Capturing smartphone value chain

M Rokonuzzaman | Published: July 27, 2019 21:03:44 | Updated: August 01, 2019 21:08:14

Mobile handset appears to be the single largest imported industrial product for consumers in all developing countries. In Bangladesh, traders imported 33.2 million mobile handsets in 2017, including 8.2 million smartphones. According to industry association, Bangladesh had to spend close to $600 million to import these devices.

Developing countries should take advantage of this in expanding the domestic industrial economy, although it is true that labour based assembling of imported components in these countries offers not more than 3 per cent value addition opportunity. Component manufacturing does not help due to low scale, scope and externality effects. In the given situation, where should the focus be on capturing value in this high volume value chain is a serious strategic issue.

Technology, business innovations, trade liberalisation, availability of human capital, and falling transportation costs have led to the reorganisation of global value chains (GVCs) in a variety of industries. And Mobile handset is no exception. Key elements of this reorganisation include the unbundling of value chain activities - intellectual asset development, production process, and the geographical dispersion of different production stages as determined by markets, wage costs, and technological capability. Although the globalisation force started in 1960 to take advantage of low-cost labour from developing as well as the least developed countries, in case of most industrial products, the labour content has been sharply falling to a very negligible level. According to a recent publication of the World Intellectual Property Organisation (WIPO), the assembling cost of mobile handsets is on an average 2 per cent of the cost of production. On the other hand, there has been a growing role of ideas or intellectual assets in extracting more value from objects (in the language Paul M. Romer's theory of endogenous technological change and growth) or conventional factors like raw materials, energy, and labour.

Among almost 1800 components, the most expensive single input - up to 20 per cent of the total - is the display or the touchscreen module, which must be compact and of high-resolution. The cost of baseband processors ranges from 16 per cent to 20 per cent. Memory and storage are also a significant expense area, accounting for about 10-15 per cent of the cost. The cost of the enclosures is around 8 per cent. The camera module, the battery, printed circuit boards, and sensors eat up most of the remaining cost-leaving only 2 per cent cost for assembling. Components like display, processor, sensor, camera, battery, and memory comprising almost 70 per cent cost are highly intellectual property (IP)--intensive, and they require very little labour to produce. Moreover, in the absence of high scale, the per-unit cost of low volume production will be enormously high. To take advantage of IP and scale, smartphone makers like Apple and Samsung do not manufacture most of these components. Apple does not produce even a single one of them. Acquiring the capability to penetrate in the component segments requires accumulation of IP and high capital investment. For example, Sony, Japan Display, Largen and many others have strong portfolio and large capital investments to be competent component suppliers. Often it takes several billion dollars to set up a component manufacturing plant. Moreover, billions of components need to be sold to recover the investment. As reported by Nikkei in 2018, Sony is pouring $5.3 billion in expanding image sensor production. To take advantage of scale, scope, and IP, even Apple sources manufacturing service of some key components from rival Samsung. 

To capture value in the huge domestic market, some developing countries like Bangladesh and India targeted labour-based assembling of imported components. They are also expanding to component manufacturing. But, unfortunately, such strategy is adding very little value, and most importantly, due to low scale advantage, particularly in smaller markets like Bangladesh, the cost of component manufacturing runs the risk of shooting up due to local manufacturing. So far the strategy has been to offer tax differential to make locally assembled mobile handsets competitive. For example in Bangladesh, currently there is 57 per cent tax on smartphone import and 32 per cent on basic and feature phones. The tax for locally assembled and manufactured handsets is 18 per cent and 13 per cent respectively. It appears that such a tax differential policy is creating success. Within just a couple of years, six local assemblers have popped up in the country meeting more than 40 per cent domestic handset demand, and it will soon reach 55 per cent.  In addition to homegrown brands, major foreign companies like Samsung and Vivo are also setting up assembling plants in Bangladesh. The question is: how much value is added locally and how much of it is captured to offer better quality products at a lower cost to consumers?

So far, local brands are not pursuing IP based value addition. As a result, local patent offices,  neither in Bangladesh nor in India,  are showing any spike. On the other hand, global makers are ramping up patent filing, even in India. But such IP is not being produced in developing countries. Due to IP, scale, scope and externality advantage, China-based smartphone makers are basically cornering homegrown brands in developing countries. For example, India's homegrown brands' market share has come down from 54 per cent in 2014 to 10 per cent in 2018. In 2014, local brands like Micromax, Lava, and Intex once captured nearly 54 per cent of the market share of India. The same brands had less than 10 per cent market share by the end of 2018.  Today, the top player in India is Xiaomi, accounting for 29.7 per cent of all smartphone shipments (IDC data, reported in the media). According to data from IDC, four of the top five smartphone brands in India are from China-Xiaomi, Vivo, Oppo, and Transsion hold the 1st, 3rd, 4th and 5th positions respectively. Samsung which ousted Nokia from the Indian market remains at number two. Such a trend indicates that foreign brands will capture the domestic market in the guise of import substitute producers, adding virtually no or negligible value through labour. Such reality raises the question: where should the focus be on adding and capturing value in the global smartphone value chain?    

High contrast in patent filing between home-grown brands and foreign ones raises a key question--is IP base helping Chinese companies to offer better products at comparatively less price than what homegrown brand can offer? In the production cost of smartphones, 5 per cent to 7 per cent value is in IP royalty. And this number will likely go up in 5G smartphones, set to produce $20 billion in royalty revenue annually by 2025. It may be wise to target this segment of the value chain. By using tax differential and other policy measures, developing countries should encourage both foreign and local brands to focus on setting up local research laboratories and creating IP for earning royalty from global value chain. It's time to change the focus from labour to the capacity of a growing number of graduates to harness ideas for succeeding in building an industrial economy. Such a change will also produce high-end productive knowledge, fuelling the technology economy as a whole-crucial to driving growth.

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. zaman.rokon.bd@gmail.com


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