About this Video

• Video Title: The Business of Phones: Ind Vs China, Cost, Profit & Strategy | Ai+ Smartphone | FO374 Raj Shamani
• Channel: Raj Shamani
• Speakers: Raj Shamani, Madhav Sheth (CEO of AI Plus Smartphone and former CEO of Realme)
• Duration: 01:31:50

Introduction

This video is an interview with Madhav Sheth, CEO of AI Plus Smartphone and former CEO of Realme, discussing the Indian and Chinese smartphone markets. The conversation covers the history of the Chinese smartphone revolution, the challenges faced by Indian brands, Chinese strategies in India, opportunities for Indian entrepreneurs, and Madhav's experiences with Realme and his new venture, AI Plus. A significant portion focuses on data security concerns and the development of an Indian-made operating system.

Key Takeaways

1. China's Smartphone Dominance: China's dominance in the global smartphone market stems from a multi-decade strategy involving government investment in R&D, technology transfer, and initially low labor costs. This created a robust ecosystem of component manufacturers and skilled labor.

2. Challenges for Indian Brands: Indian smartphone brands previously failed due to a lack of investment in deep technology R&D, relying instead on white-labeling and lacking the scale to compete with Chinese giants.

3. Opportunities in India: India presents a massive market opportunity, similar to China's growth phase in the past. The potential for growth in exports is significant. However, a lack of strong Indian brands remains a challenge.

4. AI Plus Strategy: Madhav Sheth's new venture, AI Plus, aims to disrupt the market by offering high-specification smartphones at affordable prices (under ₹5000), emphasizing an Indian-made operating system and increased data transparency for the user.

5. Data Security Concerns: A key focus is addressing data security issues. The video highlights how user data, including biometrics, is often collected and sold without explicit consent, emphasizing the need for greater transparency and control over personal information.

According to Madhav Sheth in the video, the four major components in a phone (representing 70-75% of the total cost) are:

• Chipset: Approximately 25% of the cost.
• Memory: Approximately 12-15%.
• Display: Approximately 12-15%.
• Camera Module: Approximately 10-15%.

The remaining 20-25% covers smaller components, with the phone body itself accounting for 3-5%.

The video does not provide the exact selling prices of ₹100 phones across different brands. However, it states that a phone with a ₹100 manufacturing cost might sell for ₹170-₹180 in the offline market. Higher-end brands like Apple and Samsung would significantly increase the selling price above the manufacturing cost, driven by brand value and consumer willingness to pay, while budget-conscious brands would likely have a smaller markup. The video indicates that the difference between the manufacturing cost and the selling price constitutes the profit margin for the brand.

Madhav Sheth's professor's quote boils down to this: Profit comes from understanding how much people are willing to pay for something versus how much it actually costs to make.

Real-world example:

Imagine you make handmade candles. Each candle costs you ₹50 in materials and time.

• Scenario 1 (Low Profit): You sell them for ₹60. Your profit is only ₹10 per candle. This is because you haven't considered how much people might actually be willing to pay.

• Scenario 2 (Higher Profit): You do some market research and find people would happily pay ₹150 for a uniquely designed, beautifully scented candle, especially if it's presented nicely. Even though your cost remains ₹50, your profit per candle increases to ₹100.

The difference between ₹60 (what you initially charged) and ₹150 (what the market will bear) is the key. The professor is saying that finding that sweet spot—the price people will pay based on the value they perceive—is the essence of a good business strategy. It's less about clever tricks and more about understanding your customer and what they're willing to spend.

According to Madhav Sheth, China captured the global smartphone market through a multi-pronged, long-term strategy. This involved:

1. Government-led investment in R&D and deep technology: The Chinese government heavily invested in research and development centers, often partnering with local companies through joint ventures. This fostered the growth of expertise and innovation in the technology sector.

2. Technology transfer: China initially attracted manufacturing by offering low labor costs and eventually leveraged this position to acquire technological know-how from companies like those in Japan, which shifted manufacturing to China to reduce expenses. This allowed China to learn and eventually develop its own technology.

3. Scale and negotiation power: China's massive scale in manufacturing gave its companies incredible negotiation power with vendors. This resulted in lower costs for raw materials and components. They also incentivized factories to establish themselves in China.

4. Sweatshop origins (initially): While acknowledging ethical concerns, Sheth notes that in the early stages, the lack of strict labor laws in China contributed to lower production costs, allowing Chinese manufacturers to offer significantly cheaper products than competitors. Over time, however, labor laws were implemented, and China continued to remain competitive through scale and R&D investment.

In essence, China's success wasn't accidental; it was a planned and executed strategy over several decades combining government support, strategic partnerships, and efficient manufacturing practices.

Madhav Sheth doesn't explicitly detail a comprehensive Chinese marketing strategy, but he highlights key aspects of their approach, particularly focusing on Realme's experience and contrasting it with the strategies of established Chinese brands:

• Massive Offline Investment: He describes how established Chinese brands like Vivo invested enormous sums (he mentions figures in the billions of rupees) in offline marketing. This included extensive billboard campaigns, even in unexpected places like petrol stations and public restrooms, along with significant investment in retail staff incentives and promotions. This saturation branding created widespread visibility.

• Zero-Margin Strategy (Initially): Realme, in its early stages, employed a strategy where they took almost zero profit margins on the manufacturing and sales of the phones themselves. They funneled those potential profits directly into marketing and branding to gain market share rapidly.

• Contrast with Realme's Online Focus: While the established Chinese brands heavily focused on offline channels, Madhav Sheth points out that Realme’s initial success was built on focusing on online sales and partnerships with major online marketplaces like Flipkart. This allowed them to reach a different segment of customers with a more cost-effective approach.

Sheth emphasizes that these established Chinese brands' marketing was aggressive, highly visible, and extensive, focused on rapidly building brand awareness and dominating market share, even at the cost of initial profitability. This contrasts with Realme's initial zero-profit strategy combined with an online-centric approach.

Madhav Sheth describes a complex relationship between the Indian government and Chinese smartphone makers, marked by initial openness and subsequent increased scrutiny:

Initial Openness (2014): The Indian government, under Prime Minister Modi, initially welcomed Chinese companies to establish manufacturing in India, offering incentives like land subsidies and tax benefits. The goal was to boost domestic electronics manufacturing and create jobs. Sheth notes this was a time of significant openness, even allowing 100% foreign ownership.

Subsequent Scrutiny (2018 onwards): However, this initial welcoming stance shifted as the government began to notice that the benefits weren't fully accruing to India. The government questioned the lack of significant tax revenue and the lack of technology transfer, leading to increased scrutiny of accounting practices and transfer pricing. The government's approach wasn't necessarily anti-Chinese, but it focused on ensuring compliance with regulations and maximizing benefits for India.

Government as a Catalyst: Sheth highlights that the government acted as a catalyst, pushing for technology transfer and compliance. While the government wasn't directly forcing technology transfer, the increased scrutiny and regulatory pressure incentivized Chinese companies to consider it. Sheth believes that the government's actions, though potentially seen as interference by some, were ultimately beneficial for India’s long-term development in the electronics sector.