Demonetization has shaken the mobile phone market, leading to a huge decline in sales. The feature phones and budget phones faced the maximum burnt. Consumers of these phones mostly prefer to pay by cash, which has now become the sole reason for the decline in sales.
As an aftermath of this effect, companies are now laying off their workforces to reduce inventory pile-ups caused by the slow production rates.
Foremost is Foxconn, the world’s largest contract manufacturer. Quoting industry experts, ET reports that Foxconn, Lava, Intex, Karbonn and Micromax account for half of the assembled handsets in India. Foxconn works for Xiaomi, Oppo, Gionee, Infocus and Nokia, and has over 8,000 factory workers in India.
The company saw its production rates fall by 50% and had to lay off the workforce to deal with this problem. The 4 plants of the company in Sri City, Andhra Pradesh, were producing 2.5 million devices a month. However, ever since the note ban, the rates have dropped down to 1.2 million a month. Foxconn has put 1,700 of its workers on the bench or on paid leave. This plan will apparently not change until the production rates rise up to 2 million per month, as revealed to ET by an unnamed senior industry executive at Foxconn.
Foxconn Is Not The Only One
Companies like Intex, Lava and Karbonn also plan to reduce their workforce by 10-40%. Retailers have a pile-up of devices from companies as consumers are avoiding cash purchases.
- Lava employs 5,000 people at its plant. And all of them have been sent on leave as the plant has now been shut down for a week, starting December 12th. The entire production of mobile phones is being shut down by the company at the plant, revealed sources to ET. Interestingly, the company was named as the fastest growing Indian smartphone brand in 2015, which had an astounding YoY growth of 214%.
- According to top officials at Intex, the company will lay off 500-600 people at their Noida plant in January. Due to poor sales in the first week of December, the company has slowed down production and imports of SKD kits.
Both the companies together generate more than 10,000 mobiles per month and employ over 5,000 people.
- According to a senior executive, Karbonn plans to lay off about 40% of its workforce by the end of this month. At factories in Noida and Bawal, Haryana, more than 1,200 workers may lose their jobs.
- Micromax, a company that lost more than 50% of its market share earlier this year, has slowed down its production in Rudrapur and Telangana facilities. The company saw a 32 percent decline in smartphone shipments from Q2 to Q3. With demonetization in effect, this rate has fallen further. Their consumer sales is down by 25-30%.
Demonetization effect on mobile phone market
Back in April, India was touted to become the second largest smartphone market by 2017, overtaking the US. Reports from Morgan Stanley showed that India would have an annual growth rate of 23% through 2018. Thanks to declining production rates in China, India was in the right place at the right moment.
The number of smartphone users in India is 330 million which is only 25% of the population. Thus, companies across the world looked up at India as a potential greenfield to increase their market sales. IDC reports showed that in Q3 2016, 32.3 million units of smartphones were shipped, clocking a QoQ growth of 17.5%.
However, smartphone sales in the second week of November fell by almost 90%, courtesy the demonetization. The sales, however, is recovering and is around 60-70% right now.
Unfortunately, the revenue lost is nearly half the average daily revenue of handset makers. It has come down to INR 175-200 crore from the original revenue of INR 350-400 crore. Simultaneously, a latest IDC report revealed that phone shipments in this quarter are also declining. The report stated that feature phone shipments will have a sharp decline of 24.6%. Smartphones will have a sequential decline of 17.5%.
Some of the core reasons why demonetization has affected the mobile phone economy are:
In India feature phones and budget smartphones account for the largest chunk of the sales. The low to mid-range smartphones, dominated by Xiaomi, LeEco, etc fall within the price range of INR 6,000-15,000 and are mostly purchased through cash. As reports state, a majority of the population in India prefer phones at an average price of INR. 10,000. This is the core reason for lower production rates in mobile phones. Offline sales have almost hit the wall; retail stores have faced an inventory pile-up!
Electronic payments are still limited to the urban and semi-urban areas. As of March, only 22 million credit card holders and 636 million debit card holders existed in the country. With a population of 1.2 billion, these numbers are quite low.
Limited Access to Online Markets
Rural areas still have low or no access to online marketplaces and thus, prefer cash transactions. This has led to a sharp drop in smartphone sales in these areas, though not as much as in the urban metropolitan regions.
All these factors are core to market loss. However, smartphones are still a luxury, not a necessity. Thus, these factors are central to how demonetization has affected the mobile phone market.
But, Not All Was Bad!
Apple recorded almost three-fourth of its monthly average sales in just three days after the new notes were announced. They sold over 1 lakh phones in these three days as people rushed to get rid of their then-useless currency notes. On the night before demonetization was to fall into effect, several stores sold iPhones till midnight, some selling at a premium price too.
OnePlus did not feel much of an impact on their smartphone sales. Most of its phones cost over INR. 25,000 and is an online-only brand. People generally pay using their credit or debit cards, or opt for net banking for an online purchase. Thus, COD hasn’t caused any hindrance to the phone sales of OnePlus.
It remains to be seen how much more loss the Indian smartphone market will incur due to the demonetization. But considering the predictions that market will rise after 4-5 months, India still has a chance to recover and increase its sales next year.