Sony Ericsson in India: small step or giant leap?: Local manufacturing will depend on two EMS partners

FOR THOSE WHO WATCH Sony Ericsson Mobile Communications L.P., sifting for signs that the Japanese-Swedish partnership will accelerate efforts to gain market share, last week’s news on the vendor’s plans in India was tantalizing.
The Sony Ericsson-generated news release provided few specifics on the deal and used bold, suggestive language about the company’s strategic plans, but the company could not provide clarification by press time on questions it raised.
First, the news: Sony Ericsson has initiated a partnership with two outsource manufacturers, Flextronics and Foxconn Electronics, to make one entry- and one mid-tier handset in Chennai, India, with the first phones appearing this summer and a goal of 10 million units in two years. The entry-tier phone will sport a color screen and the mid-tier device will be music-enabled, with local content and customized keypads.
The press release went further: “As part of a strategic and longer-term growth plan, (Sony Ericsson) will increase its presence in important growth markets around the world, for greater manufacturing flexibility and competitiveness. The decision to manufacture in India is part of this strategic decision.”
Miles Flint, CEO of Sony Ericsson, said in the release that “local manufacturing in India will result in improved cost efficiencies and enable us to offer attractive products at even more competitive price points.” And, he added, his company’s “overall aim” was to become “a top three global player,” reiterating recent public statements that Sony Ericsson is gunning for Samsung Electronics Co. Ltd.’s current market-share-based position behind Nokia Corp. and Motorola Inc.
The Japanese-Swedish vendor shipped nearly 75 million handsets last year; upping that total by 10 million units would represent only an incremental step toward Samsung’s 2006 total of 118 million units. But, of course, how the two competitors will fare in volume shipments over the next two years is anyone’s guess. In terms of revenue, Sony Ericsson surpassed Samsung in the fourth quarter of last year.
Still, the tried-and-true business model of using outsourced manufacturing to quickly ramp up production volume-already in use by Sony Ericsson and leading rivals-offers a glimpse at how Sony Ericsson might address the Samsung challenge.
According to one analyst, however, too much chest-thumping might send the wrong signal to Sony’s and Ericsson’s investors about their precocious partnership, which has achieved envious average selling prices and high margins-not to mention record growth in revenue and profits-with music- and camera-centric mobile handsets. Last year SEMC surpassed LG Electronics Co. Ltd. in volume shipments to secure the No. 4 global ranking.
“I’m not convinced that this announcement has any real strategic implications,” said Chris Ambrosio, analyst at Strategy Analytics. “I’ve heard that the Indian authorities have been considering requiring in-country manufacturing from vendors in order to sell handsets there.”
When Sony Ericsson says it is targeting the No. 3 position, Ambrosio said, it “clouds perceptions of SEMC’s targets for profitability.”
“They have the right to say it,” Ambrosio added. “They’ve had a few great quarters. If they can be aggressive, now’s the time.”
Selling low-cost handsets in emerging markets is a sure path to expanding volume, the analyst said. Sony Ericsson’s J-series has been profitable elsewhere in the entry-level tier, thus it may be expanding that effort to India, which could serve the company as a regional manufacturing hub to take the J series to nearby markets.
Globally, Ambrosio said, the Japanese-Swedish partnership needs to expand its portfolio across all product and price tiers and do so profitably.
“If India does that for them, that’s a step in the right direction,” Ambrosio said. “But it’s only one step.”
Establishing a manufacturing hub in India would likely cut labor costs, shipping costs and lower local tariffs, all of which add to profitability on entry-tier phones with slim margins, the analyst said. According to The Hindu, a daily newspaper in Chennai, Sony Ericsson now imports its phones for the Indian market from Malaysia.
“This move may help Sony Ericsson eke out a few percentage points of margins on its entry-tier phones,” Ambrosio said.
If one seeks to gain market share, however, competing in India means going up against Nokia, which claims 60 percent of the market, the analyst said. In Ambrosio’s view, it wouldn’t make sense to sacrifice profit to gain share in India. Sony Ericsson said its Indian market share last year was 9 percent, up from 3 percent in 2003.
Nokia’s fourth-quarter results demonstrate, however, that healthy margins on entry-tier handsets in emerging markets are possible. Sony Ericsson already claims third-place among India’s GSM vendors as a result of its work since 2002 to develop distribution partners and build its brand image. According to media reports, India’s handset market appears to be increasingly driven by middle-class subscribers in urban areas, which may favor Sony Ericsson’s portfolio in the mid- to high-tier.
Still, Sony Ericsson is just announcing an effort where the competition is well-established. Nokia, Motorola, Samsung and LG already manufacture handsets in India.
Flextronics is based in Singapore. Foxconn is the trade name for Taiwan-based Hon Hai Precision Industry Co. Both are electronic manufacturing services with global operations and customers that include some of the leading handset OEMs. According to The Hindu, Flextronics already has a factory at Sriperumbudur, India, while Foxconn is constructing its facility. Chennai is in the province of Tamil Nadu, at the southeastern tip of India. Sriperumbudur lies just southwest of Chennai.