According to research firm Counter­point, the Indian smartphone market grew by 23 per cent to 24.9 million units in the first quarter of 2016, surpassing the US to become the second largest market in terms of users. India has been witnessing strong sales growth at a time when there is a slowdown in the global smartphone industry. During January-March 2016, global smartphone shipments re­m­ain­­ed flat at 344 million units owing to weaker demand in China and Brazil as well as parts of Europe.

India has thus become a key focus area for smartphone manufacturers as its appetite for devices continues to grow at a brisk pace. With a mobile subscriber base of 1.02 billion and smartphone sales overtaking feature phones sales, the country offers huge growth opportunities. As a result, several global players have been venturing out of their home markets to make inroads into India. Many smartphone vendors are looking to establish exclusive retail stores in the country apart from selling through franchisees. More­over, the recent foreign direct investment (FDI) reforms introduced by the government in the single brand retail segment have created a conducive environment for companies to open wholly owned outlets in the country.

FDI guidelines

While 100 per cent FDI is permitted in the single-brand retail segment, companies are required to obtain approval from the Foreign Investment Promotion Board if the FDI exceeds 49 per cent. For proposals involving FDI beyond 51 per cent, com­panies have to source 30 per cent of the value of goods from India, preferably from small and medium enterprises.

In November 2015, the government eased some of these provisions with a view to promote its Make in India and Startup India initiatives. The new norms propose that the requirement of sourcing 30 per cent of the inputs domestically for companies seeking to invest more than 51 per cent equity in the single-brand retail segment would be applicable from the date of the first store opening instead of the date of re­c­eiving FDI. Further, in the “state-of-the-art” and “cutting-edge” technology seg­­ments, the sourcing norms can be relaxed, subject to government approval.

The new FDI norms have generated a lot of enthusiasm amongst smartphone companies in the Indian singlebrand retail segment.

Setting up shop

Following the liberalisation of the FDI norms, several global smartphone vendors have expressed their interest in opening single-brand retail stores in the country. US-based handset vendor Apple was the first to approach the government to allow single-brand retailing. The company currently sells its products in India through a network of franchisee-owned stores and distributors such as Redington and Ingram Micro. In response to its application, the government has reportedly decided to waive the domestic sour­­cing requirement for the company, paving the way for Apple to open its own retail outlets in the country.

Apple’s increased focus on the Indian market can be largely attributed to the fact that iPhone sales in the country regis­tered a year-on-year growth of 56 per cent, despite its first global sales decline in 13 years during the quarter ended March 2016. Emerging markets like India are going to play an integral role in the company’s future strategies as the smartphone market becomes saturated. According to Tim Cook, chief executive officer, Apple, India is currently at a point where China was about seven to ten years ago in terms of network and market economics, and the company has a great opportunity in the country.

Several Chinese players including Xiao­mi, Gionee, LeEco and Oppo have also approached the government for retail lic­ensing. These companies feel that a brick-and-mortar presence is needed to build brand awareness in India.

At present, Gionee sells its products in India through multibrand stores and 30 Gionee-branded franchises. The company plans to increase the number of franchise outlets to 250 by December 2016. It is also looking to open 200 exclusive service centres in the country. In addition, the company plans to sell its products through its own e-commerce platform.

LeEco plans to open wholly owned exclusive retail stores in eight to ten cities in order to display its entire product portfolio ranging from phones, TVs, headsets, Bluetooth devices and power banks. Be­sides, the company is looking to open 500 franchise stores across India. It also has plans to set up a research and development centre in Bengaluru by end-2016.

Oppo, a relatively new entrant in the Indian market, also plans to set up 35,000 outlets by end-2016, including exclusive retail and franchise stores.

Meanwhile, Xiaomi like Apple has sought exemption from the 30 per cent local sourcing requirement. Currently, Xiaomi sells its devices through select e-commerce platforms and retail stores. India is one of the biggest markets for the company, especially in the 4G segment. According to CyberMedia Research, Xiao­mi accounted for 10 per cent of the total 4G devices shipped to India in 2015. The company also assembles devices like Redmi 2 and Redmi Note at Foxconn’s manu­facturing facility in Andhra Pradesh.

E-commerce opportunity

Under the new FDI norms, an entity that has been granted a single-brand retail licence will be permitted to undertake e-commerce activities. This is significant considering that the share of smartphone sales through e-commerce increased from 15 per cent in 2014 to 30 per cent in 2015. Further, as per market estimates, the share of online sales in total smartphone sales will reach around 35 per cent by end-2016.

The trend is being driven by the growing internet penetration in the country and the benefits availed of by smartphone companies through online sales. Through the online sales platform, companies are able to reach a wider audience as compared to a small number of customers th­rou­­gh a few stores. Moreover, companies do not have to share their margins with various distributors or dealers, nor spend on promotions at retail stores.

The grant of retail licensing will also help companies build their brands online. This could be one of the reasons why an established brand like Samsung is expected to apply for a single-brand retail licence in India soon. Of late, online sales have be­co­me a key part of Samsung’s future growth strategies. The company has created a dedicated team that looks after online sales distribution and promotion strategies. Besides, it has recently launched a few online-only smartphone models such as the Galaxy J3 and On series on various e-commerce platforms.

Conclusion

The new FDI norms have generated a lot of enthusiasm amongst smartphone companies in the Indian single-brand retail segment. This is a positive development as a higher influx of FDI adds considerably to the country’s GDP.

However, some industry experts are of the view that not all smartphone vendors need to have their own stores. This strategy is relevant only for bigger companies such as Apple, Samsung and Sony, as they can set up marquee stores and run them the way they want to. Since these are established brands, customers are likely to make an effort to visit their exclusive stores. According to analysts, for small players trying to establish themselves in India, it is better to continue investing in conventional media to create awareness about their products, unless they are willing to invest huge sums to build their brand.

Puneet Kumar Arora