Does Jio's new low-cost smartphone, co-developed with Google, stand a chance against a well-established army of handset majors?
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In late July last year, while India was battling the first wave of Covid-19, a small electronics manufacturer quietly set up shop along a leafy road near Ulsoor Lake in Bengaluru.
It was only in October when UTL Neolyncs Private Limited (UNPL) became one of the 16 successful applicants to the government's production-linked incentive (PLI) manufacturing scheme that the industry took notice. Still, little was known about UNPL, except that it was a joint venture between India's United Telelinks—best known as the manufacturer of the once-popular Karbonn phones—and an obscure Israeli firm NeoLync that, per its website, is building an "integrated product creation platform" for electronic products.
It was in August this year that UNPL exploded into the spotlight. After all, everyone takes notice when India's most valuable company brings out its chequebook. Reliance Industries, through its investment arm, pumped Rs 20 crore into Neolync Solutions, a UNPL-related entity, with the promise of another Rs 40 crore over the next year and a half. And just like that UNPL's raison d'etre was clear—building the JioPhone Next.
The entry-level smartphone is Reliance's latest salvo in its two-decade-old pursuit of telecom domination. That started with the launch of Reliance Infocomm's Rs 501 CDMA handsets in the early-2000s, a resounding success that introduced millions of users to cellphones and reshaped the Indian telecom sector for good. However, the second effort—Reliance Retail's Lyf smartphone in late-2016—faded away after an initial bump. The JioPhone Next now takes up the mantle to bring the country's 350 million-odd feature phone users still on 2G networks into the 4G arena, and then into the Reliance ecosystem of retail, media, content and myriad other services. All for the price of Rs 6,499 for only the handset or a Rs 1,999 down payment followed by 18-24 monthly instalments that include phone and data services.
It will certainly have an impact on the overall smartphone market. That's the strength of Jio's brand and its commitment to doing something new
Navkendar Singh
Research Director
IDC India
The launch comes in a year when India's smartphone market is set to jump 15 per cent to a record high of 173 million units, according to Counterpoint Research, as digital interactions such as e-commerce transcend the socio-economic strata. The average price of a smartphone has surged from Rs 14,500 in 2019 to Rs 17,200 now. As a result, brands like Xiaomi, Samsung and Oppo have shifted focus to the Rs 10,000-20,000 price segment, which now accounts for 47 per cent of the market. Meanwhile, the sub- Rs 8,000 segment dwindled to 17 per cent from over 50 per cent in 2017. This is Jio's target market. "It will certainly have an impact on the overall smartphone market. That's the strength of Jio's brand and its commitment to doing something new," says Navkendar Singh, Research Director, IDC India.
What matters is the price-value proposition. Unlike mid-tier or premium segments, buyers here are primarily concerned about the specs or features they get for their investment
Tarun Pathak
Research Director
Counterpoint Research
But Jio is not without competition. There is itel, with a leading 27 per cent share of the feature-phone market, followed by Lava, Samsung, Nokia and Karbonn. Besides, Samsung, Realme, Lava and Xiaomi also sell sub-Rs 8,000 smartphones. Buyers in this segment are brand-agnostic, points out Tarun Pathak, Research Director at Counterpoint. "What matters is the price-value proposition. Unlike mid-tier or premium segments, buyers here are primarily concerned about the specs or features they get for their investment," he says.
That makes it all the more pertinent then that the JioPhone Next's price—for just the phone or the bundled service plan—failed to impress most industry analysts. Jio's plans are consumer-friendly, even if with a limited choice, but its "pricing is still shy of being compelling," said JP Morgan analysts. Morgan Stanley analysts say the "plans are less aggressive" than it had expected.
Then there is Jio's distribution model, which adopted the pull strategy by requiring customers to first register their interest and then get the phone via a retail outlet. That runs counter to the strategy of the incumbents, especially the Chinese ones, who have a well-established store presence. Indeed, Jio has already rolled back its registration requirement.
But before distribution, Jio had to line up its manufacturing ducks in a row. This was important for two reasons. First, Jio is not a manufacturing company—the phone is only a means to grow its telecom services business and Reliance's ecosystem. Second, Jio had to ensure it isn't hobbled by issues such as the global semiconductor shortage or held hostage by its dependency on Chinese manufacturers, as in the past.
And that's where UNPL comes into the picture.
Building the foundation
In the 20 months leading up to the PLI approval, four UNPL-related entities popped up to form a telecom equipment production ecosystem. While it isn't fully clear what role each of the quartet—Neolync Electronics, Neolync Solutions, Neolync India and Neolync Telecommunications—has in the JioPhone plan, it's plain that Jio is steering clear of Chinese manufacturers. After all, once bitten, twice shy.
Jio had contracted the likes of ZTE, Wingtech and Tinno Mobile to make its Lyf handsets. But the plan to launch in 2015 was delayed to mid-2016 "due to hiccups in the supply chain," points out IDC's Singh. Still, Lyf captured seven per cent of the market and a berth among the top five players. However, its market share plunged to below 2 per cent by late 2018 as Chinese smartphone majors flooded the market and Jio struggled with supply and quality issues, over which it had no control.
This time around, Reliance has not only picked a partner with a local manufacturing base but has also taken control via an investment. UNPL is on the path to invest Rs 100 crore since early 2021 to expand the capacity at its two plants. While the Noida plant is not for Jio, the one in Tirupati, Andhra Pradesh, primarily manufactures the JioPhone Next. UNPL also handles the phone's production at a contract manufacturer's plant in Sriperumbudur, Tamil Nadu. The entire operation is being overseen by Eyal Magal Fogel, NeoLync's chief operations officer, and Muthukumar Vasudevan, who heads the Tirupati plant—both veterans of Flex, among the top global contract electronics manufacturers.
Jio's investments and push for greater domestic manufacturing will bode well for the JioPhone Next's future. However, component shortages and supply chain constraints will continue to pose challenges for Jio's Make in India plans. Its future success will depend on how Jio can secure its chip supplies
Prabhu Ram
Head of industry intelligence group
Analyst firm CyberMedia Research
"Jio's investments and push for greater domestic manufacturing will bode well for the JioPhone Next's future. However, component shortages and supply chain constraints will continue to pose challenges for Jio's Make in India plans. Its future success will depend on how Jio can secure its chip supplies," said Prabhu Ram, head of industry intelligence group at analyst firm CyberMedia Research (CMR).
Jio's aim, say industry sources, is to make 50 million smartphones in the next six months. It procured 2.1 million phones by October and will procure a total of 3.5-4 million phones by the end of 2021, according to CMR. These estimates, which Reliance declined to confirm, typify its grand scale of operations, especially contrasted with the production prowess of other manufacturers. Samsung's annual capacity is 60 million phones, while Oppo's tops 50 million smartphones. Most feature-phone makers' capacity range from a few lakhs to about 40 million.
On the software front, Jio has roped in Google to develop an operating system (OS) for the JioPhone Next. The idea was to "create an experience tailored for India's new internet users," says Ram Papatla, General Manager and India Engineering Lead, Android. Among other features, the OS, called Pragati, can translate both texts and voice into regional languages. This could be a game-changer, given Jio's target market largely speaks in vernacular languages. Counterpoint's Pathak believes the uniqueness of the OS alone would prompt buyers to recommend the phone. "We believe that's how the JioPhone Next's journey could get a leg up."
Nonetheless, there is only so much even Reliance can control. Due to the chipset shortage and the consequent delay in production, Jio had to defer the JioPhone Next's launch by one and half months to early November.
And that means its choice of distribution model is even more critical.
Spreading the word
Reliance launched the JioPhone Next like it did its broadband service, JioFiber. Potential customers first had to register their interest online and would then get the phone through one of the 30,000-plus Jio-branded and partner outlets across the country. "Marketing gimmicks always work and this is something of that sort. It works initially but definitely not for too long," says Harish Bijoor, brand expert and owner of Harish Bijoor Consults.
Marketing gimmicks always work and this is something of that sort. It works initially but definitely not for too long
Harish Bijoor
Brand Expert and Owner
Harish Bijoor Consults
Still, the online-first model makes sense considering that online smartphone sales are nearing parity with offline sales, rising to about 55 per cent from 35-36 per cent in end-2019, according to Canalys. But the question is if Jio's target buyers—2G feature phone users with an average revenue per user (ARPU) of about Rs 80-90 per month—have the inclination to jump through such digital hoops rather than walking into a store.
We will never know, because a month after its online-only launch, the JioPhone Next is now available for sale in its partner stores. There are two reasons for this, say people familiar with Jio's distribution plans. Firstly, the phone's availability has improved and secondly, this mirrors the JioFiber distribution playbook—start online and move offline. While the number of distribution outlets may go up by a couple of thousands, Jio is not going to sell through every possible store, like its rivals, the sources say. It wants to keep the 'exclusivity' factor intact.
However, that exclusivity factor includes a store count that already compares favourably with its rivals. Market leader Xiaomi currently has a reach of 15,000 stores, which it plans to double by March 2022, said Manu Kumar Jain, managing director, Xiaomi India. Xiaomi entered India in 2014 with an online-only business model that cut unnecessary costs incurred offline, allowing it to price its products competitively and undercut existing players. But it switched tack in 2017, two years after Vivo and Oppo entered and rapidly expanded their offline distribution network. Now, every one in five Xiaomi phones sold is in a store.
Reliance works with some 300,000 retailers for its telecom services like selling SIM cards etc. Further, they have a massive customer database of telecom users in the country that they are leveraging to target consumers for the JioPhone Next. Thus, even if they do not engage with most individual retailers, they have the might to succeed
Arvinder Khurana
President
India Mobile Retailers Association
But, Reliance's distribution might transcends just handset stores, points out Arvinder Khurana, president of All India Mobile Retailers Association, the apex industry body for handset retailers. "Reliance works with some 300,000 retailers for its telecom services like selling SIM cards etc. Further, they have a massive customer database of telecom users in the country that they are leveraging to target consumers for the JioPhone Next. Thus, even if they do not engage with most individual retailers, they have the might to succeed," he says.
Market experts also agree that rather than the exclusivity factor, Jio's brand recall among consumers in the semi-urban and rural markets could be its biggest asset. Jio is right now a "challenger brand" in its category, says Bijoor. But, given its dominant position in the telecom services space—a 36.43 per cent share in the wireless market as of September, according to the Telecom Regulatory Authority of India—superior brand positioning and a massive war chest, he expects Jio to give "competition to a fair number of existing players".
But to do that, Jio has to get its pricing right—low enough to attract customers and high enough so that its ARPU isn't dented.
Balancing act
Sunil Raina, President and Business Head, Lava, is unfazed by Jio's entry into its turf. "We don't really grudge it," he says, adding new entrants will help expand the base. In fact, Lava recently launched three smartphones priced below Rs 6,500. Lava's years-long experience in the price-sensitive segment helps it understand users better than most. A feature phone user changes their handset only if it gets defunct, resulting in an average replacement cycle of three years, compared to 18 months for mid-segment smartphones. "Also, these users expect their handsets to be sturdy. They are used to longer battery life and louder speakers," says Raina.
These users expect their handsets to be sturdy. They are used to longer battery life and louder speakers
Sunil Raina
President and Business Head
Lava
But these features require components, whose prices have escalated steeply for nearly two years, says Counterpoint's Pathak. Industry estimates suggest overall costs have risen 25 per cent since March 2020 due to rises in component-, ocean freight and fuel prices. That would explain the higher-than-expected price for the JioPhone Next. But that's hardware costs, which affects all brands equally. What about the bundled service plan?
"While the data-bundled offers have been a huge success in some global markets, India is still a growing market for the concept and consumers here are still very price-sensitive," cautioned Rahul Sharma, Founder, Micromax India. In fact, Micromax adopted the model a few years ago to a "good response," says Sharma. "The Indian market is evolving, so let's see how the concept resonates with the buyers."
Analysts, however, already have a verdict. They say Jio's pricing schemes are too expensive for most of its target customers, who are at the bottom of the payscale pyramid and would find it unattractive or unviable to be locked into monthly instalments. On top of that, the instalments are at an 11-18 per cent premium to Jio's normal data plans, Morgan Stanley estimates. Clearly, Jio wants to shore up its ARPU. But even here it faces competition.
In a clear response to the JioPhone Next, Bharti Airtel recently announced its "Mera Pehla Smartphone" (my first smartphone) programme in partnership with 12 device makers. The scheme offers as much as Rs 6,000 cashback on smartphones priced up to Rs 12,000 and requires users to repay a fixed monthly amount over three years. The idea is to stem subscriber churn and push the migration of 2G subscribers to 4G services, just like Jio.
"Airtel's offer will appeal to subscribers who can afford 4G but don't see much value in migrating to 4G," says Ashwinder Sethi, principal at management consultancy firm Analysys Mason. "On the other hand, Jio focusses on massive subsidies on devices that are likely to appeal to first-time smartphone users. While Airtel's cashback offer spread over three years will help in building loyalty, Jio's initial discount will help it to get a larger number of first-time users."
That and the higher-than-normal instalments will boost Jio's overall ARPU, says Morgan Stanley. The "price point is more aspirational (unlike previous handsets) and should help reduce investor concerns about phone subsidies or ARPU dilution," the broking firm noted. Incidentally, after the launch of the first generation JioPhone in mid-2018, Jio's ARPU rose to Rs 154 from Rs 130 quarter-over-quarter. Currently, Jio's ARPU hovers around Rs 145, while Airtel's is around Rs 153.
Jio managed to sell well over 100 million handsets in its previous attempt and brought close to a fourth of the then 2G users into the 4G universe, according to Counterpoint. "This time their target is different but we expect a good number of offtakes," says Pathak. That difference is not in the target market but the plan—to use the JioPhone Next as the entry point to the Reliance ecosystem. The other difference is that Jio has noticeably toned down its take-no-prisoners, viva-la-revolution approach. After all, it has much to lose.
And win.
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