 million) in 2007 and E2, 713 million ($3,991.7 million) in 2006. This is proof of the value for the Indian mobile handset market. Currently, there is a mad rush globally to tap the Indian mobile-handset market. This only makes it harder for small Indian players to enter the market and be profitable.

Threat of Substitutes
While satellite phones are an option, their prices prohibit them from entering the mainstream market. The only substitutes can be better mobile handsets (smart phones, touch screen etc.). With the arrival of Googles Android operating system for touch screen mobile phones, and technology getting cheaper thanks to manufacturers in China, this has become a fairly cheap option. The ever-changing technology in this industry makes the threat of substitutes areal one, but the fact that this technology is generally available to all players, makes this lesser of a concern.

Supplier Power
Chip manufacturers, OEMs in china and plastic casing producers markets are all as crowded as the mobile handset market. This means manufacturers can bargain for the best deals.

Overall
The mobile-handset industry in India is very competitive, price sensitive and dominated by global giants who are exploiting economies of scale and their global advantage in every manner possible. The attractiveness of the industry for small players is very questionable. So, why did Micromax enter the market?

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Understanding where the real value lies

Market growth Communications

Communications, which accounted for only 2% of average household consumption in 2005 with a market size of Rs. 344 billion, will be one of the fastest expanding categories with growth of over 13% per year taking the market size to Rs. 4,288 billion by 2025.3
Figure 2: Growth in Indian Communication Market

The wireless subscribers number is only an indicator of the number of handsets that have been sold. People tend to own more than 2-3 phones in a space of 2 years. The Indian mobile handset market, 151million for the 12 month period ended Dec 31st 2009, is expected to grow to 402 million for the 12 month period ending Dec 31st 20144. More specifically, the Medium ASP segment (Phones priced between Rs. 2000 Rs. 5000), is expected to grow from 68 million to 240 million per year, during the same period; a growth of 250%. So, who is going to be buying these cheap phones?
3 The bird of gold: The rise of Indias Consumer Market, McKinsey report, May 2007. 4 Analysys Mason 6

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Shift in the Income Pyramid

Figure 3: Change in Indian Income pyramid

The aspirer segment is going to drive most consumption in the next decade. The aspirer households, with an annual income between Rs 90,000 and Rs. 200,000, are concentrated in rural India. What does this mean to the mobile-handset market? The fastest growing segment in India is going to be communications. Maximum consumers of this segment are going to be in rural India. As history has shown (Nirma, Sunsilk shampoo sachets, etc.) their requirements are quite different from the urban markets and they react very differently to marketing and pricing efforts. This is the opportunity that Micromax decided to go after.

Group D10, CSTR Report Micromax: Harvesting the bird of gold

New game strategy

It was clear that the segment was concentrated in the rural areas. This was an area that Nokia was already targeting, with phones like the 1100 (USP: torch light). This was however a condescending approach towards the segment the problem wasnt the fact that the rural areas had a shortage of lighting devices. The problem was irregular supply of power. Micromax correctly (based on sales) figured this shortcoming and set out to address this problem. The X1i, Micromaxs first product, had a 30-day battery backup. Charge it at your convenience, and features to support the most basic usage make as many calls as you want. This has been Micromaxs legacy since. The where was rural India. The how was to identify unique issues people in rural India faced and address those, one issue - one product at a time. Below, is the strategic gameboard of the Indian mobile handset market. With respect to Nokia, the market leader, Samsung tried to take them head on. Their success has been quite limited, with a paltry 8% market share, as compared to Nokias 60%. However, Samsung is building a niche for itself in touch-screen phones. LG on the other hand, decided to play the same game in a niche. They realized the clear segmentation between CDMA and GSM subscribers. LG is the market leader in CDMA phones with over 40% market share. Micromax, decided to change the game and hit a new market segment. This would keep it below Nokias radar for long enough to help them build a strong brand and market share. The where for Micromax is clear, however the how has more to it than product design.

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Strategic Gameboard

Where to compete?

Across-the- board (entire market) Selective (Market niche)

Emulate market leaders funcfon - Samsung

Rewrite industry rules to exploit a unique, industry wide advantage

Mobile handset industry

Resegment the market to create a niche - LG

Create and pursue a unique advantage - Micromax

New game

Same Game

How to Compete? Micromax used a number of other strategies to change the rules of the game. From better channel management to lower fixed cost setup, Micromax worked systematically on a number of different issues to gain this advantage. By making a series of small decision, Micromax managed to gain an advantage, which took many imitators a long time to understand their success, and kept it out of Nokias sights. These changes were a combination of disruptive and differentiation. The following sections talk about some of these advantages.

Cost Advantage
Very low R&D spends Nokia spend 5863 million on R&D in 2010 (globally). Considering the Indian market is about 7% of their revenues, we can assume 410 million is the spending in India; which is Rs. 25,833 million. Micromax, in contrast, spend Rs. 12.43 million on Research. In the long run, Nokia will definitely reap the benefits of the R&D, but Micromax has pointed out the fact that a lot of the present problems the rural user faces dont need new solutions, rather they need a better mix of existing solutions. Further, a lot of Nokias R&D expenditure is on projects like Nokia Instant Community, helping social interaction when people are in close proximity. People in
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Group D10, CSTR Report Micromax: Harvesting the bird of gold

rural India are still grappling the basic communication issues; it will be a long time before they will be in apposition to buy phones with GPS to help them use such communities. Micromax is focusing on fixing their current problems before they can solve additional issues. No capital expenditure As of March 31st 2010, Micromax has Plant and Machinery worth Rs. 2.9 million. Nokia had invested $285 million5 (Rs. 12.8 billion) as of March 2011 on their Sriperembudur, TamilNadu manufacturing unit. The low initial upfront cost of Micromax afforded them great freedom in pricing strategies they used. Micromax uses OEM (Outsourced Equipment manufacturers) in China and Taiwan for all of their production. Even the supply chain management (shipping the goods to India) is managed by outside vendors. By using core-capabilities of other companies, Micromax works on its core capability, product design (functionality) and sales & marketing. The end result of this cost advantage Micromax is able to provide a lot more phones at lower price levels as compared to Nokia. These lower priced phones have better aesthetics, more appealing in terms of vanity and in most cases, have better features. Here is an example of 2 similarly priced phones (~ Rs. 4700).
Table 1: Nokia vs. Micromax, Product specs

Nokia 2730 Classic Micromax Q75 Total Memory Ext Mem: up to 2 GB microSD up to 8GB Talk Time Up to 3 h 30 min Up to 7 Hours SMS Yes Yes MMS Yes Yes E-Mail Yes Yes Push Mail No No Music Player Yes Yes Ring Tones MP3 Ringtones Polyphonic, MP3 Camera Yes Yes MegaPixels 2 MP 3 MP Camera Zoom 4x digital zoom Digital Zoom Video Capture Yes Yes OS Java Java EDGE Yes Yes 3G 384 Kbps No Interface Icon Grid Icon Grid 5 http://www.deccanherald.com/content/66989/nokia-invests-285-m-india.html 10

Group D10, CSTR Report Micromax: Harvesting the bird of gold Java Technology Infrared Bluetooth ports Wi-Fi Internet Yes No Yes Yes No GPRS Yes No Yes Yes Yes EDGE

The cost and feature leadership is unique to Micromax.

Disruption:

Distribution and Channel Management Micromax uses a 3-tier distribution network. 1. State Distributor 2. Regional Distributor 3. Retail outlets These are spread across 23 states in India, and also in Nepal, Sri Lanka and Bangladesh. Micromax also gives demonstration training to sales coordinators and retail outlets. There is a plan to outsource such training to increase effectiveness (use core competencies of other agencies). Nokia has two separate distribution models6 - One uses HCL (North and East) to manage all order form regional distributors and they distribute to RDSS (redistribution stockiest supplier) who in turn distribute the phones to retail outlets. In the west and south of India, Nokia has developed its own distribution channel7, and takes responsibility for hiring, training and managing the salesforce which directly supplies to retail outlets. Nokia capped the growth of RDSSs by introducing multiple RDSSs for each territory. "We look at an RDS' ability to serve retailers. We feel one RDS can best serve a maximum of 200 retailers," explains V Ramnath, director, operator channel, Nokia India8. This meant their star performers now had to compete with 4-5 other distributors in their area, which meant they looked else where for profits enter Micromax. Micromax also provides the channels with better incentives 5% commissions to each level. Nokia usually gives a 2% channel margin, out of which 1% is usually discount.9
6 http://www.thehindubusinessline.in/2006/02/21/stories/2006022102340400.htm 7 http://www.scribd.com/doc/36106585/Sales-and-Distribution 8 http://m.economictimes.com/PDAET/articleshow/msid-7793841,curpg-4.cms 9 http://business.in.com/article/work-in-progress/micromax-mobile-advantage/10472/0 11

Group D10, CSTR Report Micromax: Harvesting the bird of gold

The simplicity of Micromaxs distribution strategy is its strength. Aligning the incentives of distributors and retailers to theirs, Micromax has been able to reach more customers. Asset-Light Business Model Micromax offers marginal short-term or no credit to distributors. This ensures strong cash flows (reduced accounts receivable) to fund regular operations. Micromax also maintains only 10days of inventory, and takes delivery on a daily basis. Daily sales reports (models, volumes, inventory) from state and regional distributors are connected to the information manufacturing and financial areas (using Microsoft Navision). This provides real-time synthesized data to better manage the supply chain and predict product demand. Segmentation & Product Development Micromax realized the heterogeneity of the rural Indian market, and broke it down into fine-grained segments. Micromax has more than 40 models (Exhibit 1) for the rural market. In comparison, Nokia has around 10 models (Exhibit 2) for this market. This fine-grained segmentation meant Micromax could develop products in a much more focused manner. Since the R&D costs were low, they didnt have achieved huge volumes and could produce based on the segment-size. The actual development team is 24 members strong (as of Aug 2010), and works directly with the chipset manufacturers to test out feasibility of their designs. Micromax also works with multiple chipset manufacturers to ensure best possible output quality for their designs. Micromax proved their product design capabilities with the launch of the dual-sim handset range, which by 2008 marked out 20 to 30 percent of all mobile handsets sold in India.

Their time-to-market from the design to production stage is around three months as compared to the 18 months taken by larger guys, Naveen Wadhera, Director, TA Associates.

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Group D10, CSTR Report Micromax: Harvesting the bird of gold

IPO: the Future

On 9th March 2011, Micromax announced its initial public offering. They plan to raise Rs. 4.68 billion ($104 million), selling 10% stake in return. The object of the issue (as stated in the Draft Red Herring Prospectus): 1. Establishment of new manufacturing unit (Rs. 2,260 million) 2. Enhancement of Micromax brand through advertising (Rs. 1,250 million) 3. Investments in acquisitions and other strategic initiatives (Rs. 750 million) 4. Funding expenditure for general corporate purposes (the rest) Scaling gracefully - The largest issue for most startup. Micromax has developed enough inertia to go after the mainstream markets. We are not the poor cousins of Nokia, Instead we will force Nokia to launch newer products to compete with us. 10 says Vikas Jain, Co-founder Micromax (see Exhibit 3 for Management structure). Accordingly, the proceeds from the IPO are being used to fund this growth. One questionable object of the IPO Establishment of a new manufacturing unit. Questionable because we earlier evaluated their strategy of outsourcing all manufacturing, and how it gave them huge cost benefits. The new plant will work as an assembly location (Printed Circuit boards, soldering, annealing etc.) and the chip manufacturing will continue to be through partner organizations. Micromax believes they have reached sufficient economies of scale to be able to efficiently utilize a manufacturing plant in India. They do not plan to stop using their OEMs in China and Taiwan. The plant is also a risk mitigation plan, guarding against the adverse effects trade policies between India and China or Taiwan.

10 http://business.in.com/article/work-in-progress/micromax-mobileadvantage/10472/0#ixzz1SEhhnMgn 13

Group D10, CSTR Report Micromax: Harvesting the bird of gold

Exhibits:

Exhibit 1: Micromax models (Rs. 2000 - Rs. 5000)

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Group D10, CSTR Report Micromax: Harvesting the bird of gold

Exhibit 2: Nokia Models (Rs. 20000 - Rs. 5000)

Exhibit 3: Management structure

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