India's cheap smartphone ban and the semiconductor crisis

India is apparently gearing up to ban low-cost smartphones worth Rs 12,000 and below from China, according to a Bloomberg report on Monday. The government has yet to announce details on this ban, which could have far-reaching implications for Indian smartphone users and the global smartphone market in India. Low cost smartphones dominate the smartphone market in India, and the key players in this industry are almost all Chinese.

Reporting by Counterpoint Research shows that aside from Samsung, all smartphone sales in India are dominated by Chinese brands like Xiaomi, Realme, Vivo, Oppo, and OnePlus.

Aside from destabilizing the industry with price increases, handing a windfall to firms like Samsung headquartered in places other than China, and making it potentially harder to buy an affordable smartphone in India, there could be another unexpected effect: some relief for the seemingly never ending global semiconductor crisis, which started during the COVID-19 pandemic and intensified in the wake of the Russian war on Ukraine.

Low-cost smartphones are a key use case for semiconductors, and globally so, and so a point of interest for the semiconductor industry, which has had to ration its limited supply across a range of industries. But evaluating the exact impact on the industry may not be quite so simple. Interestingly, most of the Chinese manufacturers too have manufacturing setups in India, although Samsung does have the largest such set up. 

However, in most cases, chips are purchased by manufacturers months before they are actually assembled into a product, shipped to the countries where they are sold, and ultimately purchased by the consumers who will use them. As such, semiconductors that were intended for Chinese smartphones sold in India for at least the next few months may have already been acquired for sale by manufacturers like BBK Electronics, Realme and Xiaomi.

Second, while smartphones are easy to imagine as a key source of semiconductor demand, they are not the largest source of demand for the industry. McKinsey estimated in April that the wireless communications industry accounts for 25% of the semiconductor market, behind automobiles and computing and data storage.

Even if 25% is still a sizable chunk, the Indian smartphone industry is not a proportional part of the global smartphone market. Not only are the phones sold here cheaper than usual (Apple is the top smartphone manufacturer worldwide, with Samsung following closely), there are fewer of them sold in India overall.

Smartphone shipments in Q1 2022 actually declined 1% to 38 million compared to the same period last year, according to Counterpoint. Apple alone shipped 59 million smartphones globally in the same period, the firm said in a separate report. Players other than Apple accounted for 82% of sales in that period. For Indian buyers, smartphones from domestic Indian manufacturers have simply not matched up vis a vis Chinese players, with a price gap of at least 30% on a like to like basis in most cases. That might signal a shrinkage of the market till the situation changes, because Indian manufacturers simply cannot reduce or match Chinese price points and features.

Analyst Kim Jang-yeol (김장열) of Sangsangin Investment & Securities told The Korea Economic Daily that the impact of the cheap smartphone ban in India would reduce costs for other manufacturers if competing firms don’t escalate their demand to the levels of Chinese manufacturers pre-ban. Kim was reserved on how much Samsung, which is the largest non-Chinese player in the market, would benefit, saying this would depend on how much the low-cost smartphone market grows from hereon.

So this ban may only ease things for a part of the semiconductor market in a few months’ time, and potentially not by much. In the meantime, though, market forces in India might fluctuate and increase prices due to scarcity of handsets, which in turn might lash back to manufacturers planning chip purchases based on these new increased prices. And if that sounds like it makes no sense, welcome to the global semiconductor crisis.

Of course, we can also expect the market to find its own way of finding ‘solutions’ to such an artificial scarcity for now. Besides outright smuggling as in the case of Gold for instance, inflating phone prices, and then offering those at a significant discount for instance, although how the GST authority treats such sales will be interesting to watch.