Party's Over, Almost, in the Smartphone Market

India is a leading market for smartphones and has an untapped segment. However, the decline in volume of annual shipments, especially for entry-level smartphones, belies the 5G-induced optimism

It was in 2020 that India surpassed the US as the second largest market for smartphones, an achievement not quite surprising for the second most populous country in the world. To put it in perspective, India had 492.8 million smartphone users in 2021, as per the Global Mobile Market Report by international market research firm Newzoo. The population of the US, on the other hand, was 332.9 million. Even in terms of smartphone market potential, India was way ahead, with a penetration of 35.4%, much lower than the US at 82.2%, the report indicates, suggesting a huge untapped segment in India.

This puts India in a highly enviable position in terms of smartphone market dynamics. Just that things may not be as cheerful as that, at least not at present.

The Rise and Slump

The telecom segment in India touched a major milestone in 2016 when the annual smartphone shipment crossed more than 100 million units—it reached approximately 109 million. According to the Worldwide Quarterly Mobile Phone Tracker by International Data Corporation (IDC), the figure rose to 124 million in 2017, 142.3 million in 2018 and 152.5 million in 2019, before declining marginally to 151 million in 2020.

“When Jio came in 2016, a lot of us who were using 3G wanted to shift to 4G. Jio had actually accelerated that adoption. So, 2017, 2018 and 2019 became the growth years of smartphone market in India. Data plans had also become cheaper, which added to the growth,” says Tarun Pathak, research director at Counterpoint Market Research.

The three months of 2020—April to June, when there was countrywide Covid-induced lockdown—were a complete washout, he notes. “In April, the normal sales would have stood at 14 to 15 million, but that month was completely wiped off. In those three months, we would easily have had 40 million sales. Second thing was uncertainty. People were holding back,” he adds.

The market recovered strongly with approximately 161 million shipment units in 2021, only to exit 2022 with 144 million shipments—the lowest since 2019—registering a 10% year-on-year decline.

The shipments also fell 27% YoY to 30 million units in the fourth quarter of FY23. Despite multiple price discounts and channel schemes, high inventory levels after Diwali restricted new shipments, the IDC report states.

Counterpoint Market Research pegged the decline in India’s smartphone shipment to 9% YoY, touching 152 million units in 2022. While estimates vary, the inference remains the same: all may not be well at present for the smartphone segment in its leading market.

“In terms of volume and revenue, the entry-level and budget phones have been the major contributors traditionally to the overall smartphone market. Most of the growth over the years has been coming from the first-time smartphone users,” says Pathak. “These users were 5.5 million per month in the pre-pandemic era. In the past year, this number has come down to almost 3.5 million per month, which means that the feature phone-to-smartphone adoption has gone down significantly. The people having feature phone held on to their basic phone, which impacted the market” he adds.

Noteworthy Triggers

Pathak attributes a part of the problem with the smartphone market to the macroeconomic situation of inflation leaving lesser disposable income in the hands of people and phones turning more expensive. The looming financial uncertainties during the pandemic saw people tightening their purse strings.

The entry-level segment, which is big market making up one-third of the total smartphone sales in India under Rs 10,000, shrunk significantly last year. “There was no innovation that happened in this segment and devices kept becoming more expensive because of the dollar exchange rate. No new launches happened in this segment, so people have no incentives to upgrade,” Pathak explains.

Concurring with him, Pankaj Mohendro, chairman, Indian Cellular and Electronics Association, says, “[When] 5G service was launched, companies did not want to launch new 4G models, and 5G phones came at a cost. Rs 12,000 is the entry-level price of 5G phones. So, the segment of Rs 5,000 to Rs 10,000 became undersupplied. This is a prime reason for the de-growth in the entry-level segment.”

As per the IDC report, the entry-level segment (sub-$150) shrank to 46% of the market, down from 54% a year ago. The report also dubs the dearth of new launches in this critical mass segment as a barrier for new smartphone users.

Overall, the smartphone base in India has plateaued and the pace of adding to the existing smartphone user base in India has slowed, according to a September 2022 report by Techarc, a research and analytics firm. Between 2020 and 2022, the country added only around 100 million users to the smartphone base, it adds. “There have been two main reasons for this—technical limitations in offering the desired phones within the price range suitable for the entry level and the market disruption created by Jio in terms of wanting to address the lower segment of telecom users, either through a hybrid feature phone with 4G capability or a basic-level smartphone having potential of becoming the first smartphone of millions who are presently using a feature phone,” the report states.

Faisal Kawoosa, chief analyst at Techarc, says that affordability is a key reason for the market stagnation and that is hampering the fast adoption from older spectrum technology to the newer ones. “The transition from 2G to 3G smartphone could cost you somewhere around Rs 3,000 to Rs 4,000. The 4G smartphone was available under the threshold of Rs 6,000. Right now, when you look at 5G, you will not find even a single player offering a 5G smartphone below Rs 10,000. There are feature phone users who buy a phone for even less than Rs 1,500; for them, adopting 5G phone is a substantial jump.”

Major brands have acknowledged the prohibitive price tags of latest smartphones as an impediment to their growth. Apple CEO Tim Cook said on the company’s earnings call in February, “There’s been a lot done from financing options and trade-ins to make products more affordable and give people more options to buy. And so, there’s a lot going on there.” However, despite the US tech giant making great strides in the Indian smartphone market of late, it is unlikely that its efforts to make its offerings more affordable can have a bearing in the mass segment of the market as it is likely to stay premium.

Value Over Volume

While there is a downward growth in entry-level and budget smartphone market, the premium segment is showing robust growth.

One of the key highlights of the Indian smartphone market in 2022, according to the IDC report, was that “the mid-premium US$300-500 grew 20% and premium price segments of US$500+ 55%, respectively, while the sub-US$300 segment declined by 15%. In the premium segment of US$500+, Apple maintained its lead with a 60% share (iPhone 13 being the 3rd most shipped device in 2022), followed by Samsung with a 21% share”.

While replying to a question during a post-earning call, Cook dubbed the Indian market “hugely exciting” for the company. Underlining the strategy of the company for the nation with a population of 1.4 billion, he added that Apple was putting “a lot of emphasis” on the Indian market where it also set a quarterly revenue record.

The observers of the Indian smartphone market see a post-pandemic pattern, like the one being witnessed in Indian real estate and the automobile markets, where the sales of premium products are growing at a faster pace than ever before. According to international property consultant Savills, premium residential value in all metropolitan cities in India has witnessed considerable growth in 2022. The SUV market in the country witnessed a similar rise, doubling from 7.77 lakh units in 2019 to 14.7 lakh units in 2022.

The Indian smartphone market is no different, with the premium segment making rapid gains in recent quarters. The premium (between Rs 25,000 and Rs 50,000) and the super-premium smartphone segment (between Rs 50,000 and Rs 1,00,000) saw shipments increase in 2022 by 12% and 41% YoY respectively, according to a CyberMedia Research report. According to the report, the premium segment contributed 11% to India’s smartphone shipments and 35% to the smartphone market revenue in 2022, the highest ever.

Smartphone makers’ push towards premium products seems deliberate, as a slowdown in the mass segment is rather apparent. “Every company has a growth outlook. If the company is not able to sell a greater number of units, it will target increasing revenue by 20X. That is why companies are migrating their portfolios towards the upper segment. Since volumes are not increasing, the brands are shrinking their portfolios and focusing more on the segment which has paying capacities so that at least they grow in terms of revenue if not volume,” says Kawoosa.

Llike Cook noted, phone makers are finding ways to make premium phones more palatable to new audiences. Analysts believe that the growth of the premium segment is being driven by several no-cost EMI schemes like “buy now, pay later”. They concur with each other that the momentum for premium segment will continue to grow in 2023 even as the overall growth in the sector drops. “The affordable smartphone segment continues to be impacted by the prevailing macroeconomic conditions and, consequently, weakened consumer appetite. Consumers in the premium smartphone segment are upwardly mobile and look at their smartphone as an extension to their lifestyle. This is why, over the past three years, the premium smartphone segment continues to be resilient,” Prabhu Ram, head of industry intelligence group, CyberMedia Research, says.

In 2022, Apple continued to lead the premium smartphone segment, with the iPhone 13 emerging as the top-selling model. It also led the market in Q4 2022 in terms of shipment value.

5G: The Silver Lining

The highest-ever smartphone shipment decline of 10% in 2022 came after a contraction of 4% in 2020 when the pandemic struck in India, but analysts see brighter prospects for this segment, thanks to a pick-up in 5G adoption by people. Additionally, buyers who had postponed their purchase plans after the announcement of the launch of 5G are also expected to add to the sales figures this year.

In 2022, 50 million 5G smartphones were shipped, with an average selling price of $395, which was lower than the average price of $431 in 2021. According to the IDC report, with more affordable 5G launches expected in 2023, 5G devices should account for around 60% of shipments in 2023. The 5G smartphone shipment share increased to 31%, with 5G shipments growing 74% YoY in 2022, as per the CyberMedia Research’s India Mobile Handset Market Review Report for 2022.

“The silver lining continues to be the growth in 5G smartphone shipments. It will be a big year for 5G in India. As we move forward, we anticipate original equipment manufacturers (OEMs) to bring more affordable 5G smartphones into the market. All of this bodes well for and complements the aggressive 5G network deployment by Indian telcos,” says Shipra Sinha, an analyst at CyberMedia Research, in the report.

A slew of reports highlighted the shrinking of the smartphone market in 2022 partly because of waning pent-up demand, less options in the entry-level segment and high inflation. But the industry is dubbing this divergence “peculiar” and expects the sector to stride on the path of growth once more.

Pathak of Counterpoint Research believes that there is room for India to see another phase of growth in the sector. “India has 626 million smartphones; there is a lot of room for growth. There are approximately 220 million feature phones operational in the market. These, at some point of time, will be converted into smartphones,” he avers.

While more launches are expected in the 5G segment, Prabhu Ram anticipates that the smartphone market will grow in single digits in 2023. “The market outlook for Q1 2023 remains challenging. Our market insights point to a 21% decline in smartphone shipments in January 2023. Smartphone OEMs will look to reverse the prevailing market conditions by stepping up competition and steering the launch of new 5G-capable devices across price tiers,” he says.

Mohendro is confident of witnessing a growth both on volume and value fronts. He expects the volume to grow by 10% to 12% and the value to grow by 20%. However, Counterpoint Research expects the smartphone market to grow by just 3% with total shipments at 157.3 million in 2023.

Techarc expects 5% to 6% growth in 2023. “A lot of brands are trying to bring 5G in the affordability segment. Samsung has introduced 5G phone at Rs 14,000. It also has its finance scheme. The reason for Samsung’s growth is its Samsung Finance,” says Kawoosa. Techarc’s report estimates that, by 2025, the smartphone sales will exceed Rs 5 lakh crore. Also, it expects the new smartphone sales in 2024 to cross the 200 million milestone. If that happens, the figure will have doubled in around eight years, faster than the 11 years the first 100 million took.

For the Indian smartphone market looking to put the slump behind, affordability and value for money will be the deal clinchers. All the optimism around 5G will be futile if it cannot impress the masses, the premium smartphone market being a niche segment.