Indian Smartphone industry: Porter's five force analysis

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In this article, I would like to present you the structural forces driving the Indian Smartphone Industry.

Five Force Analysis

1. The threat of new entrants:

The threat of new entrants is on the lower side, as sunk costs, patents and licenses required, economies of scale and exit costs are on the higher side.

1.1 Sunk Costs: High

1.1.1 Costs associated with R&D, Promotions, setting up of production facilities are some of the major sunk costs in the smartphone industry 1.1.2 Huawei, Apple and Samsung have spent $9.2B, $8.1B and $12B on R&D in 2015 respectively

1.2 Patents & Licenses: High

1.2.1  A single smartphone can involve thousands of patents. These can be w.r.t display, chipset, batteries, features, design, software etc. For instance, Samsung filed a patent for foldable and bendable displays this year 1.2.2 Huawei Technologies filed  3898 patents in 2015 alone, while Samsung filed 1683

1.3 Economies of scale: High

1.3.1 Economies of scale are major source of cost reduction because capital investment  and many overhead costs such as R&D, marketing, and administration costs per unit, decreases 1.3.2 Learning curve effects are prominent when a complex technologically is repeated like the design of the phone, FOTA release etc.

1.4 Excess Capacities: Low

1.4.1 100M phones are locally manufactured in India in 2015. Out of this 35M are smartphones. This represents only 32% of smartphone shipments 1.4.2 Due to make in India policies, mobile phone manufacturing facilities are set to raise. Samsung, HTC, Lenovo have made agreements for contract manufacturing of smartphones. Micromax, Karbonn, Lava, Spice are building their own manufacturing facilities

1.5 Exit Costs: Medium

1.5.1 Health and retirement benefits for the employees, environmental liabilities, agreements with contract manufacturers if any, redundancy costs associated downsizing operations, the Past and present contracts, Government policies 1.5.2 Nokia has offered VRS for 5500 employees while shutting operations in Chennai plant

2. Bargaining power of suppliers: 

Bargaining power of suppliers is high, as chipset market is concentrated mainly within three players worldwide, these suppliers can have price discrimination and also backward integration by the smartphone players is also limited

2.1 No. of Suppliers: Low

2.1.1 There are three key components in a smartphone. Those are chipset (core electronics), display and camera 2.1.2 W.r.t. chipset market, there are only three players operating in the market. (Mediatek, Qualcomm, Spreadtrum etc.)

2.2 Switching costs: Medium

2.1.1 Considerable switching costs exist, when a chipset vendor is changed, other components working depend on the chipset, design also depends much on the chipset used

2.3 Backward integration: Low

2.3.1 Apple’s chipset revenue accounts to 21% of the total smartphone processors’ market revenues 2.3.2 Samsung also designs and manufactures Exynos. It has entered top 5 players in smartphone processors’ market 2.3.3 Samsung is the dominant player in the AMOLED displays market. LG is also one of the key players in the smartphone display market

2.4 Price discrimination by suppliers: Medium

2.4.1 Suppliers mainly chipset and display vendors are able to discriminate prices among their customers 2.4.2 Price information is not readily available for mainly for chipsets and displays. As the contracts between smartphone manufacturers and vendors are very large, price information is readily available

3. Bargaining Power of Buyers:

Bargaining power of customers is high, as end customers do not have significant switching costs, distribution channels in India either online or offline is concentrated within few players

3.1 No. of customers/ Concentration of customers: High

3.1.1 No. of customers are very large. Orders are not concentrated among the customers. 3.1.2 Considering the distribution channels, selling through online distribution channels is on raise. Online distribution is dominated by three major players in India, namely Flipkart, Amazon and Snap deal 3.1.3 Distributors have significant power over the smartphone vendors. For instance, Google Android one and Lenovo handsets are not sold in offline channels, as they offered exclusive deals to online retailers

3.2 Switching costs: Low

3.2.1 Customers does not have significant switching costs while changing mobile handsets vendors. They are no learning costs except for customers moving from Android to IoS and vice versa

3.3 Backward integration: Low

3.3.1 Customers do not have ability to backward integrate 3.3.2 Considering the distribution channels, except for reliance, others may not be able to backward integrate

3.4 Price discrimination by suppliers: Low

3.4.1 Price information is widely available for customers 3.4.2 Price contracts with distributors can be understood to some extent by analyzing the price at which distributors sell phones in the market

4. Rivalry among existing firms: 

Rivalry among existing firms is medium. CR4 figures show that the market is neither monopolistic nor perfectly competitive, it is somewhere in between

4.1 Fixed costs & High exit barriers: High

4.1.1 Product development set up, setting up manufacturing/outsourcing of the product, distribution network, and sales channels will incur a huge fixed cost. 4.2.1 Exit barriers are also on the higher side, considering the labor laws in the country etc.

4.2 Product differentiation: High

4.2.1 Players are focusing more on the product differentiation, mainly on product features. For instance, Quick charge, Heart – rate monitor, fingerprint sensor was introduced in some of the phones last year 4.2.2 Performance of the product, customers look at the processor type, RAM and internal memory of the phone to gauge the performance of smartphone 4.2.3 Focus is also on style and design of the products for differentiation, for instance, new colors, sleek designs are the norm for present day smartphones

4.3 No. of firms & Market Growth: Medium

4.3.1 There are more than 60 players competing for share in Indian smartphone market 4.3.2 Smartphone market is growing at a rapid pace with a CAGR (2014-15) of 32% 4.3.3 Smartphone volumes have slightly declined in Q4 2015, Q1 2016 but increased by 17% (27.5M) in Q2 2016

4.4 Switching costs: Low

4.4.1 Apple created an app store, operating system, and software programs that can only be used by Apple products also created range of products which work solely together (like iPhone and IWatch) thereby created significant switching costs to customer 4.4.2 Samsung, LG, Lenovo has their developed their own app stores as well 4.4.3 High depreciation cost of the mobile is a hindrance in switching to other handsets, as mobiles will be sold for very less compared to its price, in the second-hand market 4.5 Storage costs: High 4.5.1 Inventory turnover on an average across the world is around 45, which means each smartphone will be inventory for 9 days. This is significant cost to smartphone manufacturers

5. Threat of Substitute Products

The threat of substitute products is low, as many available products specialize in a particular function. And also switching costs are also high

5.1 Availability of Substitutes: Low

5.1.1 Social networking, landlines, emails, tablets, camera etc. some of the many substitutes available for the smartphone. But these specialize in a particular function, whereas smartphone is a combination of all of these 5.2 Switching costs: Medium 5.2.1 Switching costs mainly include convenience, portability, and mobility

5.3 Availability of Complements: Medium

5.3.1 Smart Phone apps, headsets, battery bank, Screen guard, back covers are some of the complimentary products available in the market
Source: Publicly available databases, reports, and articles
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