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Industry Vertical Study

Consumer Electronics in India

11/14/2009

Ghaayathri P – GAPR09RM082

1 | P a g e

Table of Contents1.0 Introduction...................................................................................................................................... 2

1.1 Consumer Electronics in India.....................................................................................................2

1.1.1 Segment Definition................................................................................................................3

1.1.2 Brown Goods Industry in India..............................................................................................4

1.1.3 Computers............................................................................................................................ 5

1.1.4 Audio, Video and Gaming Devices.......................................................................................5

1.1.5 Mobile Handsets................................................................................................................... 6

2.0 Consumer Electronics Industy Analysis..........................................................................................7

2.1 Porter’s Five Forces Model..........................................................................................................7

2.1.1 Threat of New Entrants.........................................................................................................7

2.1.2 Bargaining Power of Buyers.................................................................................................9

2.1.3 Bargaining power of suppliers...............................................................................................9

2.1.4 Intensity of Rivalry amongst existing players......................................................................10

2.1.5 Threat of Substitutes...........................................................................................................10

3.0 Existing Players in the Indian Market............................................................................................11

3.1 Consumer Electronics Manufacturers........................................................................................11

3.1.1 Videocon Appliances Ltd....................................................................................................11

3.1.2 L.G Electronics.................................................................................................................... 11

3.1.3 Samsung Electronics..........................................................................................................12

3.1.4 Nokia, India......................................................................................................................... 12

3.2 Consumer Electronics Retailers................................................................................................12

3.2.1 Viveks – The Unlimited Shop..............................................................................................12

3.2.2 Infiniti Croma....................................................................................................................... 13

3.2.3 E-Zone................................................................................................................................ 13

3.2.4 NEXT Retail India...............................................................................................................13

3.2.5 Mobile Phones Speciality Retailers.....................................................................................13

3.2.6 Laptop Speciality Stores.....................................................................................................14

4.0 Key Drivers.................................................................................................................................... 14

5.0 Challenges..................................................................................................................................... 16

6.0 References:................................................................................................................................... 17

1.0 Introduction

India’s nominal GDP was US$1.17trn in 2008. Average annual GDP growth of 6.5% is

predicted by BMI to 2013. With the population forecast to increase from an estimated 1.19bn

in 2008 to 1.27bn by 2013, GDP per capita is expected to expand by nearly 59% by the end

of the forecast period, to reach a projected US$1,563. Consumer spending per capita is

assumed for a rise from US$594 in 2008 to US$1,105 in 2013. The growth in the overall

retail market will be driven, in large part, by the explosion in the organised retail market.

Organised retail refers to the familiar Western concept of chain outlets, department stores,

supermarkets, etc. According to Investment Commission of India (ICI) data, this segment

accounted for US$12.1bn of sales in 2006, or 4.6% of the total retail segment. The forecast is

that organised retail sales will reach US$76.2bn by 2013, representing 10.7% of the total and

generating employment for some 2.5 million people in various retail operations and over 10

million additional work forces in retail support activities including contract production &

processing, supply chain & logistics, retail real estate development & management etc.

As noticed in the figure above, the Organized Retail Penetration (ORP) is the highest in

footwear with 22 per cent followed by clothing. Organised consumer durables retail is very

low at around 5 %. This shows a growing opportunity in this sector.

2.0 Consumer Electronics in India

According to a McKinsey 2005 report, while Food and Grocery took the highest share of

wallet, and electronics took only a mere 5%, the proportion of spending on electronics was

definite bound to increase by 2015 and also the growth rate for the share of organised retail in

the electronics segment was set to increase from 15% to a astounding 45% in 2015. A graph

representing the share of wallet to the share of organised retail is shown below.

2.1.1 Segment Definition

In general consumer electronics refers to a variety of electronic equipment used by private

customers. This industry can be divided into many segments:

1. ‘Traditional’ Consumer Electronics: audio and video equipment

2. Computing Devices: Computers, Calculators, Laptops

3. White Goods: Household /Domestic Appliances such as washing machines, irons, vacuum

cleaners, grinders, etc

4. Personal Care: Hair Dryers, shavers, electric toothbrushes.

In addition to this, the emergence of telecommunication has lead to the convergence of

mobile technology into the consumer electronics industry and hence this paper will only deal

with traditional consumer electronics, mobile phones and computing devices which can be

termed as Brown Goods as per industry definitions. Henceforth in this paper consumer

electronics will refer to Brown Goods.

2.1.2 Brown Goods Industry in India

Out of the electronics industry in India, the consumer electronics segment is one of the

biggest markets. The consumer electronics industry comprises of communication devices,

computing devices, audio, video and gaming products. Televisions, music players, digital

players, cameras, laptops, PCs, mobile handsets and accessories, gaming consoles commonly

fall into the consumer electronic category.

In 2008, the market size was estimated to be $22 billion and growing. With the growing

population in India, exceeding 1 billion, the consumer electronic Industry is all geared up for

fast growth in the coming years. The predicted figure for the consumer electronic market by

2013 is around $46 billion, growing at a compound annual growth rate (CAGR) of 16%. This

astounding growth is due to many factors, the major ones including

Rising disposable incomes coupled with increasing consumer exposure

Increase in manufacturing in the local grounds

Credit/Financing schemes which make purchase easy

Growing competition , leading to better deals

Increased reach due to better distribution networks

Taking a look at the individual segments in the consumer electronics segment, we can

broadly classify them as:

2.1.3 Computers

According to Business Monitor India Report, the computers (laptops, desktops and

accessories) market took up a share of 33% of the consumer electronics wallet in 2008. It also

states that with the prices of PCs coming down by nearly half, the sales went up from $5.8bn

in 2008 to $6.0bn in 2009. It’s very interesting to note that the current PC penetration is only

2% and this leads to excellent growth opportunities with a predicted CAGR of 13% for the

period 2009 to 2013.

2.1.4 Audio, Video and Gaming Devices

The audio, video and gaming devices take up close to one – third of the wallet share in the

consumer electronics segment. This segment is set to grow at 22% CAGR from 2009

reaching US $15 in 2013. The main product in this group is Television, with new technology

such as Plasma TVs entering the market and cricket being the main attraction for most

Indians, the Indian Premier League, Common Wealth Games 2010 are all helping in boosting

the drive for upgrades.

2.1.5 Mobile Handsets

The largest chunk of the consumer electronic market goes to the mobile handsets and

accessories with 37% of Indian spending in 2008. With the telecommunication boom and

lower call rates, the handset market is poised to grow at 19% compounded annually and reach

a staggering figure of about 380 million units by 2013. The mobile penetration in the rural

market is 15% and is the most as compared to other categories. In the future, most vendors

will definitely target the 3 tier cities and rural customers.

3.0 Consumer Electronics Industry Analysis

3.1 Porter’s Five Forces Model

Although the Indian Consumer electronics market is highly competitive, the high growth

rates that it promises make it a good industry to enter.

3.1.1 Threat of New Entrants

Capital Requirements and Economies of Scale:

In the case of retail stores, there is lack of good distribution network and lack of knowledge

of consumer buying patterns which calls for large investment in distribution channels and

research to improve the reach.

Economies of scale is required in as there are large fixed costs associated with setting up a

manufacturing plant as there are problems of under-developed infrastructure, erratic supply of

water and electricity in many areas, a high cost of capital and continuous up gradation of

technical and managerial skills.

Supply Chain Issues:

The existence of too many intermediaries in the supply chain coupled with issues in logistics,

management of POS data, pilferage and distribution and inventory management, eats away

the profits of the retailer, making it unattractive for new entrants.

Product Differentiation:

Though the awareness is increasing amongst the Indian consumers, retailers and

manufacturers are unable to increase brand loyalty. The Indian consumer is very price

sensitive and hence he keeps hoping from one place to another, hunting for good deals.

Switching costs vary amongst the electronic categories. For instance, the switching costs in

mobile phones are high, as consumers who are used to one brand find it difficult to use

another brand. However, for televisions, cameras, and even laptops, consumers are ready to

try new brands based on price for features offered and service quality or reputation of the

brand.

Government Policy:

By encouraging manufacturing zones and improving the infrastructure, the government is

developing the entire manufacturing sector, which will help in boosting the electronics

production in India, which has traditionally been a very small slice of the overall

manufacturing segment. While the government is trying to encourage the growth of the retail

and manufacturing industries in India, there are some policies which need to be looked at.

The duty structure for electronics adds up to 30% which is a significant amount. This

is mainly due to the multiple tax structure which consists of 12% VAT, 8% excise,

4% Goods and Service Tax, 2% Central Sales Tax and Local taxes.

The FDI policy limits to 51% stake for foreign investors, which forces foreign

retailers to use franchise arrangements, and in the manufacturing sector, the FDI is

100% favouring foreign investors.

Existence of the grey market due to poor government regulations to keep counterfeits

at bay coupled with the lack of consumer knowledge and legal recourse encourages

manufacturers to churn out spurious products which can lead to lost sales of the tune

of 10-15%.

Red tapes and bribery in the Indian government system is also a stumbling block for

new retailers or manufacturers.

Taking into consideration the positives and negatives, India still offers a good chance for new

entrants and hence the threat is considered to be low to moderate.

3.1.2 Bargaining Power of Buyers

With the emergence of new channels like the internet, auction sites like rediff.com, the

general consumer (buyers) who usually purchase electronic goods from electronic retailers,

hypermarts, music and book stores, can easily compare prices and go for the best deals in

town. Though the better brands can command a higher price, buyers are constantly

comparing prices, service quality and product features and hence commands a moderate to

high power in this industry.

Large chain stores like Tata Croma, E-Zone have distinct advantage over the smaller stand

alone stores as they can demand good discounts suppliers. As brands play an important role

in the electronics market, the retailers find it difficult to integrate backwards to produce their

own electronic goods as in the case of private food labels. Considering the market dynamics

and the size of the market, the buyers have moderate to high power in the consumer

electronics industry.

3.1.3 Bargaining power of suppliers

The biggest threat is the trend of large suppliers integrating forward as in the case of Dell,

Apple, Nokia, by setting up their own retail outlets. However, in the Indian electronic

context, there are a large number of suppliers in the market who face overcapacities, poor

distribution, large duties, and declining margins and hence the bargaining power for suppliers

is less and competitive pricing comes into play. With more companies setting up the

manufacturing plants in India, like Nokia in the south, the bargaining power of suppliers is

definitely low to medium. Product differentiation is more and more difficult in the consumer

electronics industry and the existence of cheap Chinese suppliers also adds woes to the

suppliers.

3.1.4 Intensity of Rivalry amongst existing players

There are few key players in the consumer electronic market, but as they are part of big

Indian business groups, they have a lot of muscle power and hence the intensity of rivalry can

be placed at a mid level. Though factors such as high transport and storage costs, lack of

differentiation, large investments, and low switching costs tend to intensify the rivalry, the

fact that the market is only at the nascent stage with promises of high growth rates of 16%

coupled with the diverse needs of customer groups, and an untapped rural market; the

existing players seem to be enjoying a relatively low rivalry.

3.1.5 Threat of Substitutes

The threat of substitutes for the manufacturers of these electronic goods is medium to high

unlike the case of white goods. As new technology enters the market at increasing pace, the

manufacturers and retailers need to understand the consumer needs. For instance the VCR

was replaced by the DVD player which will soon be replaced by a Blue Ray Player. The

incorporation of camera in the mobile phones is definitely a threat to the camera market.

Hence product innovations in this segment are very high and players in this industry need to

mindful of this.

4.0 Existing Players in the Indian Market

4.1 Consumer Electronics Manufacturers

The main electronic manufacturers in the Indian market are Videocon Industries, LG

Electronics, Samsung, Onida, Panasonic India, Bose India, BPL, etc. The upcoming players

are D-Link, Samtel , WeP and Tyco followed by Nokia and Motorola.

4.1.1 Videocon Appliances Ltd

One of India’s ingrown companies, Videocon boasts of an annual turnover of the tune of

US$4.1billion. It has 17 sites in India, and is known to be the third biggest manufacturer of

picture tubes in the world. It also has global presence, with plants in Mexico, Italy , Poland,

China and the Middle East.

Figure 1 Market Share of Electronics Manufacturers Source: Centre for Monitoring Indian Economy

4.1.2 L.G Electronics

The market leader in consumer durables is LG for close to a decade in India. They have also

been recognised for their superior innovation and after sale service. It is proud of their

distribution channels which offer its products to the breadth and length of India. As early as

1998, LG with a budget of Rs500 crores set up manufacturing facility with a state-of-the art

technology at Greater Noida, near Delhi. L.G also has recently entered directly into the

consumer market by setting up retail shops and boast of retail sales Rs. 10,000 crores in 2008

4.1.3 Samsung Electronics

Samsung entered India in 2002 with an 80 acre sprawling facility at Noida and mainly

manufactures colour TVs, mobile phones and some white goods. Its manufacturing facilities

are best known for its high automation, high quality and state of art. Recently they opened

another unit at Sriperumbudur, near Chennai. This facility has an investment plan of USD100

million starting from 2007, over a 5 year period .

4.1.4 Nokia, India

Nokia also set up its manufacturing plant in Sriperumbudur, Chennai in 2006, just taking 5

months to complete the entire factory construction. Starting with 550 people, it has grown to

a size of 8000 people today and employs 70% women. The manufacturing facility, with a

sprawling area of 200 acres, incorporates the best quality, high efficiency and a great supply

chain system.

4.2 Consumer Electronics Retailers

4.2.1 Viveks – The Unlimited Shop

Viveks is one of South India’s oldest consumer electronic retailer founded in 1980s, which

set up a retail outlet at Chennai, with humble beginnings of housing fans, radios, fans, mixers,

irons, heaters and other household equipments. Till 1994, it had set up only 3 showrooms,

however, with a strategic initiative for rapid expansion, it established its dominance in the

two states on Tamil Nadu and Karnataka with 51 showrooms covering a retail space over

1,75,000 sq.ft and boasting of a group turnover of Rs. 400 Crores and with wide product

offerings. It plans of setting up of 50 more showrooms in south India.

4.2.2 Infiniti Croma

The Croma retail chain is owned by Infiniti Retail which is a Tata sons 100% subsidiary and

set up its first store in 2006, which was 20,000 sqft and had an initial investment of Rs 35

million, hosting various brands in household durables and consumer electronics. It

strategically has an alliance with international organized retailer, Woolworth for back-end

operations. They plan to open out 40 stores by 2010 and Croma distinguishes itself by

providing one-stop shopping with customized consultation to the middle- and upper-middle

class customer segment.

4.2.3 E-Zone

E-Zone, an electronics specialty store, which has several brands all under one roof, was

launched by Future Group, in 2007 at Lucknow. They have an interesting store format which

consists of three dedicated zones - Liberation Zone, Experience Zone and Home Zone to

meet the electronic needs of the entire family. E-Zone competes with Croma, by offering the

best deals and low prices and is positioned more towards the lower-middle and middle class

customer segment. The company has expanded to 40 stores, all over India in about 2 years.

4.2.4 NEXT Retail India

NEXT Retail India, Ltd. is a subsidiary of Videocon Industries, Ltd and opened its first retail

electronic store at Indore in 1999. Today, NEXT Retail India Ltd has more than 300 outlets

across 16 states with a presence in 145 towns spanning metros and large towns and claim to

be India’s Largest Electronics Retail Chain; a giant in the organized retailing of consumer

electronics, and home appliances. NEXT has more than doubled its last year’s turnover in the

current financial year. Their plans ahead are more ambitious with a targeted turnover of 1800

Crores for next year with 600 plus outlets.

Besides these top players, there are speciality stores dealing only with mobile phones, laptops

and exclusive dealers for the big electronic brands.

4.2.5 Mobile Phones Speciality Retailers

The main players in the mobile phone retailer market are The MobileStore, UniverCell,

Cellucom, etc. The MobileStore currently has more than 1050 outlets and plans to have a

network of 2500 stores by 2010 across 650 cities, covering virtually every major town in

every state across India. Chennai-based mobile retail chain , UniverCell, currently has 300

company-owned stores across the four southern states including 70 in Andhra Pradesh, and is

trying to touch 400 stores by March 2010 through the franchisee mode. Cellucom which

hosts mobile and laptops, first outlet was opened in January 2007 at Gurgaon. Currently there

are 120 stores across 15 cities including top four metros. These outlets cover the entire value

chain in formats like stand-alone stores in Malls, as well as Shop-in-Shop within Shopper's

Stop, Lifestyle and other large-format chain stores

4.2.6 Laptop Speciality Stores

It is very interesting to note that there are very few multibrand laptop speciality retail chains

in India. Most laptop showrooms are local players or dealers for the big brands like Lenova,

HP, Acer, etc.

5.0 Key Drivers

Young Population with rising incomes

45% of the Indian population is below 25 years which accounts to close to 500 million

consumers (18+) of which 230 million are in Urban India. With the rising incomes and

education levels, the discretionary expenditure is increasing.

Figure 2 Share of Wallet - Indian Consumer Trends

Availability of Easy Credit Options

With all the major players offering easy EMI schemes and with the increased

penetration of Credit cards, the Indian consumers now have an easier access to

consumer electronics

Changing Consumption Patterns

Gone are the times when people bought electronics with the intension of using it for

years together. With increasing speed of innovations and as new technologies come

in, the Indian consumer wants the latest and the best. Now mobile phones are changed

every year, laptops once in 2 years ,etc. People want to be trendy and are becoming

gizmo frenzy.

Falling Prices of Consumer Electronics

With new models, products and more competition, prices are being driven even

further down. Especially in the mobile phone segment, prices fall as much 20% after 6

months after introduction.

Figure 3 Retail Prices of Consumer Electronics

6.0 Challenges

Price Wars

With the increase in price wars due to the entry of new players in the market and increase in

manufacturing capacity by some original manufacturers, the profitability and margins of the

companies are adversely affected. Hence companies need to increase focus on product / store

differentiation to address various segmental specific needs

Lack of Distribution Networks and Logistics Management

Getting stock into a store in India is a massive challenge given the poor city roads and

complex intra city transportation regulations , high cost of moving goods between starts,

inefficient storage ( e.g. small store backrooms owing to expensive real estate). It is of utmost

importance to design an efficient network. Transportation, including railway systems,

highways has to meet global standards. Airport capacities, power supply, warehouse facilities

and timely distribution are other areas which need to be enhanced. The distribution network

is also highly fragmented and is very poor in semi-urban and rural areas.

Presence of Gray Market in Consumer Electronics

Presence of gray market in consumer electronics products, especially in DVD player, music

players is definitely eating into the sales of the retailers. Counterfeit products are present

across a wide range of products.

Increasing Awareness of the Indian Consumers

With the increase in access to Internet information, and availability of wide range of choices,

consumers have become quite smart. They want the product that is easy-to-handle, good in

quality and low in price. Most importantly, consumers want some guarantee for the product

that they are buying. The role of electronic companies doesn't end on the sale of the product,

but continues till the end of guarantee period.

Trained manpower shortage in India

There is lack of talent in consumer electronics retailing. Retailers need to spend heavily on

training its sales force to match the expectations of the Indian consumers both in terms of

technical knowledge and soft skills.

7.0 References:

http://www.businessdictionary.com/definition/brown-goods.html

http://www.dare.co.in/news/others/cut-duties-on-electronics-hardware-to-12-from-30-

assocham.htm

“India Consumer Electronics Report Q4 2009” By Business Monitor India

China and India’s Electrical and Electronics Industries : A Comparison of Market

Structures By Koichiro Kimura

Technopak, India

“Impact of Organized Retailing on the Unorganized Sector” Mathew Joseph,

Nirupama Soundararajan, Manisha Gupta, Sanghamitra Sahu (May 2008)

AT Kearney Report 2009

Indian retail: on the fast track and time for bridging capability gaps – KPMG Report

India Calling 2009 KPMG Report

www.univercell.in

www.themobilestore.in

www.viveks.com

www.cromaretail.com

www.next.co.in

http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf