iSight - 3i at 3GSM World Conference 2007
China’s Mobile Explosion
For the last four years, selling mobile phones in China has been a big, if not necessarily demanding, business. During the course of the next four years, demand for mobile handset sales will continue to rise dramatically, say market analysts, but the environment will become a great deal more challenging.
Certainly, since 2001, when China finally completed the 15 years of negotiations that preceded its entry into the World Trade Organisation, the Chinese handset market has been a good place to be. The economy of the world’s most populous country has grown annually by between 8% and 12%, fuelling demand for mobile phone services among a population with a voracious appetite for new technologies.
By the end of the third quarter of 2006, according to Business Monitor International (BMI), China’s mobile subscriber base was comfortably the biggest in the world at 443 million, and growing at a rate that will see it reach 800 million by 2010. However, this assumes that China’s handset supply chain can keep up with demand, and smoothly
deliver new devices at an average daily rate of 244,000.
Experts agree that if it is to do so, changes will be needed. Indeed, the mobile retail sector that will supply China’s next 400 million handsets will look very different from the one that supplied the first 400 million. According to China market watchers like Aloysius Choong, chief mobile device market analyst in IDC’s Singapore office, a radical transformation of China’s electronics retail sector in general, and the mobile phone retail market in particular, is already underway.
In the past, says Choong, large parts of China’s mobile handset supply chain have borne a much closer resemblance to traditional notions of oriental street markets than to the modern shopping mall. “A lot of handset sales outlets were Mom and Pop businesses operating from the corner of the street, or even from just a stool on the sidewalk,” he says. They were (and in thousands of cases still are) simple operations that worked because “selling ordinary mobile handsets is a simple business that anyone can do; you just sign up a customer, then move on to the next one,” said Choong.
Now, though, as both China’s retail and mobile communications sectors mature, the country’s mobile supply chain is about to undergo rapid, and extensive modernisation. This modernisation reflects the new complexity of the market, where there are now many different types of buyers with widely differing needs.
By the end of this year, BMI estimates that penetration levels of mobile subscriptions in China will reach 35% of the population. By the overall standards of more developed economies, this is hardly close to saturation point. However, so far, most of China’s mobile subscriber growth has been concentrated in the large and prosperous cities of eastern China – the so-called Tier 1 and Tier 2 metropolises of eastern China, such as Beijing, Shanghai and Hong Kong. In these cities, mobile penetration levels are now thought to be as high as 80%.
Whereas four years ago, the typical urban first time phone buyer was chiefly interested in acquiring a basic handset, phone buyers from China’s Tier 1 and Tier 2 cities are now very different. Today, “if you go out to a shopping mall in a city such as Shanghai,” says Sanjiv Ahuja, the CEO of mobile service giant Orange, “you will be struck by the ‘youngness’ of the people there. They are ambitious and determined, and they are keen to discover new things. They want the coolest devices, they expect the most innovative services, and they have very dynamic tastes.”
The importance of this more demanding and more sophisticated Chinese mobile consumer should not be underestimated. “Although, as much as 75% of the new growth in China’s handset market will come from rural areas,” says Paul Donovan, Vodafone’s CEO for Europe, “the Middle East and Asia Pacific Affiliates, these rural markets will require low-cost handsets with black and white screens and support only for basic services.”
Such sales will not support high-margins, which makes it all the more important that China’s handset suppliers compete for the business of urban buyers. Here, Donovan points out, margins are likely to be much higher. “The new generation of salaried professionals can’t all yet afford to buy cars or houses, but they are prepared to pay one to two months salary for their handset. The mobile phone has become a symbol of their success,” said Donovan.
Suppliers cannot and will not, of course, ignore the 60% of China’s population that still lives in rural areas or in smaller cities, even if these mobile users spend less. But for good commercial reasons, catering to the ‘dynamic tastes’ of China’s growing consumer class is now a top priority for both operators and handset manufacturers.
Meeting the demands of this increasingly sophisticated group will not only require suppliers to invest in the development of new products and services; they must also find new, more efficient and more sophisticated channels to market.
Nokia and Motorola (which in the third quarter of 2006 accounted for almost 57% of the handsets sold in China) are good examples. In 2006, both placed renewed strategic emphasis on the need to invest in better channels to market. In particular, says Benjamin Schmittzehe, chief executive of the China retail management strategy consultancy, Schmittzehe & Partners, “vendors like Nokia and Motorola want to reduce the cost and complexity of their channels by replacing multiple layers of regional and local distributors, wholesalers and retailers with a few large retail chains.”
Two years ago, this would have been almost impossible. Although China’s Ministry of Information Industry (MII) has carefully cultivated competitive marketplaces for communications infrastructure and services, it has taken a largely ‘laissez-faire’ approach to the country’s retail and distribution sectors.
According to Jason Yin, an investment associate with 3i in Shanghai, this attitude has contributed to the creation of China’s extraordinarily fragmented distribution network, which currently supports between 50,000 and 60,000 individual retail outlets selling handsets across the country. Even China’s two biggest handset retailers, the GoMe electrical retail chain (belonging to China’s richest man, Huang Guangyu), and the specialist mobile retailer, Digitone, account for only 8% and 4% of the country’s handset sales, respectively.
Given the increasing sophistication of China’s mobile products and services, and the obvious desire of the large handset manufacturers to find more efficient channels to market, “we think there is a clear opportunity for market consolidation,” says Yin. Consequently, in June last year, 3i’s Venture Capital fund contributed $22 million to a $40 million joint investment in Digitone with CDH.
Even before receiving 3i’s backing, the wisdom of Digitone’s decision to build a chain of 300 specialist retail handset outlets had been borne out by the company’s impressive progress. “The company’s fundamentals are very strong, and its growth driver is very clear,” says Yin. Now, with the backing of 3i and CDH behind it, Digitone has an opportunity to accelerate the expansion of its market footprint by opening new outlets of its own or acquiring smaller competitors.
Of course, Digitone, is not the only company to have recognised the need to build a retail chain more in line with the scale of China’s already large and fast-growing market. GoMe’s recent acquisition of China’s third largest electrical retail chain, YongLe, clearly demonstrates that it has market consolidation plans of its own.
Nevertheless, Yin remains confident that there is room for multiple companies to prosper. “China is a big market, and we see it [Digitone] as a very good platform for market consolidation going forward,” believes Yin.
He is not alone in this view. “Today,” says Orange’s CEO Sanjiv Ahuja, “the retail sector in China is in the midst of getting organised. It is still not as organised as North America or Europe, but it is starting to catch up. What 3i has done is to help it take another step along the way.”