The China double SIM challenge

Khurram Mahboob examines the challenges and opportunities in Pakistan’s budget handset market and its impact on the telecom companies.

Low blow: Pakistan's low end mobile consumers buy Rs 0.9 million worth of phones per month.

The global cellular industry has experienced exponential growth with the total number of mobile phones rising to four billion units. By the beginning of 2009, people in developing countries owned three quarters of the world’s total number of mobile phones. According to the GSM Association (GSMA), by 2013 the world’s total mobile population will reach six billion, with half of the new users coming from India and China alone.

Pakistan has also witnessed healthy growth in this area. Although it was the telecom operators backed by strong holding groups that triggered this exponential penetration, this growth would not have been possible without the availability of affordable (under $30) handsets.

Until 2008-09, the major contributor to volume growth was Nokia with its 1100, 1200 and 2300 series, followed by Samsung. Nokia had a very strong brand image and was extremely popular, as evidenced by the repeat purchases (primarily due to durability, battery life and resale value).

However, since the last two years, Chinese mobile phones have been making inroads in the Pakistani market. These phones have strong product features and are available at very low prices. In addition, the manufacturers have a robust distribution network as well as very deep pockets, enabling them to benefit from an extensive presence in the media. As a result, handset sales have surged and the category grew by 70% in FY 2010-11.

There are two major reasons why Chinese handsets have been adopted in such a big way:

1. There is a growing acceptance of Chinese handsets worldwide. As a result, the R&D and manufacturing factories in and around Shenzen (home to nearly 2,000 handset manufacturers) have been able to drive economies of scale on handset components.

2. For Pakistani importers, the biggest game changer has been the Free Trade Agreement (FTA) between China and Pakistan, which allows trade at zero percent duty. This benefit, when passed on to the value chain (distributors, retailers, customers) enables highly attractive prices. This is perhaps the biggest success factor in the low end market.

As a result, last year’s import bill increased to Rs 44.7 billion, with 85% of handsets imported from China.

From a telecom operator’s perspective, capitalising on the demand coming from the low end market is a sure way of gaining benefits. Today, Pakistan’s low end mobile consumers buy about Rs 0.9 million worth of phones per month; this consists of Rs 0.5 million Chinese brands and grey channel inducted handsets and Rs 0.4 million low end devices of brands such as Samsung and Nokia.

The next emerging opportunity in the low end market is the dual SIM feature; a growing segment in both India and Pakistan. Pakistan has over 110 million connections, of which 25-30% are estimated to be using multiple SIMs. The size of this segment is so significant that the Chinese brands did not take long to capitalise on the opportunity and have already flooded the market with dual SIM, feature enriched handsets, priced as low as $15. Branded players have only lately realised the portfolio gap and have launched a few dual SIM handsets to regain share. Although consumers are the greatest beneficiaries of the dual SIM proposition, telecom operators are likely to experience a significant dent in their monthly revenue in terms of lower ARPUs, as users will have more freedom to opt for connections of their choice.

Dual SIM handset demand will account for seven percent (169 million) of the global handset market by 2015 and will constitute 15% of the total handset demand in developing countries. Pakistan, with its five telecom operator market, is expected to have a much larger share of dual SIM users. If the current sales estimates are any indication, 20% of mobile users in Pakistan will have dual SIM handsets by the end of the fiscal year.

Along with the opportunities, there are many challenges for telecom operators as well. Telecom operators can offer bundle propositions to create stickiness, but this will mean further reductions in ARPU. So the bigger question is whether to embrace the dual SIM phenomenon and thereby accelerate its growth, or wait and hope this will stabilise to a manageably small share of the total market. With close to a million handsets sold every month and the total market size exceeding 100 million, recycling is a big emerging opportunity. The number of discarded handsets will increase once the earlier Chinese devices stop functioning after three years of use. Recycling these sets along with disposing the non-reusable parts in an environmentally friendly way is an avenue of public-private partnership that needs to be explored.

Handsets are now cheaper than ever before and they are likely to become even cheaper. The impact of these trends on the manufacturer-operator-consumer trio is likely to be:

1. Established brands will struggle to maintain volume share in the budget handset segment. They reacted too late to the unbranded and grey market players and they now need to undertake persistent campaign hammering to establish the importance of reliability and the resale aspect. Furthermore, the average selling price of the low end portfolio will need to be brought down to maintain market share; market forces will narrow the price gap.

2. Chinese handsets are likely to increase their advertising expenditure, while benchmarking a couple of big success stories in the segment, like QMobile, etc.

3. As a result of the phenomenal growth expected from the dual SIM handset segment, telecom operators will experience a significant drop in ARPU levels, especially in the Rs 50-250 band. With less than 400,000 ‘new’ subscribers joining the telecom market every month, it is the ‘current’ customer who should be targeted by operators. Therefore there will be lots of retention-based offers with the objective of remaining the ‘primary SIM’.

4. Customers will benefit most from the current situation. Stiff competition, favourable trade policies and a multitude of offerings will ensure that highly affordable feature enriched budget handsets are available. n

Khurram Mahboob is Head of Devices, Affinity & Loyalty, Geo Marketing, Ufone Etisalat Pakistan. Khurram.mahboob@gmail.com

First published in the September-October 2011 issue of Aurora.