Smartphones have seen a tremendous growth on their popularity ever since the introduction of Apple’s iPhone in T-Mobile’s network sometime back in 2007. The release of Google’s Android also did influence this growth in a very positive way. Android provided an open source & its associated community and also a readily available platform which paved the way for new entrants to the Smartphone OEM list.

Android, being an open source, provided the advantages of a very short development time and a quicker time-to-market advantage and these factors mainly attracted the new entrants into the Smartphone OEM business. Currently, if we look at the market share for the Smartphones held by the local OEMs, in the Chinese and Indian markets, we see these local players gradually increasing their share over the last couple of years.

There are multiple factors leading to this:

Indian and Chinese markets are price sensitive markets. The big OEMs due to their constraints of bigger setups and other operational expenditures were not able to provide cheaper Smartphone options

The local OEMs used the option of sourcing the white labeled devices from the ODMs in China & Taiwan and selling them in the local market after re-branding. This proved a considerably cheaper option. This approach increasingly led to a stage wherein the local OEMs would dictate not only the design & the form-factors but also the sourcing of each of the components by their ODMs. This led to an outsourced customization model and this model still kept the prices in check while ensuring OEM specific customizations

The local OEMs know their market and have a robust distribution networks addressing the grass-root levels

Most of these OEMs partnered with Mediatek, a fab-less system-on-chip vendor for their chipset requirements. Mediatek, while providing the obvious location advantage also provided the cost-advantage.

The above-mentioned OEM-ODM model has resulted in the entry of quite a lot of local players into the Smartphone OEM business. The focus has not really has been on innovation and quality. The main consideration has been on satisfying the local market hygiene requirements such as a battery long-life for Indian consumers and etc. This lack of innovation has led to a flood of OEMs selling cheap Smartphones with almost similar features & technologies and in quite a few cases — devices of low-quality. This lack of innovation also led to price wars and reduced operating margins to the OEMs. Some of these OEMs started looking at overseas markets especially Africa and Latin America both, of which offered a fertile market for consumption of cheap smartphones from unknown brands.

The trend seems to be that this phenomenon is going to continue over the next few years and will reach other regions as well. This study shows that the market share of the expensive smartphones will shrink from 85% of total smartphones sold in 2011 to 33% in 2017. And, the popularity of the cheaper ones will soar upto to 52%. The study further adds that the average smartphone price will fall from $188 in 2011 to $152 in 2017. There is a clear trend emerging, as this study as well concedes, that the average price of the Smartphone is decreasing and they are becoming cheaper and more affordable.

Also a recent study by Vision Mobile, on the profit margins of Smartphone OEMs reveals the following:



The study reveals that both Apple and Samsung put together and consuming almost 98% of the profit share and leaving the other players gasping in thin air. The previously established players like Sony, LG, HTC & RIM clearly lost out to Samsung and Apple.

The above picture may depict the share of profit margins and market situation, existing as of today, which is characterized by an overwhelming adoption of smartphones in developed economies and slow but steady penetration into the developing economies.

With the emergence of cheaper imitators capturing a sizable market share in developing economies and also with the growing popularity/penetration of the Smartphones in emerging markets, there will be clear emergence of two types of players in the market:

Innovators with the muscle power, i.e. bank balance, to spend on R&D and innovation. This segment is currently being occupied by Apple and Samsung. These players will drive the introduction of new and innovative features and technologies.

Followers, which will mainly include the imitators working on the OEM-ODM model mentioned earlier. These players will be subjected to intense price-wars among themselves in the geographic markets they operate. Due to lack of uniqueness and differentiation among their products, their main USPs will remain their price points. These players will be severely tested by their reducing operating margins and stiff competition from their peers operating mainly on price points.

As was depicted in Figure 1 (above), the profit margins as well as the smartphone market is currently completely dominated by Apple and Samsung. However, the feature set and the mobile user experience supported by these players are not always tuned to the needs of the consumers in the developing economies. These needs are usually ignored mainly due to the sales volumes of smartphones being not so significant in these economies. However, the next explosive growth of smartphone adoption will be seen in India, China and other developing economies. The developing market is price conscious and thereby has facilitated the emergence and growth of low-end players and cheap assemblers.

There is definitely an opportunity for a local player in each of these economies who can provide the unique set of differentiating feature and user experience needed in these economies. The smartphone is now a commodity. The followers will have to adopt lean methodologies and strive to reduce their operational cost to remain profitable. They will have to adopt unique pricing strategies and product differentiation to survive.

Harsha Bagur is a technology evangelist and a seasoned tech professional with rich experience in Telecom and multimedia technologies.