Mobile Handset Industry

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SKN SAMEERA Mobile Handset Industry Analysis

Industry Overview : 

Industry Overview In 2010 , Market size in units 80000 – 100000 mobile phones per month In value : Rs 6 – 8 billion per annum Market is mainly dominated by 3 key brands while Nokia is the market leader. Within Past 2 – 3 years Gray market captured 25% -30 % of total market share from key players

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Market is mainly segmented by the income level while lower income group contributes around 70% of total revenue Market penetration in north and east is around 10% and expects to boost up with the government heavy investment on infrastructure in those areas. Income level growth , technology development & population growth are the key demand driven factors in any market segment. With the new rules and regulations which are introduced by TRC it is expected to shrink gray market while the demand for branded phones increase. Recent Change of tariff structure and the increase of government investment on technology results for favorable future of mobile industry.

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Phone Brands in Sri Lanka

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Target Market Basic Users The cell phone is just another communication device for these consumers. Mobirati Users The mobile generation that has grown up with cell phones and can't imagine life without them. Cell phones are a central part of their everyday lives. Paragmatic Adopters Cell phones emerged in their adult years and they're now learning to use them for things other than talking. Cell phones are more a part of their everyday life than ever before, but still mainly functional. Social Connectors Communication is central to their lives and cell phones allow them to keep up to date with friends and social events. The mobile device is the bridge to their social world. Social Connectors Paragmatic Adopters

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Segmentation Strategy Potential Market Lower income group Middle Income Group Top Income Group Features Base Features Base Features Base

Market Segmentation : 

Market Segmentation Income Base

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Lower Tier : Basic Features Price range is defined between Rs.1500 to Rs.12000 . 70% of revenue generate from this market segment. Lower the price , higher the volume is the strategy behind this segment. Normally in every 6 month new model introduces to the market. Product differentiation at a lower cost is the key success behind this segment : - Shape , Display , Key pad are some basic features which change frequently. - Torch , Radio , VGA Camera are some popular features under this segment Mainly 50 - 60% of revenue generate from suburban and rural areas Gray market own 35% market share of this segment. After 6 months Same Phone with different user experience

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Demand Driven Factors ( Lower Tier ) Growth of income level : With the increase of mean income value per month we can expect demand to increase . (Due to high income sensitivity) Demand from North and East : Market penetration is around 10% and expect huge contribution from North and East to the growth of mobile phone industry. Price reduction due to Competition : Average price of a basic phone has slightly decreased due to the higher level of competition. Innovative product features : Although segment is not mainly driven by higher level of technology some new features help to increase demand. EX : Torch and Radio features has increased growth rate massively in urban and suburban areas.

Market Positioning : ( Lower tier ) : 

Market Positioning : ( Lower tier ) Marketing Strategy : Recent Marketing strategy more focus on Market development in North and East. Mass Marketing Campaign Due to lower profitability of individual customer. Less focus on direct customer relationship when compare to other market segment.

Mid Tier : : 

Mid Tier : 20% of revenue generate from this segment. Price range is between Rs.10000 – 25000. High variety of usage pattern due to higher level of feature focus. Switching propensity from lower level segment to this mid tier segment is expected to increase with the increase of income level and technology development. 60% of mobile phones belong to this segment , selling price lies between Rs.10000 – Rs.15000. Lower Tier Mid Tier 1.Income level Increase 2. Technology development Nokia 1100 Nokia 1800

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Mid Tier Music Lovers 3G/Camera Capabilities/Touch Social Connectors High Memory Capacity Powerful battery Stereo Speakers High MP ( EX : 5Mp) Dual LED flash video light Msn, FaceBook, Skype, Yahoo Messenger – Enabled Home screen notifications Photo-sharing

Demand Driven Factors : ( Mid Tier ) : 

Demand Driven Factors : ( Mid Tier ) Government Investments on Technology : Government investment on technology has increased at a higher rate specially after the 2007. Budgeted future capital expenditure on technology is greater than 2000 Mn. Increase number of Social Connectors : Penetration of Facebook in SriLanka to population: 3.14 % Penetration of Facebook in Sri Lanka to online population: 37.97%

Market Positioning : ( Mid Tier ) : 

Market Positioning : ( Mid Tier ) Sony Ericsson has received the highest ratings from users in Friendliness of physical design,operations and features Sony Ericsson has came a long way in enhancing overall customer satisfaction, mostly among middle income educated people.

Top Tier : : 

Top Tier : 10% of revenue generate from this segment Phone prices are greater than Rs.25000 and goes above Rs.100000 Profit margins are high and no of sales volumes relatively law. (Around 4000 – 6000 phones in qty per month) Professionals and businessman are the main key groups. Market is mainly restricted to western province due to higher price range Direct marketing and better client relationship management are main critical success factors. “ Positioned as Smart phones for smarter life “ market positioning concept play a major role in this segment. Business Oriented OS can see in many phones in this segment. Reasonable Demand from non businessman groups 1. Family members of higher income owners

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Top Tier Business oriented design Normally have a full QWERTY keyboard to maximize typing speed Licensed version of Quick Office Better E-mail applications Ease of use and battery longevity Designed as a multimedia device Higher demand from young people in high income families Dedicated player buttons for easier playback controls. Added entertainment hardware Better cameras and built-in entertainment hardware Business Purpose Entertainment purpose

Demand Driven Factors : : 

Demand Driven Factors : Number of businessmen and professional workers With the increase number of businessmen , we can expect that need of a smart phone will increase. Demand for business focus post paid packages When demand for higher level post paid packages increases we can expect to increase demand for top level phones. Ex : Blackberry plans Co operate post paid packages Business Solutions Sales Force Automation Data Services Remote Synchronization International Services Mobile E-mail

Marketing Strategies : : 

Marketing Strategies : Direct customer relationship with co-operate clients is the main strategy used by players in this segment. Other than that , higher level marketing campaigns use to address this top tier market directly ,which is not sense by other segment in this industry. 1. Business Magazines and articles 2. E- Commerce and M- Commerce 3. Invitation for new phone models launching ceremonies In this market we can see some major players of mobile industry also play some major roles in this top tier segment of mobile industry. Dialogue Etisalat Their main target is to increase their post paid customer base by using high end value phones as a marketing tactic. Ex : Etisalat give 10 blackberry phones free to company senior manager panel if they buy 10000 blackberry post paid packages.

Security threats on Blackberry : 

Security threats on Blackberry Recently number of countries are concerning about block the key features of black berry smart phone mainly due to the security concerns. - Unlike Apple and Nokia smart phones, the data sent over Research in Motion's Black Berry is encrypted and stored abroad. Black Berry Messenger, Black Berry e-mail and Black Berry Web-browsing services will be suspended from 11th of October in UAE. India has also threatened a ban .As a result of this Indian blackberry market has been dropped slightly. RIM is not willing to locate its servers in their operating countries (allowing interception) since the costs are not justifiable on commercial grounds. With this band of BBM, in UAE the demand for apple phone has started to increase. If India ban the blackberry, there will be high possibility of ban the blackberry in Sri Lanka as well.

Distribution Network : 

Distribution Network West Indirect Distributors and Franchise shops Ex: 1.Cellcity 2.Dialogue 3.Mobitel 4.Airtel 5.Etisalat 6.Metropoliton Direct Dealers Direct Clients Ex: Co operate Clients - Lottery board - Banks - Government Offices Phone values greater than Rs. 10000 import directly without any phone warrenty.

Customer Buying Behavior : : 

Customer Buying Behavior : Basic Users Lower and Middle Income Top Tier Groups Features Price 3G Camera Office Wi-Fi Law & Middle BUY Top Tier

Tariff Structure .……………. : 

Tariff Structure .……………. As a % of CIF SRL and SUR duties were removed by government recently. As a result of that total duty charge was reduced to 8% .

Distribution of Margins : 

Distribution of Margins National distributor decides the maximum price that each phone model can sell. So retailer has to restrict to the profit margins decided by importer As a result of this, retailers directly import phones illegally to country without buying from authorized dealers Retailer **** : retailers import directly from foreign dealers

Import cost : 

Import cost Source : Invoice of Softlogic Holdings Ltd ( Invoice Date 30 . 09 . 2010 , Sea Freight from CHINA ) Freight cost is basically for the cubic meters they occupy when they do import. Normally phones are imported via sea freight, consolidated cargo carriers and the importer tend to select the efficient route with lowest possible cost. Other cost in the invoice includes all relevant import charges such as deposits, doc charges, transportation, tax and so forth.

Retailers : 

Retailers Main Importer decides the maximum price that each phone model can sell. As a result of this many retailers directly import phones illegally to country without buying from authorized dealers. Basically there are ten basic models in mid tier, where retailers buy under dealership contracts. Normally price less than Rs .10000 phones buy from authorized dealers due to . . 1. Warranty requirement Lower income group clients give higher priority for warranty when purchasing a product. 2. Lower level of profits When Price is increasing normally phones above Rs.30000 retailers tend to directly import them and sells without warranty as those customers do not highly emphasis on warrants.

Pricing Methodology : 

Pricing Methodology Normally mother company decide the maximum and minimum price range that phone can sell within the country. Importer prepare their budget according to the cost allocate to each activity associate with each phone model . Marketing cost is normally bared by both the importer and mother company. 1. Importer need to send a marketing proposal to mother company and get an approval from them in order to get funds for initial marketing activities of each new model. Competition level , target market like attributes also take in to consideration for budget preparation. After considering all these factors importer define a price within the range which is given by the mother company.

Supplier Analysis : 

Supplier Analysis Currently most number of phones import to Sri Lanka from china due to lower production and transport cost With new trade agreement with INDIA and new Indian phone models introduce we can expect to increase number of phones import from India. With the economic downturn many number of suppliers prevented from giving credit period to direct importers. As a result of that importers have to pay cash and order the number of phones. EX : Nokia start the production only after importer pay the cash. Mainly retailers import phones directly from Singapore ,Malaysia and UAE.

Price Comparison : 

Price Comparison

Impact on Mobile Phone Industry by New Rules and Regulation…….. : 

Impact on Mobile Phone Industry by New Rules and Regulation…….. The Telecommunication Regulatory Commission (TRC) has introduced a label on every import mobile phone to Sri Lanka. Every product should be approved by the TRC. Every original mobile phone has a type label with the country name The Director of the TRC Anusha Pelpita said that sales outlets with illegal phones would be raided with the assistance of the police over the next three months. TRC is seriously considering about probability of blocking the mobile phones with fake or invalid IMEI (International Mobile Equipment identity ) from the networks of mobile service providers.

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Overall Analysis of factors impact Mobile phone Industry Historical Trend Analysis

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Considering one independent factor at a time with the dependent factor, above outcoms are visible. According to the Mobile Phone subscribers , internet subscribers and government expenditure on telecommunication they indicate around 9% CAGR in future mobile industry. According to the population growth , mean income value and expenditure on telecommunication as a single family factors indicate around 4% - 5% CAGR growth in future mobile phone industry. Important : 1. Cyclical Impact in 2008 – 2009 years due to global recession is need to consider when forecasting accurate future industry growth rate relate to above factors. 2. No of phones import only include legally import phones only.

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Qualitative Factors North and East Contribution : With the new 20% market share which is added to the mobile phone industry we can expect a abnormal growth in mobile phone industry due to market development in those provinces. Expected gray market reduction in future : 1. With reduction of tax rate, it is difficult to gray market to compete with branded legally imported phone prices. 2. New TRC approval process for each and every imported phone model, this problem becomes worst.

Future Growth of Mobile Phone Industry : 

Future Growth of Mobile Phone Industry In 2008 – 2009 number of imported phones drastically reduced mainly due to Global Economic downturn On going war Growth of Gray market share According to the industry experts phone market is normally growth with in the range of 4 % - 8 % (without any abnormal impacts) But qualitative factors reveal, there will be a higher level of growth rate around 20% - 30% due to the abnormal events happened recently When considering all the qualitative and quantitative factors industry experts say there will be a growth rate around 20% in the market.

Nokia…….. : 

Nokia…….. Softlogic Holdings (Pvt) Ltd is the Sri Lanka’s only National Distributor for Nokia Products and Accessories. Nokia has already captured around 45% - 55 % market share in legal mobile phone market. Mainly phones import from Nokia manufacturing company in China. They are following JIT approach when order the phones. Nokia has introduced 11 different phones series to address the Sri Lankan market. There main strength are product differentiation and strong brand image in every segment in market. As a result of this Nokia target phone market not restrict only to one segment and able to dominate in every segment. Nokia's next generation phone suite software called Nokia OVI has released recently which supports other platforms in addition to Windows New phone has launched with Tamil interface allowing the send of text messages in Tamil. In globally Nokia shares have fallen by 3% in 2010 compare to 2009 mainly due to higher demand for apple I phone. Softlogic has a plan to list in the Colombo Stock Exchange in next year. National Distributor for Nokia

Samsung : 

Samsung Samsung is on a massive marketing campaign after few years silent. Samsung has launched 30 GSM models in the local market ranging from Entry Color , Entry color FM range, Multi media series , Touch phones , messaging series and business phones. Has gained a 15 percent growth for the three months period from 5 percent in May till August this year. The company expects to reach 20% growth rate by the end of December this year. Company has a future plans to increase outlets from 600 to 1000 in the country by the end of December. Also Samsung has targeted to capture 25% market share in smart phone segment by the end of this year. With that intentions they have introduced 2 mobile phones called SAMSUNG WAVE ( Rs 55000.00 , 1GHZ CPU , 2 GB internal memory , 5 mega pixel camera ) and Samsung Galaxy S ( Rs 75000.00 , 1GHZ CPU , 216 GB internal memory , 5 mega pixel camera ). Samsung Wave with Samsung’s own proprietary operating system has able to give some competitive advantage for them. Samsung Galaxy Samsung Wave

Micromax : 

Micromax Micromax, a leading Indian mobile handset company launched Micromax mobile phone in Sri Lanka in May. 30 day battery backup facility and dual SIM facility coupled with the affordable price are the key features they focus when addressing the low tele – density rural population and the North , Eastern markets. Company has launched seven handsets and 3G USB data card that cost ranging from RS. 3000 – Rs. 25000. Micromax mainly focus on the rural market and young segment. To ensure brand awareness and visibility, Micromax acquired sponsorships of IIFA awards, cricket rolling from IIFA 2010, the Asia Cup and the Tri Series. Infinity Lanka Holdings is the National Distributor for Micromax Phones. Dialogue has agreed to sell Micromax phones in their outlets with a free dialogue sim. IIFA Edition Q55 Phone

Sony Ericsson : : 

Sony Ericsson : Mainly focuses on the mid and high segment of the mobile market and has been dominated that segment during past years. Sony Ericsson (SE) recently strengthened ties with telecommunications conglomerate Brantel Lanka Private Limited as its distributor in an effort to leverage the Company's large sales network. Sony Ericsson was established in Sri Lanka in 2002, and at present, the Company has recently launched 4 models with Brantel - W205, S312, J105, and Aino. Sony Ericsson has received the highest ratings from users in Friendliness of physical design, operations and features Sony Ericsson has came a long way in enhancing overall customer satisfaction, mostly among middle income educated people. W series is more popular with music entertainers Global market share has reduced by 1.3% from 2009 to 2010. W Series

E - Tel : 

E - Tel E – Tel phones mainly import from China and mainly target on lower level income group. They mainly try to introduce innovative features to lower level segment at lower price. Only legally import Phone in the market with TV facility. Recently introduce E – Tel Blackberry phones became more popular among Sri Lankan people. When compare to other Branded phone prices e-Tel Phone prices are relatively law. Brandtel is the authorized distributor of E-Tel phones in Sri Lanka. Also Brantel revolutionized the after sales service in Sri Lanka by introducing one day service sales. E – Tel KN B58 : Dual Sim / Dual standby, TV, Flash Light, Magic Voice, Black Listing, SMS, MMS T9, FM Radio, 3gp Video Player

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TRC Approval Process Type of Approval for mobile phone Requirements

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1.Applications for type approval should be made in the form issued for that purpose by the TRCSL (Commission). 2. Initially permission will be granted to import a sample unit. 3. Sample unit along with the relevant documents and completed type approval application form should submit to the Commission. 4. Commission will require a minimum of two weeks to grant type approval. 5. Any future changes in models; design etc. will require fresh type approval from the Commission. 6. Complete records of the importation should submit to the Commission in the form issued for that purpose. Periodical inspection will be carried out by the Officers of the Commission to verify the Item 3 & 4 of the type approval “Requirements” stated above. Failure to comply with these requirements may result in cancellation of type approval. Procedure……

Porters 5 Force Analysis : : 

Porters 5 Force Analysis : Threat of new entrants : Averagely High Capital / Investment Requirement : Average need higher level of capital to purchase phones due to limited or zero credit period from Suppliers. The Average Weighted Prime Lending Rate (AWPLR) dropped to 10.74% by March 2010 against 19.16% in the previous year. Access to industrial distribution channel : Adequate Number of 3 rd party cellular distributors are available It is easy to develop strategic partnership with mobile operators to display phones in their mobile outlets. Brand Royalty : Average Likelihood of retaliation from key players : Average Government regulations : Average

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Bargaining Power of supplier : Very High Profitability of Suppliers : Normally supplier decide the maximum and minimum price for each and every phone model Switching Cost : Negligible There is less or zero switching cost for suppliers to change their customers Credit period : Limited There is no or less credit period given by suppliers for phone importers. Brand Loyalty : High Brand of the phone player major role in phone industry. Bargaining Power of Buyers : Averagely High Concentration of Buyers : Average The new market development and gray market reduction will increase the number of buyers. Switching Cost : Negligible Product Differentiation among products: Average

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Intensity of Rivalry : High Structure of competition : High There is huge competition due to lot of small players in the industry. Structure of industry cost : Average fixed cost Degree of product differentiation : Average Switching Cost : Negligible switching cost has lead to higher competition Strategic Objectives : Many of the players in industry pursue Aggressive growth strategies Exit barriers : Low Threats of Substitute : Law No of substitutes available : CDMA , I pod with SKYPE application , Payphones Relative performance of substitutes : very law compare to mobile phones. Buyers willingness to above substitutes : Law

Global mobile phone Industry : 

Global mobile phone Industry . Significant reduction of key players market shares mainly due to 67% growth of smart phone market. Nokia has recently announced a slew of new smart phones aimed at expanding its consumer appeal, including a mid-tier typewriter keyboard smart phone, the E5. RIM was another vendor to forge ahead, particularly on the back of its impressive performance in Latin America where it saw 297% growth in Q1 2010. Sony Ericsson successfully delivered its first Android-based device at the end of 1st quarter , 2010 Apple, which has made share gains over the past year, climbing from 11% a year ago to 16% in Q1 2010.

Conclusion : : 

Conclusion : Market Growth : Mobile Phone industry expect to grow at a rate of 20 % mainly due to 1. newly added market share from North ,and east regions 2. With the expect reduction of gray market Industry Profitability : Phone prices reduction rate may reduce in future with the reduction of gray market. With the expect growth rate in Sri Lankan Economy , Middle Tier and top tier segments growth rates are predicted to grow much faster than low level segment. Sharp continuous depreciation of the USD against Sri Lankan Rupee . Future Market Opportunities : Global mobile phone trend is currently moving towards Smart Phone Market. Although Price of smart phones less affordability to majority of Sri Lankan , in future with the competition and economies of scale new smart phones are expected to be more affordable. There is a possibility of ban the blackberry phones in Sri Lanka . So there will be a opportunity to capitalize with in this segment. Recommendation : Before take any investment decision it is recommended to wait and see the TRC progress about the Sri Lankan gray market and do a feasibility analysis to capitalize in any niche market with in the middle and lower level segment. Also it is important to keep in touch with the demand driven factors of smart phone market . Primary Research Report Link Form Link : https://spreadsheets.google.com/viewform?formkey=dGZHbGZMQ2dEcHNwVUlrb0hhMEoxSkE6MQ Summary Sheet Link https://spreadsheets.google.com/gform?key=0AqgquTGK0m2pdGZHbGZMQ2dEcHNwVUlrb0hhMEoxSkE&hl=en&pli=1&authkey=CPyPhp0N&gridId=0#chart