PLI scheme: Lava seeks to reboot with first locally made smartphone
Hari Om Rai’s tryst with the mobile devices business began when LG Electronics offered him a pan-India distributorship for selling its mobile phones. The deal did not materialise, but after dabbling in selling fixed-line wireless phones with Chinese giant BBK for a while, Rai made his big move. In 2009, he roped in some partners and co-founded Lava International to manufacture mobile devices.
Rai admits that Indian brands such as Lava have had a dream run. Mobile penetration was growing month-on-month, and there was huge demand for 2G feature phones. Then came the smart phones, and Lava was amongst the top five brands in the country, locking horns with the Samsungs of the world.
The party ended abruptly in 2018, when the juggernaut of Chinese brands like Xioami, Realme, Vivo and Oppo rolled into India, offering aggressively priced smart phones in an array of choices. And overnight, they grabbed the market share from home grown players, resulting in many of them shutting down.
Confronted with the Chinese onslaught, Lava decided to focus on the feature phone market to survive and also reduce its financial costs. Rai was able to ensure that his company maintained a healthy 23 per cent share of the 2G feature phone market and remained amongst the top three, with only Samsung and Intel as its competition.
But the reality was that while feature phones still account for 44 per cent of the mobile phone sales volume in India, the cream was in smart phones. In terms of value, 2G phones were merely 10 per cent of the market. Says Rai: “Upon deeper introspection after the Chinese onslaught, it became clear to us that the fight was not merely between companies. Rather, it was between the countries and their carefully crafted policies to create an ecosystem.”
Rai’s wishes seem to have been heard last year when the government launched the country’s first production-linked incentive scheme (PLI) for mobile devices with the intention of transforming India into a global hub. The incentive was offered not only to global companies Like Apple Inc. and Samsung — it was also aimed at nurturing homegrown “Indian champions” by offering them incentives of 4 per cent to 6 per cent for five years so that their disability in cost of production against Vietnam and China was neutralised.
Lava took a big bet. In its application under the scheme, which has been cleared, the company has committed to sell mobile phones worth Rs 11,800 crore in the fifth year and bring in fresh investments of over Rs 800 crore. The incremental revenues it has promised are nearly double that of its current turnover of Rs 5200 crore. It has also committed to sell 60 per cent of its phones by value in the export market. Says Rai, “74 per cent of the target segment under the PLI scheme (below $200 phones) are available outside India, so we have to go global.”
Lava is also leveraging the changing geopolitical situation — the US- China trade wars and India-China border skirmishes. Many global companies want to hedge their bets and are looking at countries other than China to outsource their manufacturing. And the Indian government has put impediments for fresh investments from Chinese mobile players under the FDI policy, as they will now come under close scrutiny. Lava also hopes that the negative sentiment over “made in China” products amongst consumers will work in its favour.
But Rai’s manufacturing strategy is different from that of rivals like Dixon (which want to be pure play EMS /ODM players) and it wants to sell branded Lava phones across the globe. Says Rai: “Currently, we are selling the Lava brand in 22 countries, but our plan is to take the brand all across the world. In order to build a long-term sustainable enterprise, 70 per cent of our contribution to our business should come from the international business.”
But Rai admits that to get scale in the global market Lava will have to undertake some outsourcing deals. According to industry, it has already inked deals with Nokia and AT&T and is about to sign up with Motorola, too, amongst others. Says Rai: “The ODM and EMS business is strategic for us as it enables us to build economies of scale, But the final goal is to sell phones with our own brands abroad.”
Lava is already in the process of closing its operations in China, which was used as a base to export its phones and also design them. The decision was taken as thanks to the PLI scheme, the disability in production cost in India no longer exists. A part of its 650-strong design team will now shift to India. Rai says the company is working on its fully India-designed smart phone and will launch a smart phone in a few days with some first-in-the-world features. The plan is to have a 2000-strong design team in the country.
Rai is also planning to more than double Lava’s current capacity for manufacturing mobile devices by increasing the number of machines from three to seven. And it is looking at localisation of its products. In feature phones it has already hit 60 per cent, and in smart phones, once it does the printed circuit boards, it would go up to 40-50 per cent.
Of course, the route to building global brands is not easy. The top five brands in the smart phone space control over 70 per cent of the global market. And even big boys like Nokia, Motorola, LG, Panasonic and Google have not been able to make much of an impression here. On the other hand, though the global feature phone market is de-growing — it fell by 22 per cent in 2019 — its largest market is India.
Building a brand in such a scenario is a challenge that Rai and his team might find difficult to surmount.
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