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Japan mounts low-cost comeback in smartphones

Standout design, outsourced manufacturing drive new business model

Japanese retail giant Aeon was one of the first to offer cheap smartphones.

TOKYO -- Ten years after Apple's iPhone kicked off a smartphone boom, a low-cost revolution invites Japanese players to retake leadership in the phone industry by challenging hordes of emerging-market players.

The world received word of the first-generation iPhone in January 2007. Companies such as South Korea's Samsung Electronics, with the Galaxy S series, jumped on the smartphone bandwagon soon after. But in 2014, retailer Aeon dropped a new bomb on the Japanese market: low-cost service, with bare-bones phones to match.

One new star smartphone maker riding the ensuing low-cost wave is Gooute, which was founded by CEO Toshiya Yokochi, an alumnus of Japanese internet service provider Nifty. The Singapore-based startup had a staff of just 14 when it debuted in 2013, including those hailing from major telecommunications companies. Gooute has since worked with a well-known Japanese design team and a Chinese manufacturer to create the Aratas smartphone line, introduced in spring 2016.

Gooute CEO Toshiya Yokochi

The stylish, curved devices -- stamped with "Designed by Japan" -- are available in more than 10 countries including Japan, India and the Philippines, priced reasonably in the 10,000 yen ($85.01) range. Ringtones and system sounds have been created by a musician known for providing songs to well-known Japanese artists. "That the phone is Japanese is a major draw," Yokochi said.

But phones are just the beginning. "We don't intend to make the handset itself the selling point," Yokochi said. The devices are primarily a portal to Aratas Net, an internet platform offering content such as music and video tailored to budget phones. This service business, not sales of the phones themselves, is Gooute's key earner.

As part of these operations, Gooute teamed with manufacturers selling smartphones in emerging nations to preload devices with a news reader bearing advertising slots, splitting the resulting ad revenue with its partners. The company offers consulting services as well, such as on managing customer data. Sales of smartphones hooked up to Aratas Net are seen totaling 50 million by spring, thanks to partnerships with seven manufacturers such as Taiwan's Asustek Computer, known as Asus.

New model

For all of the brand's Japanese influence, it is China's phone design firms and original design manufacturers that make business models such as Gooute's possible. A wealth of factories expert at producing devices to specification for major electronics makers cluster in the city of Shenzhen, the world's smartphone technology capital, along with more than 600 design houses -- a way for most anyone to jump into the smartphone business.

Yet quality varies drastically among design houses: It is not uncommon for the same low-cost smartphone design to appear on the market under various brands. Gooute's use of a Japanese design team aims to lift the Aratas line above the sea of potential rivals.

Gooute's tactic of outsourcing manufacturing and drawing earnings from added value and services, reminiscent of the so-called fabless model that has let overseas players thrash Japan's information technology sector overall in recent decades, looks to be the new wave in smartphone making. Companies such as China's Huawei Technologies have gained ground in Japan even as sales at domestic stalwarts such as Sharp and Sony slump.

SIM-free handsets, which are not tied to a particular carrier and tend to be priced to sell, have held a roughly 20% share in Japan since summer, research entity BCN said. More than 30 players are fighting for a slice of the low-cost pie, including Plus One Marketing with the Freetel brand.

Stand out

But traditional tech powerhouses are not out entirely. Low-cost smartphones from Fujitsu's Arrows line introduced last summer have put the company near the No. 3 player in Japan's SIM-free handset market by sales, despite the narrow range of offerings compared with Chinese makers. The phones offer many features found in higher-end models, such as mobile payments and water resistance, for prices in the 30,000 yen range.

A Covia smartphone in use at University of Fukui Hospital.

Manufacturers without Fujitsu's brand power must find other ways to stand out. Covia, a Yokohama-based producer of communications devices, made its first foray into the SIM-free market around 2013, pushing bargain-price phones through appliance retailers. But the business proved challenging.

"Unless you can expect to sell at least 10,000 units or so of a single model, it's tough to even get in the door at Chinese factories," a Covia executive said. And sales of 10,000 units still put development costs at a hefty 1,000 yen per phone.

Covia has since shifted focus to the business sector. A sub-10,000 yen model set to debut in the spring offers an improved accelerometer and more precise GPS capability, in exchange for a lower-grade camera and cutbacks on other less vital elements. Businesses such as shippers and nursing facilities are the intended customers.

The maker's last commercial model has sold 1,000 to 2,000 units to customers including University of Fukui Hospital, thanks in part to Covia's custom capabilities including viewing electronic medical charts and notifying nurses when patients call for assistance. Other communications devices to help run such systems, as well as system development services, are sold alongside the handsets.

Recent regulatory changes in Japan's cellphone market that bar service providers from offering free phones have rustled up even more demand for cheap phones. But new entrants must quickly set themselves apart from the crowd with exceptional quality or a unique business model to remain in this intensely competitive field for long.

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