We never thought we would sell 1.8 million handsets a month: Micromax co-founder

Micromax was the first among a handful of Indian brands to challenge the dominance of European handsets maker Nokia, which used to enjoy over 70% market share in India. By early 2010, Micromax was counted among the top 4 handset sellers in the country by some analysts. The company, founded by four engineering college friends — Vikas Jain, Rahul Sharma, Rajesh Agarwal and Sumeet Kumar — used product innovations such as the 30-day battery back-up phones and dual SIM phones to capture the minds of a rural audience, which had relatively less brand preference. After cementing its dominance in the hinterland, Micromax unleashed a branding and marketing campaign in urban India, making sure to use advertising vehicles like international cricket tournaments. It even tied up with MTV for co-branded phones to garner Indian youth’s mind share. All that seems like history, when contrasted with the company’s expansion to nearly 10 countries outside India. Vikas Jain, one of the four co-founders of Micromax, talks about the journey so far and the vision for the future, in an interview with DNA. Excerpts:

How is Micromax’s foray into markets outside India doing?
We started with Nepal, then Bangladesh and finally Sri Lanka. On an average, the Saarc region is doing about 1,50,000 handsets per month. We are looking at ramping up, but honestly, we have only been around a year or so in these territories. We are still learning the local nuances in terms of customer tastes, etc. Numbers are looking good, and we have reasonably good market shares, and as a brand Micromax has reasonably a good brand recall among the local consumers.

We just did a soft launch in Brazil, where we have got approvals for three of our products and we will do a commercial launch very soon.

In the Middle East we are operational in five markets. We are in Kuwait, Oman, Qatar, United Arab Emirates and just launched in Afghanistan. You will hear something on Africa shortly.

Is the competitive landscape in Saarc countries much different from India?
It is pretty different. I wouldn’t say very different. Bangladesh is still like how Indian market used to be five years ago. They are still focused on the entry level handsets and looking at how low these can go. So as of now, the average selling prices (ASP) are still pretty down south, but I believe once the replacement cycle kicks in, the ASPs would start looking north. Especially, with 3G launch in some of these markets like Bangladesh. It will give a whole new impetus to the replacement demand. Sri Lanka has had 3G for over a year now and a decent 3G traction with 20% penetration among subscribers, which is reasonable.

My team tells me that Micromax is second after Nokia in Sri Lanka. I have not got this corroborated with a third party auditor. But, it will be foolhardy for me to say that we are not competing with Nokia, especially as we believe that they are the only one above us. I am also given to understand that our ASPs are higher than that of Nokia in Sri Lanka.

How is the India story playing out, in particular the urban journey?
Honestly, if you asked me when we started, I wasn’t expecting to sell 1.8 million handsets a month. Nobody expected it. But the growth is panning out quite well. We are roughly at `2250 crore topline. After the rural success, there was a shift to urban. It was more of an integration. I think we stitched the rural and urban story together pretty seamlessly. There is reasonably good brand recall now. So there is a high degree of brand acceptance.

The next would be to come out with form factors and products that have a wow! factor. Smart phones will be a large part of our strategy going forward. We have desisted from that category so far, largely because India was predominantly a 2G environment. But now with the operators launching 3G services across circles, the time is right to start getting into the smartphone segment. You will see a lot of smartphones being launched by Micromax. I will not be able to discuss right now what would be different, but let me tell you that we would have very differentiated products. We will have features that will differentiate us from competition very distinctly, and I am not even talking about price, which has always been in favour of Micromax customers. It will be the wow! factor.

This is not to say that we will ignore our feature phone segment. We have a pretty good road-map there as well. Some of the innovations we have been working on for quite some time are now getting ready for launch. Next three to four months is going to be very very exciting.

How would you define differentiating, especially on Android platform, because except for the form factor and the underlying hardware most competitor phones have more or less the same look and feel?
Until now, barring the screen size and the form factor, everything else is pretty much the same across different competitor products. I will not be able to share much detail, but I can tell you that it is going to be a fad. It is going to be a complete experience. It will be a factor of both hardware and software. We will be there with the product before Diwali. We are going to be there with a bang for the festival season and I can tell you this is going to be the most talked about product this Diwali. Even on the price front, I would not be competing with anyone on this particular product. It would be quite unique and it will be unique even if you were to compare it with one of the Apple products.

What is happening with the India manufacturing plant that Micromax started talking about almost a year ago?
The project size, for the manufacturing plant, is about Rs224 crore. And that is linked to our fund raising/initial public offering (IPO), which is now in a state of flux given the current market conditions. Let’s be honest, the market is in such a state that nobody wants to take a call on which way it is going to go.

So you will take a call on the plant once there is clarity regarding the direction of stock markets?
You can put these kind of strategic decisions in a limbo only for a certain period of time. We have to take a call on fund raising plans very shortly. Either we are raising funds or we are not. Being a consumer brand and being a pre-IPO stage, it eats up a lot of our marketing budget because of the mandatory eight-second investor disclosure that Sebi (Securities and Exchange Board of India) requires you to do for TV ads. An additional `2 lakh every time I want to run a TV ad is okay a few times but it doesn’t make sense if I have to do it for ever! Five TV commercials and you are talking about an avoidable `10 lakh expenditure, that you could have used for another ad slot. We filed our draft prospectus in September last year, and we have been in this state for some time. We have already overshot out marketing budget.

What’s the plan B if IPO is not happening?
With or without funding we will be able to execute most of our plans. But we will take a decision on IPO within the next 30 days. It is a sensitive issue and it is not top of our priority list. As for plan B, we will look at privately secured funds.

There were a lot of local handset sellers who were in the market including fly-by-night operators. Are they still around?
Things are going to change. Many of these players are feeling the heat and people are shutting shops. I don’t want to take names. As far as consolidation goes, it is a tricky situation. I mean, what do you consolidate, when you are talking about multiple players competing mostly on price strategy. They don’t have anything valuable such as intellectual property to bring to the table. So I don’t see much room for mergers. The only thing that could happen is people shutting shops and that has started happening already. Price strategy works in the short term but not for very long.

Which brands would you count among the potential survivors?
I think a couple of brands are doing good from what I can see in the market. Lava is doing good, so is Karbonn. Then you have Maxx. I am pretty excited about Videocon coming up with their products.

Are they (Videocon) doing good?
These are initial years and it would be unfair to judge them at this stage by saying whether they are doing good or not. But coming from the business background they are, I believe Videocon will have a very product-centric business model. That fundamental gives them a lot of promise. It would be great if they can leverage that, and it would be wonderful to co-exist with them in this market.

As a competitor, what is your sense on how your largest competitor Nokia is faring in the Indian market?
I am not the one to ridicule competition. It may be true that with the kind of gross market share numbers they used to have at one point, they had everything to lose. I mean, to hold on to a 75-80% market share in an open economy is technically not possible.

I benchmark the telecom industry with the automobile industry. Remember the times when Premiers and Hindustans were doing great and then Maruti came along and took a 95% market share and then suddenly the economy opened up and you had the Hyundais and Tatas and everybody else came in. And then Maruti saw its share going down drastically and others claiming a share of the market.

Telecom is very similar. Nokia is not a company to be written off. They spend a lot on R&D. There are things that work out and there are things that don’t. To be fair to them, the size was such that they could not react fast enough. They were working on something, I’m sure what they believed was right. Unfortunately, the dynamics of the industry changed faster than they could react.

Dual SIM phones, you know, were a no-brainer, but by the time Nokia reacted it was a bit too late. Nothing is lost, we are still adding consumers. With 3G coming into the picture and replacement cycles shortening dramatically, the demand for mid-range handsets are going to be so huge that no one player will be able to corner a very large market share. Gartner is talking about India accounting for 220 million handsets in the current fiscal. So Nokia will have its share, and some of the large competitors like Samsung will be there and I’m pretty sure Micromax will also do good. Then there will be the fringe players with market share in the 3-5% range. But beyond that, companies that are playing a simple price strategy without any differentiated product strategy is not going to survive very long. And I do think Nokia has a clear product strategy, so I believe they could spring a surprise or two.

What has worked for Micromax, in terms of garnering the market share it has?
Market share numbers have more or less remained stable. It works like this: For every year of growth that you gain, you have to give three months for your channel partners. And that is to get them aligned to your thoughts and your strategy. At the end of the day you don’t want to give your material as a consignment to the channel. You want them to pay for it. So you need to give them time to get that financial muscle to take the brand to the next stage. It is very easy to cut the channel and get more and more distributors, but that doesn’t get you loyalty. But I think that’s a formula that most players have got right by now. Brands that are cutting channel are facing the heat. Our channel is very very happy and I think general product movement and shorter shelf life are things that excite the retailer. He doesn’t want to keep the phone on his shelf for very long. He is very happy if he can get stock on a daily basis, sell it and get the replacement the next day. You do not want your retailer to buy a 7 or 15 days stock. You want him to have the peace of mind that what he has bought is saleable. You don’t want him to panic. And you need to ensure that his margins are not compromised. If you can ensure those, the rest of the upstream distribution channel falls in place on its own.

Being sort of a first mover who is now successful, was there anything that Micromax consciously implemented from the beginning to reduce risk?
I think one of the things that has worked in our favour is that we implemented a cash and carry policy for our distributors right from the beginning — as much as possible and wherever possible. As the distributor has his money put in the business, his focus and attention is far more than what it would be had he gotten the stock on open credit. So when you see the product moving fast, it excites you that much more to put in that extra effort. I am really delighted to share that people have grown with us. It is the best compliment that you can get, when your channel partners tell you that they have grown with us.

And despite the lower price points at which Micromax handsets sell, have you been able to give them a fair share to your distributors?
It is not so much about the price points. Ultimately, your margins are a function of your revenue, right? So if you are able to churn your product faster, everybody is happy.

In that last few years, when you were busy making a brand out of Micromax, is there anything that has stuck with you and reminds you of the journey so far?
I would have to say that it is the way we started the whole mobile handset business. That’s the most funny thing I still remember. Where we got the idea for our first, locally-relevant handset so to speak? Before we got into the handset business, we used to deal with PCO business for different operators. We were in rural towns close to the Bangladesh border. There is no electricity, and no signal for your mobile phones and there was this local PCO, who was turning out an Arpu (average revenue per user) of `4000 for the operator. We were dumb struck. He had a big truck battery for power, and then a contraption on his roof to catch signal for the phone. And he had a spare battery for the phone, which he would take it on his cycle some 15 kilometres, to the nearest town for charging so that he would always have a fully charged spare battery. That made us think, if we could make phones that had long battery life and could do things that go beyond what normal phones are expected to do, then we have a huge market before us. That locally relevant innovation has remained at the core of our strategy till date.

Any new innovations like the first one, the 30-day battery back up phones?
Yes, we are working on some regional products that are exclusively for that region. In Sri Lanka, for instance, we are working on a shock-proof, water-proof handset targeted at the fishermen community. There is some discussion happening between the government and industry on what is the best way to bring that product to the community. Talking about innovation, I must tell you about one of our dual SIM phones that has a gravimeter. So it is a complete touch phone and when you turn the phone upside down vertically, it switches to the second SIM.

Now that you have tasted success in the sub continent, any plans for developed markets like Europe or North America?
We look at Brazil as a prelude to entering more mature and developed markets. Brazil is a notch above developing markets like India but a notch below developed ones like Europe and North America. Brazil has 80% tele-density, they have implemented mobile number portability, so it is a bit more mature than Indian market. We are looking at markets like that as our baby steps towards moving into developed markets at a later stage. We believe we will have our share of learnings from these markets, which would help us fine-tune and sharpen our strategies. With a bit of exposure in Brazil we would start talking to operators in European markets.

What kind of time line are you looking at?
It is not in our current fiscal plans. We would like to have our learning curve in Latin American markets, see how our products and Micromax as a brand is perceived and accepted by consumers in those markets before taking a call. But obviously, there is an intent to enter developed markets.