We want to win in India — that's the biggest initiative this year," says Yang Yuanqing, 47, chairman & CEO of the $30 billion Lenovo Group.
For the global chief of the world's second largest computer maker, this means selling one million smartphones and 3,00,000 tablets this year in India, where it has just started selling these two categories of gadgets.
Amar Babu, the 48-year-old managing director of Lenovo India, has his task cut out. He toes his boss' global strategy for India. "It will be protect and attack," he says.
Protect its numero uno position in PCs, and go all out to build the smartphone and tablet businesses from scratch. IDC, a technology research firm, expects smartphone and tablet sales in India to grow at a compounded annualised 57% and 29.1%, respectively, over the next five years.
By comparison, growth in PCs is expected to stay flat, at 0.7%. "The PC market is marred by challenges owing to continued market contraction and shift in demand to portable devices like smartphones and tablets," says Kiran Kumar, research manager, client devices, IDC India. Still, as challenges go, this transition for a computer company is not just about riding piggyback on segment growth.
Two of Lenovo's illustrious peers, Dell and Acer, failed to cross over. And notable electronics majors like Sony Ericsson and LG hit a wall after recording initial gains, such is the overcrowding — there are about 30 smartphone makers — and price sensitivity characterising these businesses.
For Lenovo, there are challenges unique to it as well. The Chinese company made its mark in India by selling PCs to large companies, via bulk orders. For example, in 2012, a single order from the government of Tamil Nadu, for one million laptops, made it the market leader. But smartphones and tablets are sold mostly to individual consumers, making it an entirely different proposition.
"PCs and laptops is a 50-60 cities market. For smartphones, it's 400-500 cities and villages," says Arvind Subramaniam, partner & director, Boston Consulting Group, a management consulting firm. "How you set that distribution up will be the key."
Different distribution
Lenovo distributes most of its PCs through its five national distributors, including Ingram Micro and Redington, which also distribute Apple, Samsung and BlackBerry.
But, for tablets and smartphones, it is also fanning out through regional distributors, who are typically state-specific and do business worth Rs 300-1,000 crore, against the Rs 10,000 crore for an Ingram. So, for example, in Gujarat, where it started test marketing smartphones in October 2012, it has tied up with Aegis; the local distributor is Supreme Computers in Tamil Nadu and Peripheral Solutions in the NCR.
"To reach out to small towns and the hinterland, we have tied up with 40 regional distributors," says Babu. Lenovo started engaging with regional distributors about two years ago, when it tied up with about 20 of them.
Once it decided to sell smartphones and tablets, it struck more regional tie-ups, which is its sales model in China as well. "We want our regional distributors to be exclusive to us," says Babu. "We will, in turn, ensure they have exclusive rights to distribute Lenovo products in their catchment area."
"Lenovo is a new entrant and is yet to make a mark," says Simpy Singh, owner of KL Sons, a distributor in Haryana servicing Ambala, Karnal and Kurukshetra.
"Samsung throws carrots — you meet targets and get freebies, holidays, bonuses. Motorola, Sony Ericsson and Videocon failed as their retailer engagement was not great. The Dell sales team was too overqualified and could not speak our language."
According to Babu, Lenovo has about 6,000 retailers for tablets and smartphones. "But this is not enough to cover the country," he adds. "We have to ramp up to at least 25,000 and this should happen soon." It is also looking to increase its franchisee outlets from 1,200 to 2,000 over the next year.
In February, Lenovo also tied up with Reliance Communications to sell its smartphones. "It's a dual-sim phone, which offers both GSM and CDMA on a single device," says Babu. However, unlike western markets, the Indian market is not carrier-driven and people buy phones independent of the carrier. "India is a tough market to win in," says Subramaniam of BCG.
Middle positioning
The Indian market is also underpenetrated in smartphones. Only about 10% of the 700 million users use smartphones. According to Arvind Vohra, director of Gionee, a $1.5 billion Chinese maker of mobile phones that entered India last week, 10% penetration is the take-off point for smartphones.
"We have seen this in China and other markets," he says. "India is set for hockey-stick growth in these devices now." Babu's reading is similar. "The smartphone market in China was 10% of the entire phone market about 18-24 months ago," he says.
"Today, it's 75%. There's enough evidence India will also see such an explosion. We will be able to leverage that scale in China (where it is number two, behind Samsung) to offer a comprehensive product portfolio in India."
In India, where 70% of phones are below Rs 2,000, Lenovo is offering five smartphones, ranging from Rs 6,500 to Rs 28,000, against a 40-strong product suite in China.
In tablets, it is from Rs 14,000-30,000; in other words, its entry-level price is about twice that of those of HCL and Micromax. "We don't want to just be in the premium or mainstream segments, but in the entry-level segment as well," says Babu.
"As volumes increase, we will look at lower price points." A Rajasthan-based regional distributor, who didn't want to be named, feels Lenovo will have to lower prices to succeed.
Lenovo India's current strategy is to deliver good value for money. "We want to deliver the right mix of features, performance and price," says Babu. He gives the example of the Lenovo P700 smartphone, which retails at Rs 12,000 and is targeted at professionals. "The P700 battery gives a one-week standby," he says. "We differentiate on battery life, touchscreen, display, sound quality."
Successes and failures
Acer, the Taiwanese company that is globally ranked fourth in PC sales, went down this road in India, only to pull out within a year; it is open to a re-entry. "You need lot of upfront investment in smartphones," says S Rajendran, chief marketing officer, Acer India.
"India is not a carrier-driven market and hence your costs are high. You need a big ad and marketing budget to build the market, and overheads can go out of control when selling in villages and small towns where the market might be smaller than you expected." TC Sudhir of United Telecoms, which distributes in six states, says some global vendors had a high price premium.
"But devices would hang and users dumped them. If the product is bad, you can't push it," says Sudhir, chief operating officer, mobile devices, United Telecoms.
"Besides, computer makers don't have a good understanding of the buyer as their DNA is largely enterprise sales. That's why some of them exited a growing market."
According to Anil Sharma, managing director of UT Electronics, a Chandigarh-based distributor for northern regions, India is not a single market like Singapore or Dubai, but multiple markets.
"In Andhra Pradesh, users don't want a Hindi keypad. In UP, they are fine with it," he says. "Products for each state need to meet local user needs. Typically, 10-12% of the cost of device is the cost of selling. Companies need to keep this low."
Vohra of Gionee points out that Samsung spend more than four times of Apple on advertising and marketing — $11 billion in 2012 — to emerge as number one globally that year. "Companies need to create that visibility to capture the market, but this cash burn can be counter-productive if other things — technology, pricing and distribution — are not right," he adds.
Lenovo is nudging at the high end, going up against the likes of Apple and Samsung. It is also part of the conversation to buy BlackBerry, the troubled Canadian smartphone maker, with Yuanqing saying Lenovo could consider it.
"BlackBerry is no longer where it was five years ago. Apple and Samsung have stolen its thunder. It's trying to do lot of things to revive its fortunes, but it's too little, too late, says Sanjay Dhawan, leader, technology, PricewaterhouseCoopers. "But for its brand and presence in emerging markets, it will be a good target."
Interestingly, in India, Lenovo's brand ambassador for laptops is actor Ranbir Kapoor, who also endorses BlackBerry. "He has done really well for us in PCs," says Babu. "Since he is with BlackBerry, we will not have him for phones. Actually, it's early days to sign up a brand ambassador for smartphones and tablets—we need a certain scale to justify that investment."
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