February 27, 2014 12:00 am JST

Low-price superstars

TAKAFUMI HOTTA, SHUHEI YAMADA, and KEN KUWAHARA, Nikkei staff writers

A Zopo Mobile smartphone with 3-D capabilities attracts a crowd in Shenzhen's main electronics district.

MUMBAI/BEIJING/GUANGZHOU -- Indian smartphone maker Micromax may not be well-known in the West, but make no mistake, it is a name to remember. The company already outsells Apple at home and is gaining fast on Samsung Electronics. Now it wants more.

      Speaking at the company's first-ever appearance at the International Consumer Electronics Show in Las Vegas in early January, co-founder Rahul Sharma said Micromax is ready to rumble in the global market.

     The company's fast growth and strong sales -- it ships more than 2 million smartphones every quarter -- are reminiscent of another booming smartphone upstart -- Xiaomi of China. The consumer electronics manufacturer was co-founded in 2010 by Lei Jun, who is often referred to as "China's Steve Jobs."

     There were 1 billion smartphone users in China, India and Southeast Asia last year, up 60% on the year. The figure is projected to double to 2 billion by 2017. It is the Micromaxes and the Xiaomis -- companies focused on lower-end phones -- that will be meeting a big chunk of this surging demand. In countries where per capita gross domestic product is less than $10,000, affordability sells.

Lean and mean

Micromax's Bolt A62 phone, which is popular among younger Indians, retails for $70 in India, 50% less than Samsung's competing model. How such a low price is possible becomes evident when you disassemble the product.

     The phone uses a smaller microprocessor, which is less resistant to heat and therefore has a shorter lifespan. However, this minimalist approach also keeps the cost low. These electronic brains are supplied by Spreadtrum Communications, a Chinese chipmaker that has risen to prominence by underselling the competition.

     The phone's speaker parts were made in 2012, more than a year ago, according to an Indian engineer who helped with the "dissection." He said the smartphone did not have a sophisticated design but contained all the essential features. The use of stripped-down functions and older parts enables Micromax to keep its prices low. This approach, which is similar to that adopted by makers of generic drugs, was pioneered by Chinese smartphone manufacturers.

     The biggest advantage to this method is that it enables manufacturers to cut development costs to the bone. It is said that smartphone companies and other consumer electronics manufacturers operating in the southern Chinese city of Shenzhen, Guangdong Province, can procure roughly 90% of the parts and materials they need within a two-hour drive. And with such companies as MediaTek, a major Taiwanese chipmaker, playing the role of "shadow instructor" by offering smartphone designs along with system chips, "even a shoemaker could start producing smartphones right away," said one person in the industry.

Not your parents' growth

China is home to 300-400 smartphone manufacturers, all taking advantage of this industrial cluster. As their number has increased, handset prices have fallen. According to Imedia Research, smartphones priced under 1,000 yuan ($164) account for 40.8% of all sales in China in the quarter ended September 2013, up from 23.8% for the same period a year earlier. And some of these inexpensive models have larger displays with higher pixel densities than the iPhone.

     Among this crowd, Xiaomi is growing the fastest.

     "We promise to ship at least 40 million smartphones this year," Chairman and Chief Executive Lei wrote on Sina Weibo, a popular Chinese microblogging service, on Jan. 2. Xiaomi's smartphone shipments jumped 160% on the year to 18.7 million units last year, with sales soaring 150% to 31.6 billion yuan. If its sales double in 2014 as Lei promised, the figure would exceed 60 billion yuan.

     Xiaomi's sales have skyrocketed thanks to a business model that is distinctly different from those adopted by such major Chinese consumer electronics companies as Lenovo and Huawei Technologies. For starters, its marketing strategy focuses on social networking sites. "We are trying to create products that surprise users and make people want to spread the word about them among their friends," said Lei.

     The company also uses its official account on Weibo to provide information on youth-oriented events and product discounts. By leveraging the power of social media, Xiaomi has rapidly boosted its brand power at home. Another difference is that the company sells most of its products online.

     In a testament to Xiaomi's growing clout, Apple co-founder Steve Wozniak attended the company's pre-Lunar New Year party on Jan. 10. He praised Xiaomi in a speech that was streamed live on Weibo, sayi

     Xiaomi's next goal is to expand overseas, especially in Southeast Asia. The company will start selling a smartphone in Singapore on Feb. 27, taking its first step beyond mainland China, Taiwan and Hong Kong. The phone, a popular model called the Redmi, will be sold through Singaporean telecommunications company StarHub for 169 Singapore dollars ($133). The day after the release, Xiaomi will also begin offering the handset via its website.

     With the city-state's two other mobile service providers, Singapore Telecommunications and M1, also expected to begin offering Xiaomi smartphones, the Chinese company is poised to establish a solid presence there. Xiaomi plans to make Singapore its international base from which to push into other Southeast Asian markets and India. The company aims to sell the Redmi in Malaysia by April.

     "We solidified our foothold in China by 2013, completing our preparations to expand overseas," said a Xiaomi official.

Cheaper, faster  

There are other "Xiaomis" in China, too.

     In late January, sales staff working for Shenzhen Zopo Communications Equipment were hawking a smartphone with 3-D capabilities to young passersby in Shenzhen's main electronics district, one of the country's largest. The timing was no accident: People had just received their bonus payments before the Chinese New Year holidays and were in a mood to spend. Many were peering into the smartphone's 4.3-inch display, which showcased the phone's 3-D capabilities by playing a video of a fairy materializing out of a forest.

     "Smartphone makers that can't set themselves apart from others won't survive long," said Zopo's marketing director, Wang Peng. The company's survival strategy centers on offering an excellent viewing experience through its advanced camera and 3-D functions.

     Last November, the company launched a phone that boasts smooth video and game display functions thanks to a new chip produced by MediaTek. The chipmaker announced its new offering only the day before the phone was released. Zopo, which closely communicated with MediaTek throughout the development process, even asked the Taiwanese company if it could sell the phone before the chip was officially released.

     Another Chinese smartphone manufacturer, Shenzhen Yusun Telecommunication Equipment, sells approximately 70% of its handsets for 1,000 yuan or less. Such rock-bottom prices are made possible by the company's ability to quickly take advantage of plunging parts prices. In the past year, for example, the price of a 5-inch liquid-crystal-display screen has fallen by about half. Wang Xiaoyan, the company's chairman and CEO, said it takes Shenzhen Yusun only about a month to replace a smartphone part in an existing model with a good-quality but cheaper alternative, compared with about three months for Sony and Samsung.

Getting connected    

Contrasting with this explosive growth are the recent lackluster performances of global giants, Apple and Samsung.

     The South Korean company is grappling with stagnant sales growth of its high-end models.

     At the U.S. company, meanwhile, net profit declined for the fourth straight quarter during the October-December period. The culprit is steadily falling unit prices amid intensifying competition from new players. Apple is pinning its hopes on China, the world's largest smartphone market, to serve as the catalyst for ending its funk. China accounted for 15% of the company's total revenue in the quarter ended December, up from 13% a year earlier.

     Sensing which way the wind is blowing, the company recently tied up with China Mobile. The world's largest carrier started selling iPhones on Jan. 17. Through the partnership, Apple is aiming for higher profits while continuing to pursue a vertically integrated business model based on both hardware and digital content. The U.S. company encourages competition among China Mobile and other local carriers, which shoulder all promotional expenses in the hope of landing long-term data communications service contracts.

     This helps Apple hold down costs while protecting its profitability against competition from local manufacturers. The strategy has proved very successful in advanced economies, but there are doubts about how effective it will be in emerging economies. That is because new iPhones cost more than what many workers  in such countries make in a month. Also, many governments levy high import tariffs or set limits on how much telecom companies can spend on marketing.

     The international heavyweights face threats from other fronts, too. Jay Sullivan, chief operating officer of U.S. nonprofit organization the Mozilla Foundation, revealed a prototype of a $25 smartphone at the Mobile World Congress in Barcelona, Spain, on Feb. 24. He said Chinese chipmaker Spreadtrum Communications offers a low-end chip for budget smartphones running on Mozilla's Firefox OS software. If telecom companies embrace such inexpensive phones to attract more customers, new mobile operating systems to rival the established ones will gain a foothold as well.

     This flood of low-price products is also a game changer for Internet services.

     Many people in Asia who cannot afford PCs can now jump directly into the smartphone economy. Not only are phones cheaper than PCs, they can connect to the Internet without expensive land-line fees now that many network operators offer affordable data plans. In the Philippines, for example, a smartphone user can post more than 300 tweets online for about $6.

     The combination of low costs and portability means people are spending more time online using social media services, shopping and playing games.