Technology

Qualcomm Rewires for India


One late-summer afternoon, Rahis Khan proudly displays a $40 Soly Elisom phone—not to be confused with a high-end Sony Ericsson. Khan, 25, works at a tiny electronics shop in the Palika Bazaar, a sprawling underground market in New Delhi. He carries real smartphones, too, but few customers want them. “They’re very expensive,” he explains. “Too expensive for this market.”

Qualcomm (QCM) Chief Executive Officer Paul Jacobs is trying to change that. The San Diego-based company is the top producer of processors for handsets running on Google’s (GOOG) Android operating system and aims to make smartphones more popular worldwide. With its large middle class and advanced telecom infrastructure, China has already become Qualcomm’s top market, accounting for 29 percent of revenue last year. In other emerging markets, however, the company is still trying to persuade merchants to push legit smartphones with Qualcomm chips rather than lower-end knockoffs. In large part, that’s because Qualcomm-powered devices can be expensive: An HTC phone unveiled in late August, for instance, offers glasses-free 3D-viewing and costs more than $700. “Prices need to come down for devices to get out into the mass market,” says Jacobs.

The potential is greatest in India, the world’s second-largest cell phone market after China, with 850 million users. Just 13 million of those use the faster 3G network that Qualcomm’s chips are best for. Most cellular operators have made 3G available only in the past year, thanks to licensing delays by India’s bureaucracy. And they’re hungry to speed up the transition, since 3G consumers use more data-intensive (and lucrative) services such as Web browsing, video streaming, and music downloading. “There is huge money available if you can get the consumers,” Himanshu Kapania, managing director of Idea Cellular, said at a Qualcomm-organized forum in New Delhi on Aug. 30.

Last month, Chinese handset makers Huawei and ZTE unveiled Android phones powered by Qualcomm chips for about $100. That’s not yet low enough for Indian operators, though. “The big threshold will happen at $50 to $60,” says Sanjay Kapoor, CEO for South Asia at Bharti Airtel. “At that price, then an explosion of the market can happen.”

To get there, Jacobs has made changes at Qualcomm. In the late 2000s the company lost a step to Taiwanese rival MediaTek, which made a splash in 2G phones by working closely with cheap, no-name producers in China that had little experience making handsets. MediaTek didn’t just sell them its chips; it taught its customers how to produce handsets. Jacobs says Qualcomm tried to keep its distance from what he calls this “swarm of ants” strategy, but MediaTek’s success made Qualcomm realize it had to adapt. Now the American company has started offering reference designs of its own to companies that work on 3G phones. “We learned you need to give the complete design, soup to nuts,” says Jacobs.

That new approach is helping companies such as Micromax, one of India’s leading local brands, take aim at the $100 smartphone barrier. Micromax once needed up to 12 months to come out with a phone, says Vikas Jain, business director and co-founder of the company. Now it needs only four, he says. Qualcomm’s expertise is also helping Micromax reduce its use of components from other companies, Jain adds, thus cutting by 30 percent its bill of materials for new devices. The company’s cheapest smartphone now costs $175, but Jain expects a $100 handset within six months. “Once we are able to reach these price points,” he says, “we are very sure about the mass adoption of smartphones in India.”

For most Indians right now, though, the smartphone “is not a device that you must have,” says Lennard Hoornik, president of South Asia for Taiwan-based smartphone maker HTC. The $100 challenge, he says, misses the point. For Indians to buy smartphones en masse, they need to have lots of apps in Hindi, Tamil, Bengali, and other Indian languages. “There aren’t enough local apps that make people feel, ‘I have to have this.’ ”

Some Qualcomm partners are helping to speed that process along. Huawei has 2,500 engineers in Bangalore focusing on hardware and software for the Indian market, and the company is running trials on smartphones that can display messages in local languages. To whet appetites, Huawei is giving out bandwidth: It’s working with local operator Aircel to offer students free 3G data plans for three months. “We are trying to get the price right so Indian youth can afford them,” says Anand Narang, marketing director in India for Huawei Devices. He says Huawei will offer a $60 smartphone—powered by a Qualcomm chip—“by the second half of next year.”

Meanwhile, Qualcomm is looking further ahead. Although 3G is only getting off the ground in India, the government last year auctioned off spectrum for the next generation of high-speed mobile service. To ensure operators go with the Qualcomm-backed standard, called Long Term Evolution, rather than the alternative WiMAX technology backed by Intel (INTC), Qualcomm spent $1 billion to buy spectrum. The plan is to sell it to operators and help them launch LTE networks. The move, which Jacobs calls “a surgical strike,” not only outflanked Intel, it also helped drive operators in other countries to the LTE camp, says Shiv Putcha, an India telecom analyst with London-based research firm Ovum. He points to moves by Clearwire (CLWR) in the U.S. and Yota in Russia to adopt LTE as signs that Jacobs’s strategy has paid off. “Qualcomm coming in and pushing LTE really shut the door” on Intel, he says. “All of these technologies are going to coexist,” says Aicha Evans, general manager of Intel’s Mobile Wireless Group. “The users don’t really care what is below the hood.”

For the next few years, though, the real action in India will be in 3G networks. Back in the Palika Bazaar, salesman Khan is waiting for a cheap smartphone that might interest some of his customers. A $40 made-in-China clone won’t provide the sort of online experience you can get from real smartphones, but there’s no beating the price. “For a common man,” says Khan, “I’m not sure there’s a better deal.”

The bottom line: To crack the world’s No. 2 mobile market, Qualcomm is collaborating more with Indian handset makers and buying 4G spectrum.

With Mehul Srivastava and Ian King
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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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