One year in Mobile phones, volumes vs margins and the BoP

Also of note in today’s news is this little factoid – One billion cellphones were sold in 2006! While most of the article is product oriented pr, this snippet underscores the point I made in my earlier post, that the real extent and impact of the mobile was unexpected.

"Emerging
markets contributed to the high volume sales," said Ramon Llamas,
research analyst in IDC’s Mobile Technology and Tracking team. "It was
not long ago that shipments into mature markets, including Japan, North
America, and Western Europe, consumed the majority of devices shipped
worldwide. More recently, however, device shipments into emerging
economies in Asia/Pacific, Central and Eastern Europe, the Middle East,
Africa, and Latin America have surpassed shipments to mature markets,
and the difference between the two continues to grow."

While
I’m tempted to wonder if this shift from high margin markets to low
margin but high volume markets signals changes for more than just the
wireless carrier/telco/handset industry but is a precursor to a more
macro shift in purchasing patterns and market behaviour, I’ll focus on
the mobile platform [obsessively, some might add] here and come back to
that thought in another post.

I’d noted somewhere a while ago that when analysts were saying that
Moto’s profits were down while volumes were up [something that even
Nokia experienced this year – I’ll dig up the links] that the metrics
for market success might need to be reconfigured if companies were not
to be considered as underperforming.

As the quote from the article above notes, high volumes of sales in
emerging economies are a recent phenomenon, in the last year or two,
prior to that the market for handsets, for example, were high margin
profitable handsets [consider the 50% margin estimated for Apple’s as
yet unlaunched iPhone] whereas now its sheer numbers.

This brings to mind this quote from a post written exactly 12 months to the exact day ago,

This exemplifies CK Prahalad’s assertions that the ‘fortune’ at
the bottom of the pyramid will be derived from volume not margins.
12
million phones are twelve million phones – even if the profit that
Motorola makes is just a dollar a piece, that more than recoups their
investment in this development, I should say. Compare that to the cost
of developing an even more advanced phone with all the bells and
whistles for the first world markets – marketing and promotion alone
would eat up a significant chunk of the investment. And as cellphone
penetration increases, it allows even more services and schemes that
support sustainable development in emerging markets.

More than what I said, I was rereading my debate with niblettes
in the comments [this was when I thought he was my most challenging
debater on the blog hence my tone] and here’s something interesting in
light of the of developments in the past one year. Mind you its more of
a reflection on what we were imagining back then, you could say, but I
think relooking at our questions and answers in light of the facts
today would be a fascinating exercise to undertake. Here’s what nibby said,

"but what is your point with respect to what I am saying?"

I guess my point was that I don’t think current market leaders will
be able to capitalize on the opportunity. Not for technical reasons,
but rather for reasons of organizational psychology and prudent
management (once you’re up-market, hooked on big margins with ever more
sophisticated offerings your big customers and your own mythos woun’t
let you move down-market (at least I’m not aware of any company that
has done so, and done it successfully)).

I’m not sure what the future will look like (forecasting is such a
dark art). But I can imagine a couple scenarios where an upstart
Wall-Martizes (huge volumes, low margins, dirt simple, for a market
with little disposable income whose primary constraint is cost) the
cell phone industry with a market base of developing nations. Will they
then move into this market? I don’t know. Will the impact of thier
success in the developing world drive incumbent market leaders to
compete down market? or will it push incumbent market leaders further
up market to smaller volumes but bigger margins? Not sure. But it does
smell right for a shake-up
(I don’t think the millions of potential
customers in the developing will not be denied–for long).

Lets look at the numbers for 2006 –

Top Five Mobile Phone Vendors, Shipments, and Market Share, FY 2006 (Preliminary)

Vendor

2006 Shipments

2006 Market Share

2005 Shipments

2005 Market Share

Year-on-year Delta

Nokia

347,500,000

34.1%

264,900,000

31.8%

31.2%

Motorola

217,400,000

21.3%

146,000,000

17.5%

48.9%

Samsung

118,000,000

11.6%

102,800,000

12.3%

14.8%

Sony Ericsson

74,800,000

7.3%

51,100,000

6.1%

46.4%

LG Electronics

64,400,000

6.3%

54,900,000

6.6%

17.3%

Others

197,800,000

19.4%

213,100,000

25.6%

-7.2%

TOTAL

1,019,900,000

100.0%

832,800,000

100.0%

22.5%

Note: Vendor shipments are branded shipments and exclude OEM sales for all vendors.

Ooh! Hours of analytical fun, yes, you know what my future posts will be about for a bit, but coming back to what we were debating last year, on the 20th of Feb 2006, the first pass observation to make is that negative number you see in the delta for "Others" – which implies that niblettes question above – that if this low margin, high volume market was a hurdle than major manufacturers were going to have difficulty overcoming, there was a wide open opportunity for a low cost, no name handset maker to "shake things up" – a scenario that each of these companies evaluated I’m sure. Of course, today I know that niblettes is our resident expert in scenario planning! Still, the downturn in "Others" sales speaks volumes [ha!] – logically, one would expect that to have either increased or  a new name to have shown up on the list. But it also says something about the ability of leaders like Nokia and Motorola to serve this emerging category successfully – both demonstrate significant growth in numbers of handsets sold.

On this thought, I’d really like to look at the numbers sold in India and China and compare the top handset brands sold specifically in those markets. Another interesting analysis would be to compare the pattern of sales by brand in emerging economies vs. mature markets.

What are your thoughts on whether the rankings would change and how?

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2 Responses to One year in Mobile phones, volumes vs margins and the BoP

  1. bigdavekowalewicz says:

    low end phones like the motofone are cheap, but they cant do much. Seems Ed Zander might be backing the wrong horse.
    Goes back to the google subsidized phone; find other ways to make accessing the web cheaper from a mobile device.

  2. Niti Bhan says:

    When you say Ed Zander might be backing the wrong horse, I’m going to make the assumption here that you mean choosing the strategy of low cost phones which are dumbed down versus the strategy of full featured phones which could demonstrably act as handheld computer being made more affordable, either by working to source the cheapest and best materials/methods etc OR through innovative business models that would allow the manufacturers to affordably price them at significantly lower than cost price in order to reach the BoP segment who needs this access to technology the most?

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