Why Micromax Needs Pantech (Or another Manufacturer)

Indian mobile phone company Micromax is said to be in talks with South Korea’s 3rd largest phone manufacturer Pantech for a stake in the latter.

micromax_logo.jpgIndian mobile phone company Micromax is said to be in talks with South Korea’s 3rd largest phone manufacturer Pantech for a stake in the latter. Banks which own 37% of the debt laden Korean phone maker, are trying to sell their stake in the company (via).

Although Micromax has denied these reports, this is a serious possibility. As competition heats up in its home ground, Micromax needs Pantech, or perhaps, another low cost manufacturer like never before. Buying a manufacturer is likely to reduce production cost for Micromax, which imports most of the handsets sold in India from China.

Micromax which has launched in markets like Russia, has very little intellectual property. That rules out a likely expansion in markets like US & UK, where patent laws as much more stringent. Meanwhile in India, where it has grown phenomenally, Chinese competitors are chipping away at its market share.

The Chinese Come to India

Chinese smartphone maker Xiaomi is set to enter the Indian market with phones that will be sold at cost. That is, the company is willing to forgo margins. In a price sensitive market like India, where homegrown phone makers haven’t managed to create any real differentiation, users will have no qualms buying from Xiaomi.

The fight, then will be to get these devices into their hands, through distributors.

Another Chinese brand, Gionee has already been chipping away at the market. Their strategy of working with distributors seems to have paid off. In its first year of entry, the company sold phones worth Rs 500 cr in India.

While the Indian smartphone market is still growing at breakneck pace, sales at the lower end of the price point will be quickly be cannibalized by these Chinese phone makers. And at the top end, Samsung will continue to defend its market share.

Oppo, another Chinese phone maker has also entered the country. Meanwhile, iconic brands like Motorola have also been selling at lower price points, making it tougher for homegrown phone makers to maintain their lead in India’s fastest growing Rs 5,000- Rs 15,000 category. Huawei and Lenovo also don’t want to be left behind.

Indian manufacturing?

While Micromax has started assembling phones in its Rudrapur plant, it remains to be seen how well that scales. Also, components will still need to be imported from more mature and cheaper semiconductor markets. To encourage domestic production of mobile handsets, the government recently proposed to restructure excise duties in all categories to 6% with Central Value Added Credit & 1% without Cenvat credit. This is expected to bring down costs for phones costing over Rs 2000.

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