The Return of Micromax
Micromax Co-founder Rahul Sharma is not superstitious. But when he re-focussed his attention on the struggling consumer electronics firm, one of the decisions was to go back to the company's old office in Udyog Vihar Phase V in Gurgaon. Earlier, when the going was good, Micromax had shifted base barely a kilometre away to a bigger office in the adjacent Phase IV. Going back to the same building where it started its journey in smartphones more than a decade ago and where it scaled dizzying heights, is symbolic of what the company is aiming to do ahead - script the same success story all over again.
"We want our old position back. That is the target, else we would not be making this comeback," says Sharma. "We understand the sweet spot of this market and you will have a Micromax product disrupting all of these sweet spots. We have the infrastructure and manufacturing set-up in place and are investing big time in R&D. We are here to disrupt."
As any market leader will testify, getting to the top is not an easy task. What is more difficult is staying there. And since 2015, Micromax has discovered just that. The decade gone by was one of the contrasting halves for the firm that was founded in 1991 as a distributor of computer hardware.
An early entrant in the smartphone market in India in the late 2000s, the firm had a meteoric rise in the first half of the last decade. By the end of 2014, it had overtaken long-time market leader and South Koreas Samsung as the country's largest smartphone maker. It was akin to David taking down Goliath, but it did not stay that way for long.
"Usually people come to shop without any preference for a brand. They list their requirements and budget and depend on us to guide them. Before the Chinese entered the market, Samsung was the only brand people would ask for. And then Micromax joined that league," says Amol Rajwade, who runs a multi-brand mobile phone outlet in Kanpur. "That is the time you knew Micromax had made it big."
The entry of deep-pocketed Chinese players such as Xiaomi, Oppo, Vivo, OnePlus and India's rapid shift from 3G to 4G aided by cheap data plans launched by Reliance Jio queered the pitch for the company. It could not withstand the onslaught. Micromax's descent over the second half of the decade was as dramatic and rapid as its journey to the top. From 19 per cent in 2014, its marketshare had slid to just 0.5 per cent in 2019 in India's 158-million-unit smartphone market - the second largest in the world.
In the process, the company's revenues, profits and valuation nosedived, while PE investors also cashed out. In 2015, the unlisted firm was valued at Rs 21,000 crore, but today it is less than Rs 1,500 crore. Revenues in 2014-15 were Rs 10,451 crore and it was generating a profit of Rs 364 crore. By 2018-19, revenues had shrunk to less than a fourth at Rs 2,443 crore, with a profit of Rs 145 crore.
"It is not us alone. Everybody else lost business to the Chinese as well," says Sharma. "What was happening was we were getting peppered with a volley of bouncers and could do nothing but duck. They came in hordes and it was difficult to identify the real players. They were not making money, but were buying market share. We did not have the bandwidth to compete so decided to step back. To use a cricket analogy, I knew we will get a full toss at some point. We needed to wait and hit that out of the park."
Micromax is padding up for its second innings and the full toss has come in the form of an intense anti-China sentiment following the clash between the two countries at Galwan province of Ladakh on June 15. Most of the focus is on smartphones, a product that has come to symbolise China's growing influence in India. Any real dent in demand, however small, for Chinese products here, will throw up a sizable opportunity for Micromax. The timing seems just right for the company to script a grand comeback, but will it be able to follow up on this premise?
The Nationalism Card
The impact of the anti-China sentiment is already beginning to show in the market. In the second quarter of 2020, the share of Chinese smartphone makers fell to 73 per cent, from 82 per cent in the first quarter. Sharma says they started working on the comeback plans more than a year ago when the US and China were embodied in a global trade war. That relations with India would suffer a meltdown and sentiment against Chinese goods would turn negative just as the company would be ready to embark on its second innings was, however, unforeseen. "It is more of a coincidence. You can't make things like phones and create an ecosystem so quickly. It takes a lot of time," says Sharma. "We have been working on this for a year now. The geo-political tension has been going on for the last two years. Separately, we have been working very actively with the government here to work towards building the whole ecosystem."
The ecosystem refers to hundreds of components that go into smartphones, which are either not manufactured in the country at all, or where the scale is low. India imported $28 billion worth of electrical components and machinery from mainland China and Hong Kong last fiscal.
Policymakers want India to reduce its dependence on China and become self-sufficient. In April, the Ministry of Electronics and Information Technology launched a product-linked incentive scheme for manufacturing smartphones, which provides a 4-6 per cent incentive on incremental sales over FY20 levels. The scheme specifically favours local brands. International firms have been excluded entirely in case of phones that cost less than Rs 15,000, a category that constitutes 75 per cent of smartphone volumes. There is no such condition for local firms. Also, domestic firms need to invest just Rs 50 crore initially and Rs 200 crore incrementally over four years to avail the incentives, while for others, it is Rs 250 crore initially and Rs 1,000 crore over four years. Sharma believes this will help create a level-playing field for local brands against cash-rich Chinese companies.
"It is a great scheme and makes us competitive in the market," he says. "It is not that everything is coming from outside. Even today at least 50-60 per cent of the supplier ecosystem is already here. This scheme will help push MSMEs to invest more."
While that takes care of the manufacturing side of the business, Sharma believes the current mood of the nation will save him a lot of dollars on marketing - a key area where the Chinese have dwarfed everybody else, including Samsung.
"This whole anti-China thing is going to take care of a lot of dollars on the marketing side for us," says Sharma. "This time it's not just business alone, but about the country and something that I feel from the heart. Within a week after the lockdown was lifted all our smartphones were sold out - whatever we had, including stocks 2-3 years old. That is when we started wondering what's happening. Then we realised people only wanted Indian products. We want somebody from India to come and be successful."
"Consumers are buying Chinese phones because they do not have an option. But if I give you a great product, which is as good as competition with our secret sauce of better features and it is from Micromax, an Indian brand, it will be different now."
What the company is aspiring for is to reclaim its lost glory when it was one of world's top 10 handset companies. It even had Hollywood star Hugh Jackman as its brand ambassador. To regain that position, Micromax plans to launch at least 20 smartphones over the next two years, and has prepared a war chest to fund its expansion plans. Besides the Chinese onslaught, the company had suffered due to the transition from 3G to 4G. Its dependence on supplies from China left it with a major overhang of 3G phones in its inventory when the market graduated to 4G connectivity in 2016. And when it got ready with its own devices by the end of the year, demonetisation exposed its weakness in the digital domain.
"I dont want to focus too much right now on what went wrong, but we have had our learnings. We are going to focus a lot more on R&D and invest there. We will have minimum dependence on outside (imports). First we are going to focus on the software side of it and we will do it 100 per cent out here in India. Then slowly within 12-18 months we will start building up other hardware capacities," he admits.
While the focus right now is firmly on the mobile handset market, the company is looking at the television segment as well. It is not very different from the strategy adopted by other smartphone makers, including Xiaomi, Oppo and Realme, which have diversified into smart TVs. It is seen as a logical extension, and Micromax was one of the first to do so back in 2012 itself. But like in smartphones, its presence in this category, too, has been dwarfed by Chinese firms, something that it wants to rectify. Across its two factories in Bhiwadi and Telangana, the firm has a capacity to produce 20 million handsets annually and 4 million televisions.
"At present, we have 25 models, of which 15 are smart TVs with price points ranging between Rs 8,500 and Rs 50,000. We have a 3 per cent share in the market right now, but wish to be among the top five players as we were a couple of years ago," according to the company's spokesperson.
In the past, the company dabbled with other consumer electronic products such as tablets, air coolers, air conditioners, refrigerators, water purifiers and even washing machines. These are all products that demand high investment, scale and relatively low margins. Not surprisingly, the flirtation was short lived and barring air conditioners it does not produce any of the other products anymore. Even in ACs, it does not have plans of major expansion. "They thought the strategy to bring in these high-ticket purchase items and selling them in India will work just like it did in smartphones," says an industry insider. "Consumer durables are not use and throw in India. Consumers demand after-sales and service where the credibility of the brand counts. Micromax had none."
An Uphill Task
The Indian smartphone market has changed in the last few years and going forward, due to the onset of 5G, it will remain dynamic. So, the prospect of Micromax upstaging its bigger and more technology oriented rivals is suspect.
"It's a matter of scale now. The only non Chinese brand to have any real scale is Samsung. Do you expect Micromax to start making 100 million smartphones annually a year-and-a-half from now when 5G would be around? I don't think that is possible, so the numbers don't stack up," says Navkendar Singh, Research Director, IDC. "Scale doesnt come overnight. Just because the situation is suddenly in your favour doesnt mean you can make two million phones overnight. That needs investments and commitment. If local brands start this journey and plant the seeds today and remain disciplined, they can see the fruit of their efforts after two years."
How long will consumers continue to shun Chinese products is also not known. Geo-politics has impacted consumer sentiment in the past as well, but it has never sustained beyond a point.
"It is something that we asked ourselves and I discussed this with multiple people. The conclusion is that this time it is different," says Sharma. "This is not for the short term. People have lost jobs and livelihood, or have seen earnings reduce. On top of that, the Ladakh issue happened, which is linked to the safety and security of the country. That is another emotional topic."
Another issue that plagued the company in the past was its lack of focus on the core business as it sought to diversify into other domains such as televisions and air conditioners - products that are still part of its portfolio. A former employee with the company told Business Today the lack of focus cost the company dearly when the Chinese onslaught had begun. He isnt convinced that it is any different today.
"The distraction cost the company. There were differences in opinion between the CEO (Sanjay Kapoor, ex-Airtel) and promoters and it affected the morale," he adds. "What I am hearing from colleagues still in the company is that they just want to use the current sentiment to scale up and make a quick buck out of this. The long-term vision and plan is lacking."
Experts believe competition in the smartphone market will only get more intense in the coming days.
"The Chinese are very competitive. They will not just go away at the first bump in the road. Xiaomi has surprised by not only maintaining its leadership in the market, but at a high share - almost a third of the market. Vivo has also consistently risen. They are no pushovers," says Tarun Pathak, Associate Director, Counterpoint Research. "The opportunity is there right now, but the window will close soon. What lies after that is a hard grind in the market where every rupee will have to be earned. If they have a reasonable strategy, are willing to struggle and fight, they may crack it."
@sumantbanerji
