Literature Riview

Sat, Sep 18, 2010 | Updated 11.24AM IST

14 Jul, 2010, 04.03AM IST, Joji Thomas Philip,ET Bureau

Upwardly mobile: Nothing micro about

Micromax
NEW DELHI: Although he’s never driven a truck in his life, Rahul Sharma’s past, present
and future is memorably connected to a truck battery. In August 2007, in the powerless village
of Behrampur in West Bengal, Mr Sharma saw an Airtel PCO being powered by a truck battery.
Every night, the PCO owner would lug the battery 12 km to an adjoining village on his cycle,
charge it there overnight, and lug it back to Behrampur in the morning.

In late 2007, when Micromax decided to diversify from PCO devices into the business of
mobile handsets, the PCO owner of Behrampur was the inspiration for its first product. The
company designed a battery that could last 30 days on a single charge and give 17 hours of
talk-time. Micromax asked vendors in China and Taiwan to manufacture 10,000 handsets with
these battery specs. The X1i, priced at Rs 2,249, was an instant hit in rural India, and
Micromax’s handset business was on its way

In just 30 months, by staying with this philosophy of making handsets that address specific user
needs and are also affordable, it’s come a long way. Says Rajesh Agarwal, one of the four
promoters: “We sell a million handsets a month now. With a market share of about 10%, we are
a close second to Samsung.” There are many views on that 10% figure. Citigroup put it at 10%
in February, a top executive of a rival says it’s 8%, IDC India says it was 4.8% in 2009.
According to IDC, Nokia had a market share of 54.1%, Samsung 9.7% and LG 6.4%.

Never mind the quibbling over numbers. Fact is, the company is mounting a serious challenge
to the slippery No. 2 spot in the mobile handset business. In the past four years, the second
spot has been lost by Motorola, Sony Ericsson and LG. Samsung has held it for the past 24
months, but Micromax is catching up. “We will be No. 2 by the end of this fiscal,” says co-
promoter Vikas Jain.

Decided to be different

Micromax, its promoters say, posted revenues of Rs 1,600 crore and a net profit of Rs 150 crore
in 2009-10. Early on, they decided there was no point in aping the leaders. “We had two options
— compete on price or be different,” says Mr Jain. “We decided to be different.” In its case,
different meant a longer battery life or a phone that had two SIMs.

Micromax has taken the utilitarian philosophy to the mid- and high-end also, with a reasonable
degree of success. But here’s where it gets tougher. Says Romal Shetty, national telecom head,
KPMG: “In the mid- and high-end, customers expect certain service quality. Micromax’s
challenge will be to achieve such quality standards, and convey the same through branding and
positioning.” Asks Ajay Parmar, head (institutional research), Emkay Global Financial Services:
“Their biggest challenge will be brand stickiness. Will their existing customers buy Micromax
again?”

Before it found its centre, Micromax dabbled on the fringes, changing its identity repeatedly.
Rajesh Agarwal started Micromax in 1991 to distribute IT peripherals. One of his neighbours in
Pitampura, in West Delhi, was Rahul Sharma. In Delhi’s Jamia Millia University, Mr Sharma was
friends with Sumeet Arora, a junior. And one of Mr Arora’s friends was Vikas Jain.

It would be eight years before they would come together to do business. After college, Mr Jain
moved to the US and joined GE, Mr Arora joined Blue Star and Mr Sharma worked with an auto
components company called Bundy Engineering. In 1999, all three quit their jobs to join Mr
Agarwal. They set up Micromax Technologies, an IT education company dealing in e-commerce
and embedded technologies.

The four divided responsibilities on functional lines, which hasn’t changed since. Mr Jain, 35, is
the business director; Mr Agarwal, 45, managing director, handles finance; Mr Sharma, 34,
executive director, oversees marketing; and Mr Kumar, 35, is the chief technology officer. While
they don’t say how the equity is divided among the four, they do say theirs is an easy
relationship.

Their big break came in 1999, when Nokia signed them up as an all-India distributor for
machine-to-machine devices — essentially landlines that were customised to run on a mobile
network. They were used by call centres and PCOs. By 2004, Micromax had revenues of Rs 10
crore and employed about 80 people. It was installing about 10,000 Nokia 32s a year in India,
making it the largest Nokia distributor worldwide for these products. But, overnight, it all
threatened to come apart.

The same year, Nokia decided to exit this segment. “As much as we were shocked, we decided
to turn this into an opportunity,” says Mr Agarwal. So far, they had been customising a Nokia
instrument. Now, they decided to build and sell the whole thing themselves — that too 40%
cheaper than the Nokia 32.

Airtel was its first client. Against the 10,000 devices it sold for Nokia in a year, Micromax was
selling 35,000 of its own within a year. Business peaked in 2007, with sales of 250,000 devices.
Then, the mobile revolution took over. Overnight, again, Micromax faced extinction. Again,
Micromax converted the threat into an opportunity.

Six months on, it too hopped on to the mobile bandwagon. But it went about the business
differently. It stressed on product innovation for the low-end, price-conscious user. So, it went
rural. It worked. Says Mr Sharma: “Customers were willing to pay a premium of Rs 200 for the
X1i.”

Then, instead of manufacturing itself, Micromax sourced its handsets from 12 factories in China,
South Korea and Taiwan. It was model-based sourcing: Micromax would come up with an idea
and give it to the factory best placed to deliver it. This is different from, say, Nokia, which would
be compelled to stay in-house or go to a vendor-partner, even if another vendor had better
capabilities to execute a particular model.

Micromax also looked at distribution in a new way, standing by its cash-only model. While rivals
offered a 60-day credit line, Micromax refused to give credit. “If the distributor does not buy your
handsets, there is no pressure on him to sell them,” explains Mr Agarwal. At the same time,
Micromax offered to supply distributors regularly to keep inventories down. So, distributors didn’t
have to shell out large amounts upfront or have a lot of money locked in. “If we give a distributor
1,000 handsets and ask him to sell them over a month, he will worry about his daily sales,” says
Mr Agarwal. “But if we supply less, demand will be close to equal or more than supply.”

Micromax has 34 super-distributors across India. Unlike a Nokia or a Samsung, it doesn’t

interact with the 500-plus sub-distributors. Neither does it intervene in how the super-distributors
sell or place the products. “We offer our super-distributors a 15% margin, which is higher than
the industry average of 6-10%,” claims Mr Jain.

Some of Micromax’s competitors, who do not want to be named, say the company fares poorly
on after-sales. “It addresses a segment that is comfortable with the use-and-throw philosophy.
Also, the company’s claim of 450 service/care centres are inflated,” says an executive with a
rival telecom firm. Nokia and Samsung have 900 and 800 service outlets, respectively.

The Micromax promoters refute these charges. On product quality, Mr Agarwal says: “The
plants we are associated with also manufacture handsets for all global majors. They don’t apply
different standards while manufacturing for us.” He also points out that their phones sell well in
rural India, where users demand longevity.

Micromax is investing Rs 100 crore to set up a manufacturing plant in Baddi, Himachal Pradesh,
to ensure its outsourcing model does not cause supply-side uncertainties. Production is being
scaled up from 50,000 units per month to 500,000 units a month by March 2011.

In December 2009, US-based private equity firm TA Associates invested $45 million (about Rs
200 crore) in Micromax for a minority stake. While Micromax has not specified the exact holding,
ET has reliably learnt that TA picked up 15-20%. That would value Micromax at Rs 1,000-1,200
crore. It has also learnt that the company is looking at an IPO, at a valuation of Rs 3,000-3,500
crore. While industry and banking executives indicate a mop-up of around Rs 600-800 crore,
company executives refused to comment.

Micromax has already used the TA funding to expand to neighbouring countries such as Sri
Lanka, Bangladesh and Nepal. The company now plans to expand to Middle East, Africa and
Latin America.

Over the next six months, Micromax plans to launch four handsets a month. There’s a
mosquito-repellent phone, which is designed to emit frequencies to repel mosquitoes, a phone
that doubles up as a computer mouse, and a waterproof one. The truck-battery philosophy still
rules at Micromax.
Micromax Mobile Advantage
In two years, Micromax made its mark in the Indian mobile handset market dominated by Nokia.
Now it’s ready to take on the leader
by Rohin Dharmakumar | Feb 27, 2010
Four years after it was first recommended, mobile number portability still remains a paper
concept. Yet for over nine months, Saurabh Raina, a 43-year-old employee with a switchgear
manufacturer from Bhopal, is choosing the best monthly plans on offer across six different
GSM operators while he can be reached on the same number he has had for over seven
years.
The key lies inside his mobile phone — a full-keyboard (QWERTY) model called the “Q3” that
supports two active GSM SIM cards at the same time. One of these he keeps constant as his
“incoming number” to receive calls, while the other, he changes at will depending on which
operator offers him the best tariffs.
This “dual-SIM” feature is today present in 20 to 30 percent of all mobile handsets sold in
India, estimate experts. Yet market leader Nokia does not have a single dual-SIM handset in
its vast repertoire of phone models for India. And the company that made Raina’s Q3 —
Micromax Mobiles — offers this feature on 22 out of the 26 phone models it sells in India. The
Q3 itself, though fancy looking, costs only Rs. 3,700.
Micromax is now India’s third-largest GSM mobile phone vendor with a market share of 6
percent after Nokia (62 percent) and Samsung (8 percent), according to research firm IDC. It
sells anywhere from 700,000 to one million mobile phones every month. And by its own
estimates it is now selling nearly Rs.1,500 crore worth of phones annually.
“We are not the poor cousins of Nokia,” says Vikas Jain, one of the four friends who together
started and grew Micromax to its present position. “Instead we will force Nokia to launch
newer products to compete with us.”
The guys at Micromax have two aces up their sleeve — a keen eye for what the customer
needs, and the ability to swing their supply chain.
Though the company started making mobile phones only in 2008, it was founded in 1991 by
Rajesh Agarwal as a distributor of computer hardware for brands like Dell, HP and Sony. In
1999 three of his friends — Sumeet Arora, Rahul Sharma and Vikas Jain — joined him as
equal partners in the company.
Agarwal, the eldest of the four, keeps a handle on the company’s finances. The quieter Arora,
a “class topper”, is the company’s chief technology officer. Jain manages Micromax’s alliances
and partnerships with other companies. And the tall and fashionable Sharma is the risk taker
with the big ideas.
It was Sharma who convinced the others, after nine years of selling computers, software
courses and “fixed wireless” public phones (PCOs), to enter the crowded mobile phone
market. The company’s first phone, the X1i, was born from the realisation that many Indian
villages and towns didn’t get enough electricity to even recharge a phone daily.
Catering to a Need
By increasing the size of the battery to 1800 mAh, Micromax was able to tout a standby time
of 30 days for the X1i. And at the rather affordable price of Rs. 2,150, the phone was a big
success in rural India.
The unexpected success of Micromax’s first mobile phone taught the four friends two key
lessons. One, “If you give people something that helps them in their day to day lives, they will
buy it,” says Sharma. Two, even though there were over 50 companies selling mobile phones
in India, with Nokia alone dominating over 60 percent of the market, there were features,
niches and categories that could be carved out by a new entrant.
“We knew that competing on price along with Nokia, Samsung or LG would not get us
anywhere. Instead we wanted to create, and own, categories,” says Agarwal.
The friends realised that intense competition among mobile operators for subscribers would
inevitably lead to multiple connections per user. But carrying two phones around in your
pockets wasn’t something most people fancied.

The seemingly obvious solution — handsets that accept two SIM cards simultaneously —
became Micromax’s second killer category.
Micromax neither had the brand awareness of a Nokia that would lead to customers asking for
its phones from retailers, nor the clout to force massive volumes through distributors. Yet it
also saw that commissions given by phone manufacturers to their channel partners were often
very low, leading to a lot of dissatisfaction. This is what they decided to capitalise on. “Nokia
usually gives a channel margin of 2 percent, of which 1 percent is usually given away as
discounts. The remaining 1 percent cannot sustain any business,” says Agarwal. Nokia could
not respond to Forbes India’s queries for this story within the stipulated deadline.
So Micromax decided to give a 5 percent commission to each of its distribution chain partners
— the 34 “super-distributors”, the 450 distributors and the 55,000 retailers. But there was a
catch — it would not offer any credit. Instead distributors are expected to complete an online
bank transfer to Micromax before getting any of its phones to sell further on.
“As a result we are not plagued with dead inventory, periodic schemes or issues around “price
protection”. The retailer only picks up what he sees demand for. And because their money is
involved, partners tend to work harder,” says Jain.
But having a lean, cash-based supply chain means Micromax has to be much more accurate
and faster in its forecasting as compared to its bigger competitors.
Naveen Wadhera, a director with the $16 billion private equity firm TA Associates, finds
Micromax’s supply chain one of its real strengths. “Their time-to-market from the design to
production stage is around three months as compared to the 18 months taken by larger guys,”
he says. TA Associates recently acquired an undisclosed stake (though less than 20 percent)
in Micromax for $45 million, valuing it upwards of $225 million.
Still there are more sceptics than believers in the company.

Disproving the Disbelievers

Its sceptics say Micromax’ rise has been fuelled to a large extent by the Indian government’s
decision to bar illegally-imported Chinese phones that lacked an identifying IMEI number. As
consumers rushed to replace their cheap Chinese phones, many opted for the relatively
cheap Micromax ones.
Others say without a strong consumer brand or control over its own distribution, it has no
competitive advantage in the long term.
One way Micromax is responding is by committing to invest Rs.100 crore on marketing over
the next two years. It has also signed up Hindi movie star Akshay Kumar as its brand
ambassador. There will be a new tagline — “Boring is out” with advertising designed by ad
agency Lowe.
And to the charge that Micromax is a maker of cheap phones, Jain replies, “We are not even
present in the sub-$30 phone market, as our cheapest phone is Rs.1,400.” That segment is
dominated by Nokia with a market share of close to 80 percent.
But better responses can be found inside the buzzing Micromax office in Gurgaon. A 35-
person research and development team churns out designs and prototype of new mobile
phones — some radically different, some only slightly so.
There’s a sleek and shiny white square studded with Swarovski crystals which slides open to
reveal a QWERTY keypad. Another sports a small clip on the bottom which is really a wireless
Bluetooth earpiece which can be unplugged and used. A third bills itself as a remote control
for your TV and DVD player, apart from its regular phone features.
But the most exciting of the prototypes is one called the “secret weapon”. Slated for a high
profile launch during the upcoming IPL cricket tournament, it could define the next big
category for the upstart company.
An excited Sharma holds the new phone in his hand, before suddenly swinging it at the laptop
in front. On screen a tennis player serves the ball to his opponent. It acts like a wireless,
motion-sensing controller for computer games like tennis or golf, like the Nintendo Wii.
“This phone can convert every PC and laptop from Hapur to Varanasi into a gaming device,
especially for those who can’t afford to spend Rs. 20,000 on the Wii. And even if he is not into
games, his kids will ask for his phone the moment he comes home in the evening,” says
Sharma.

This article appeared in Forbes India Magazine of 05 March, 2010