Chinese Phone Makers Are Rushing to India. We Went to See What Kind of Market It Really Is

3G, corner shops, second-hand iPhones, HTC and Sony... India's phone market today looks a lot like China's did a few years ago

Over the past month or so, racing to get new products out before the next iPhone, OnePlus, Xiaomi, Meizu, Lenovo, Smartisan and Qiku have held one launch event after another.

This has happened every year for several years, but this year is different. Besides fighting one another at home, nearly all the Chinese makers have set their sights on India.

Going to India has become the thing Chinese phone makers most want to do this year. At the end of April, Lei Jun flew to India himself to launch the Mi 4i, a phone built for the local market. Then Huawei, Xiaomi, OnePlus and Lenovo each announced they would make phones in India. Add Gionee, ZTE and Vivo, which arrived long ago, and almost every Chinese phone maker is now in India fighting for market share.

A phone shop with no room left to hang another sign

On August 26, when Meizu held its brand launch in Delhi, the last of China's major phone makers arrived in India.

So what does this market that everyone is fighting over actually look like? After the Meizu event, QDaily reporters toured three districts of New Delhi, the Indian capital, and visited more than ten phone retailers and carriers of every kind to see how Indians buy and sell phones.

Where Do Indians Buy Phones?

In China, carriers are an important channel for selling phones. Indians, by contrast, tend to buy them at electronics chains, or even at small shops on the street.

According to Ipsos's 2014 report on India's mobile phone market, 90% of phone sales go through channels that cannot be tracked, which can be lumped together as no-name shops. Of the remaining 10%, large electronics retailers account for a quarter of sales and retail chains for the other three quarters.

No-name shops, retail chains, big electronics chains, Apple authorized resellers: India sells phones through a wide range of channels. But like other Indian shops, they usually open after 11 a.m. and close early, around 7 or 8 p.m.

The market also looks much like China's a decade ago: foreign makers such as Samsung and Sony lead, and local makers can sell only on price.

A newly posted Android One poster at the door of a phone shop

Walk into any of these scattered shops and the brand lineup resembles Suning or Gome three years ago. Samsung and Apple take the most prominent spots, and most of the posters outside are theirs. HTC, Sony and Microsoft (Nokia smartphones), which Chinese makers pushed out of the Chinese market long ago, still occupy plenty of counter space.

Apple's best seller is still the iPhone 6. Samsung's best seller, though, is not its flagship Galaxy S6 but the mid-range Galaxy A8.

The other brands also push flagships, but most of them have dropped to around 2,000 yuan: the HTC One E9+, the Sony Xperia Z3+ and the Lumia 730. In India that is still an expensive phone.

The second-generation Android One, tossed into a cabinet alongside a Gionee phone

Curiously, almost every phone shop also has a poster at the door for the Lava Pixel V1, the second-generation Android One phone Google made with the Indian brand Lava. The first Android One offered poor value for money, failed to meet Indians' needs and sold badly: just 800,000 units in India.

Google seems to hope the second generation will turn things around. Yet for all the posters, inside the shops this phone that Google has such hopes for gets little display space. It sits in the budget counter with the other low-end phones.

India's "Zhongguancun"

Beyond these formal channels, India has places like Gaffar Market, which sells second-hand phones of unknown origin in bulk. The scene is much like Beijing's Zhongguancun electronics district ten years ago. One street devoted to phones, no more than 500 meters long, holds nearly 50 repair shops, with almost a hundred sales counters set out in the open in front of them.

Gaffar Market in India is packed with phone counters like these

The iPhone is still the top seller

They are called counters, but each is just a small glass case about as wide as one person. Inside, four or five rows of unboxed phones are crammed together, all lying face down. The sellers told QDaily they lay them out this way so buyers can spot the brand at a glance.

Every phone in the counters lies face down

A glance is enough: most of the phones in these cases are Apple's iPhone 6 and 6 Plus, a few are Samsungs, and other brands are almost absent. The iPhone 5s is usually priced at 2,100 yuan and the iPhone 6 at 2,600 yuan, and the price can probably be haggled down further. Where the stock comes from is also questionable.

India's Apple Is Not Quite China's Apple

In every country, the iPhone rules the high end. India is no exception: Apple is the only brand with its own dedicated stores. But the iPhones sold here differ somewhat from those sold elsewhere.

They are a little old. The iPhone 4, long gone from shelves in other markets, still sits in display cases in Delhi's Apple stores. And the old products Apple sells in India are not only phones: the iPad 2, launched in 2011, and the MacBook Pro with a built-in optical drive are also on sale. While our reporters browsed, customers kept asking staff about these "old" products.

Average income in India is roughly where China's was ten years ago, and Apple is using iPhones and Macs from several years back as its low- and mid-range lineup to reach a market with little money to spend.

An inconspicuous Apple authorized reseller in India

Apple itself does not treat India as a core market either. Its Indian website still sells nothing online, and there are no official Apple retail stores. Indian consumers can buy Apple products only from Apple Shops run with large electronics chains, or from third-party authorized resellers.

Outdated devices have become very cheap: in Delhi an iPhone 4 costs less than 1,700 yuan. A clerk at one authorized reseller told QDaily that while the latest iPhone 6 sells best, outdated iPhones and iPads like these also sell well.

Mid- and low-end phones at this price are exactly what Chinese makers are relying on to win India. In China's fast-moving market, Chinese phones barely compete with Apple. In India, their 1,000-2,000 yuan phones will have to compete with older Apple products.

Weak Local Makers

India's phone market resembles China's of a decade ago in some ways. Local brands such as Micromax, Intex and Lava hold a sizable share, but they sell mainly in rural India, relying on low prices and established distribution to keep shipments high.

From left: Google Trends regional interest for iPhone, Xiaomi and Micromax; far right, a map of per capita income in India in recent years

As the image above shows, interest in local makers such as Micromax comes mainly from India's poorer regions. In the big cities, such as Delhi, Mumbai and Bangalore, shops do not push their phones. In the big cities it is the iPhone, and even the Chinese brands, that draw more interest.

Where Are the Chinese Brands?

Nearly all the Chinese makers have chosen to sell online, to avoid the cost of building retail networks from scratch. Xiaomi teamed up with Flipkart, India's largest e-commerce company; Meizu with Snapdeal, smaller but growing fast; and OnePlus with Amazon, a recent arrival in India.

Next they build fan communities and advertise on Indian tech sites, always stressing "high quality, low price." Then come limited releases and pressure to pre-order fast. OnePlus even brought its invitation-code system to India.

Almost every brand has had reports of online stock selling out in minutes. They may have sold only a few tens of thousands of phones in all, but the reports create the false impression that Chinese makers are about to take over the Indian market.

A Xiaomi poster and display counter

In physical retail, meaning the small street shops, Chinese brands are hard to find. Because they are absent offline, ordinary consumers outside tech circles still know little about them.

Of the seven or eight phone shops QDaily visited, we saw Gionee in only two and a Xiaomi display case in one. One reporter spotted a Huawei billboard outside a shop, but on going in to ask, found that the shop did not sell Huawei phones and the billboard was about to come down.

E-commerce in India lags far behind China's, and only a small share of consumers treat websites as their main place to buy a phone. For now, Chinese makers entering India online will struggle to unseat the international brands quickly, as they did in China.

Indian E-Commerce Is Rising

India has three main e-commerce sites: Flipkart, founded in 2007; Snapdeal, founded in 2010; and Amazon, which entered India in 2013. Flipkart has the largest share, 44%, followed by Snapdeal with 32% and Amazon with 15%.

Market shares of India's e-commerce sites

India's e-commerce market is still very small. eMarketer data for 2014 put India's e-commerce sales that year at just US$5.3 billion, against China's US$426.2 billion, nearly 80 times as much.

But small as it is, it is growing fast.

The platforms are also still burning cash to compete. In July 2014, Amazon, barely a year into India, committed another US$2 billion to the market. This past July, reports emerged that Amazon would invest a further US$5 billion.

In August 2015, Snapdeal closed a US$500 million funding round from investors including China's Alibaba, Japan's SoftBank and Taiwan's Foxconn. Shortly before that, Tiger Global and Steadview Capital put US$700 million into Flipkart.

A study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and PwC puts India's e-commerce market at US$17 billion in 2014. If it grows 35% a year for the next five years, it could pass US$100 billion after 2019.

For Chinese makers, that is good news.

Still a 3G World, but Data Is Cheaper Than in China

China's mobile market is split three ways among China Telecom, China Mobile and China Unicom. India's is badly fragmented: the two giants, Airtel and Vodafone, hold about 40% between them, and nine other carriers divide the rest.

In India's major cities, 2G and 3G are still the most common networks. Only a few carriers offer 4G, and only in a few cities. Delhi, the capital, got 4G only this June.

India launched 3G in 2008, the same year as China. But China had more than 400 million 3G users by early 2014 and moved rapidly to 4G in 2015. India had only about 70 million 3G users as of 2014, and 4G users are pitifully few.

Mobile data prices in China and India compared

The network is less developed than China's, but data is correspondingly much cheaper. An Airtel 2GB plan costs about 50 yuan (500 Indian rupees), and a 3GB plan about 30 yuan.

India's 3G may be called 3G, but in many places it does not even match the speed of China's 2G networks. You buy 2GB of data and cannot use it up because the connection is so slow, which is maddening.

Getting a SIM card, though, is a real headache. To activate one in Delhi you need a copy of your ID card or passport, photos, a reference from a local, and a local address. As the rules have tightened in recent years, it has become ever harder for Indians from other regions to get a SIM card, let alone foreign visitors.

The SIM card itself is free, but clerks usually charge a service fee of around 100 rupees. Plan prices are clearly set, yet if you just ask a clerk, you will usually be quoted an inflated figure. So look up the prices before you go, or ask the clerk for a printed price list.

And unlike the markets we know in the United States, Europe, Japan and China, Indian carriers do not dominate phone sales. They sell SIM cards and leave it at that, without using the chance to sell you a phone, unlike Chinese shops plastered with contract-phone signs. Street phone shops, for their part, rarely recommend carrier plans when they sell a phone.

Hardly Any Wi-Fi

In Delhi, do not count on free Wi-Fi on the street, in shops or in restaurants. After a walk around central Delhi, I found only Starbucks offering it.

A free Wi-Fi sign at a Starbucks door, a rare sight in India

Apart from Starbucks, the only Wi-Fi I could connect to was at the airport and in upscale hotels, and these usually gave just 30 minutes free. Interestingly, all of it was supplied by Tata Docomo, a mobile carrier jointly owned by India's Tata Group and the Japanese carrier Docomo.

Free Wi-Fi is almost nowhere, and even password-protected networks are scarce. Open your phone in central Delhi and you will usually find only three or four locked networks. In the center of a Chinese tier-one city, you will find at least a dozen.

That few businesses offer free Wi-Fi suggests that few people use Wi-Fi, and that smartphones have not yet spread widely. This is exactly the opportunity Chinese phone makers see.

India Has the Most Room for Smartphone Growth

In May, IDC reported that China's smartphone shipments had fallen year on year for the first time in six years. China's smartphone market is clearly close to saturation. Smartphone penetration in China is said to have reached 90%. The era of smartphones replacing feature phones is over; from now on, the competition is smartphones replacing smartphones.

In India, smartphones are taking share from feature phones

In India, the shift from feature phones to smartphones has only just begun. According to IDC, smartphone penetration in India was only 32% as of the third quarter of 2014. Given India's huge population, India will be the biggest smartphone market of the next five to ten years.

But Cheap Hardware Plus Software Profits Is Hard to Copy

For all the market's potential, the road into India is not easy for Chinese phone makers. The model Xiaomi popularized in recent years, selling hardware cheaply and making money from software, will be hard to repeat in India.

For one thing, Indian consumers are extremely price-sensitive. That is the main reason good, cheap Chinese phones have quickly won some of the market. But Indian consumers are even less willing to pay for software than Chinese consumers, who were already reluctant.

A sign outside Croma, a large electronics chain. Free gifts with purchase (Buy & Get) are its favorite sales tactic

Indian users believe that once they have bought a phone, they should not have to pay for the software on it. It is like the Chinese market used to be, where the only way to get users to pay was to hook them on games.

For another, India, like any other normal market in the world, uses global internet services such as Google, Facebook and Twitter. Android phones all come with the full suite of Google services, so Indian users download Android apps from Google Play. Google also controls the distribution of software and games.

A paid phone setup service at a Croma store, which costs a surprising 60 to 80 yuan

Customized operating systems, their own app stores, and steering users to spend inside apps and games are key ways that companies like Xiaomi make money. But to suit the Indian market, the phones that Xiaomi, OnePlus and others sell in India all come with Google's official Play Store preinstalled, and none of the money spent there goes to the Chinese makers.

Chinese makers that sell hardware near cost and cannot earn extra from software will face a harder fight than they do at home.

On top of this, the Indian government recently raised the excise duty on imported electronic devices from 6% to 12.5%. For the next couple of years, Chinese phone makers will probably make little money in India and will mostly be building their brands.

Over the past few months, one Chinese maker after another has announced plans to make phones in India, mainly to avoid the high tax on imported electronics. But unlike in China, where you can simply hire a contract manufacturer like Foxconn, India lacks a complete electronics industry, and Foxconn has only just announced plans to build a factory there.

Still, the Chinese makers have come, for the hundreds of millions of people about to use a smartphone for the first time.