Translated material
Smartphones without B
The head of the notorious PR agency Marina Rozhkova on the fate of cheap electronics brands in Russia
Author: Marina Rozhkova
Rising dollar and euro exchange rates, rapidly rising prices for electronics and a shortage of goods on store shelves - this is what Russians think about before the New Year, when the largest purchases of televisions, smartphones and other electronic equipment occur.
It would seem that after iPhones began to cost from 54 thousand rubles, and flagships on Android also raised prices beyond what is currently prohibitive, the finest hour of the so-called B-brands - cheap Chinese smartphones and tablets from unknown manufacturers - should finally come. The head of the notorious PR agency Marina Rozhkova explains why in 2015 this category of gadgets may not survive at all, accompanying market analytics with illustrations in the agency’s corporate style.
Marina Rozhkova In recent days, pictures of the following type have been circulating on the Internet: “Like, everyone is sweeping iPhones and other Samsung devices off the shelves! But before, during a crisis, everyone bought buckwheat and sugar... They brought the country!”
After Black Tuesday , people really rushed to buy expensive electronics en masse, including iPhones and iPads, even though Apple raised prices by 30 percent. The reasons for the sudden unbridled growth in demand for expensive gadgets should be sought not in the huge increase in the standard of living of the population (after all, there is enough money to buy iPhones!), but in the views on the life of a modern resident of our country.
Before the final victory of the crisis, people want not only to eat and provide themselves with food for the next difficult months, but to “gift” themselves the most fashionable image toy with their last money. Right now, at the end of 2014. Because in 2015 it will most likely not be possible to do this. Money in rubles will simply depreciate, and the price tag for electronics will fly into the skies.
The focus of consumers on buying the most expensive electronics during the “storming” of stores after a dramatic jump in the dollar exchange rate seriously hit second-tier brands, the so-called B-brands (bi-brands) - relatively small Russian companies offering smartphones, tablets and similar equipment.
If the dollar jumps had not happened, the consumer would have bought himself some Russian-Chinese smartphone for 10 thousand rubles. And by the end of next year, you see, you could have saved up for a brand new iPhone for 40. But now the consumer is trying to “breathe before dying” and spend the maximum of the remaining money (which is still rapidly depreciating) on the coolest gadget possible - namely an iPhone or a top-end Samsung. After all, if something happens, a Chinese phone will be more difficult to sell, and an expensive mobile phone can be exchanged for money even in the midst of a crisis.
In this article I will try to speculate about what awaits the so-called B-brands in the future. As proof of the importance of these dozens of brands, let me remind you that in 2013, according to GfK , they controlled over 18 percent of the Russian smartphone market (we add up the shares of “Others”, Highscreen, Explay, Fly). There is a strong suspicion that a year later, by the third quarter of 2014, the beginning of the collapse of the dollar, their share increased even more.
To understand the complexity of the current situation, it is worth explaining how B-brands produce their products. Such brands - usually Russian - order batches of smartphones and tablets from China, paying only a small part of the cost of the batch, about 10 percent. Of course, in dollars. Then, within a month or two, this batch is produced in Asian factories.
Next, Russian B-brands “take away” the shipment, paying the remaining 90 percent of its cost - of course, also in dollars. Then the product travels for a month to the warehouses of retail chains, and then within another month (and sometimes more) it ends up on the shelf.
From this moment on, networks begin to sell out devices, and the manufacturer (B-brand) is not paid anything immediately. Money for the shipped product is “issued” not at the stages “the product arrived at the network’s warehouse,” “the product is placed on the shelf,” or “the product is sold off the shelf,” but a long time after its physical appearance on the shelf.
Just a couple of years ago, the standard deferment of payments for large retail chains was 30-40 days after shipment of goods, in 2013 it was already 60 days. Now some large chains are declaring their desire to “credit” goods for 90 days or more. Some networks, for example, even require 120 days for deliveries in 2015 - that is, four months from the moment the goods are shipped.
Those smartphones and tablets of B-brands that are on the shelves this December, when the dollar costs 60-70 rubles, were purchased by B-brands in Asian factories back in the summer-autumn, when the dollar was at the level of 35-40 rubles. Meanwhile, prices for devices delivered and on shelves today remain at the same pre-crisis level. Retail chains do not consider it possible to raise prices now, in December, because if prices are raised in proportion to the growth of the dollar (that is, twice), then the demand for smartphones and tablets of B-brands will rush to zero. Buyers will not consider it necessary to take for 10 thousand rubles what was offered for 5 a month ago.
At the same time, if you sell a smartphone for the same constant 5 thousand rubles, it turns out that B-brands are simply operating at a loss. Chains fix price tags in rubles, and new goods from Asian factories must be purchased for rapidly growing dollars. Thus, all the profits of manufacturing suppliers were simply “eaten up” by the rise in the exchange rate of this very dollar, driving the entire business into serious disadvantages.
The networks will pay their suppliers in another two, three or four months and in rubles - but it’s not entirely clear what the dollar exchange rate will be at that time. Even if we imagine that the situation will stabilize and there will be no further growth in the dollar exchange rate, the profits of B-brands have actually turned to dust.
Therefore, today many B-brands have actually stopped shipments online and simply sit on goods purchased from the Chinese, not wanting to supply already produced gadgets to retail chains. And the latter are still trading those balances that they managed to obtain before the start of the “galloping” decline in the exchange rate.
In the current situation, it is easier for B-brands to pay a penalty to networks for non-delivery of goods according to previously concluded agreements than to deliver the goods and receive even greater losses. Moreover, some B-brands are already refusing goods produced in Asian factories: yes, they also pay a penalty to the factories, and lose those same initial deposits in the amount of 10 percent of the cost of the batch. But this is still more profitable than paying the remaining 90 percent, delivering the goods to Russia and not knowing what to do with it: give it to employees instead of wages or sell it at a loss.
A significant (almost doubling) increase in the key rate by the Central Bank of the Russian Federation also deals a strong blow to the business of B-brands. This measure by the regulator led to banks generally minimizing or, in most cases, even suspending lending to almost all participants in the “near-electronic” market. And those loans that are still issued to B-brands come at terrible “draconian” rates, which drive the electronics manufacturing business into even greater minuses.
All current business models of both B-brands and retail chains were “tailored” to a certain stability in the economy, stability in cooperation with banks and, sorry for the tautology, stability of the dollar exchange rate, which did not change radically throughout the year. But once everything changed, suddenly and significantly, the legs of B-brands and retailers noticeably gave way.
The situation is further aggravated by the fact that smartphones and tablets are perishable goods, and this means that B-brands will not be able to sit on warehouse stocks for a long time without delivering them anywhere. A device that is modern today, in six months will already look like a useless old thing - especially when we are talking about a budget device that has the characteristics of last year’s flagships of world brands. And it will be even more difficult to sell it, especially considering that large global players (that is, A-brands) may not yet raise prices for their products, and in the foreseeable future, prices for smartphones of A-brands and B-brands with comparable characteristics may become equal .
How so? It's simple: firstly, if a major player - say, Lenovo or Samsung - has problems in one specific Russian market, then they can work for six months at a loss, subsidizing this market at the expense of dozens of other countries and without sharply raising prices. As “moral compensation” they will increase their market share, for which high management from Korea, Japan, the USA or China will also “slap” new stars on their shoulder straps for Russian managers. Moreover, some companies - for example, Microsoft - hedged the dollar, and the exchange rate for them is actually still equal to 35 rubles. This creates additional negative pressure on B-brands, making their existence even more difficult.
Considering the current situation in Russia, we should expect a noticeable increase in the lifespan of the device for the average user. That is, a certain mechanic Vasya from Rostov - a typical consumer of B-brand products - will use his smartphone not for a year, as before, but for more than two years. This, as you already understand, will once again “hit home” specifically for B-brands. And if only this would be their last problem!
about, can also be added to the collection of horrors has already spoken The situation with marriage, which the ex-CEO of Prestigio Yuri Antoshkin . In short: in conditions of economic stability and a rapidly growing market, not all B-brands paid attention to the quality of their products. At the same time, many of them began to give not even the classic one-year warranty on devices, but two years. Yes, this was a serious marketing advantage in those days when B-brands were profitable and could afford to repair faulty devices or even replace them with new ones.
Now the situation is completely different: no one cares about fat, and devices have failed and will continue to fail. And just now the second year of warranty has begun for hundreds of thousands (if not millions!) of those very first devices of local brands, provided with a two-year warranty. This guarantees additional service costs for B-brands, which are already operating at a loss today. Moreover, it is possible that during the crisis, a wave of so-called “consumer terrorism” will rise, when people, dreaming of a new device, will deliberately disable devices purchased a year and a half ago in order to get money or a new one from the brand/retail chain. device of a more modern model.
B-brands could see a resurgence in 2015 if they learn to sell devices online. For now they are slowly dying
All this leads to one thing: in 2015 it will definitely not be easy for B-brands, nor for retail chains. But there may be several options for the development of the situation. Firstly, individual brands of class “B” may begin to “leak” goods held in warehouses after the new year - in order to recoup at least some of the money invested, pay off employees and/or creditors and close the shop. Others - those who are stronger and have accumulated at least some "fat" - may try to sharply increase prices, putting pressure on retail chains. Of course, in the end they may not succeed, and they will take the first path and also close the shop. Although, of course, brands of the second type have a much better chance of survival. B-brands of the third type do not yet exist.
But everything indicates that they will appear by mid-2015. These will be brands that do not have rapidly “fading” obligations or debts either to banks, or to retail chains, or to customers who bought a tablet with an extended two-year warranty 1.5 years ago. Such brands will start working “from scratch” in the new realities of the increased dollar exchange rate. Their business model can be focused, for example, on direct sales via the Internet, bypassing retail chains, which already require up to a 50 percent markup on the goods supplied (in previous years, the retail share in the price of each gadget was 30-40 percent).
New B-brands will be able to offer devices that are competitive in price in the new market, and even with characteristics that are much above average. The last point is especially important, because in conditions of declining income levels and rising prices for most goods, people will be much more careful in choosing the electronics they purchase, meticulously studying the technical characteristics and capabilities of the devices.
The situation in the market for components for smartphones/tablets is such that new B-brands already have every opportunity to offer consumers solutions that are quite competitive with respect to first-tier brands. Competitive in functionality and characteristics, but at the same time 20-30-50 percent cheaper. For example, the processor manufacturer MediaTek, beloved by B-brands, now offers the MT6595 chipset with eight cores for smartphones and it is a quarter cheaper than Qualcomm solutions. Despite the fact that in terms of performance and “tricks” it is not only not inferior, but even superior to them. Suffice it to say that Meizu MX4 on MT6595 has become the most powerful smartphone in the world. Another example is the latest octa-core tablet chipset MT8392. It allows you to run games on relatively inexpensive budget tablets, getting the same top-level graphics as on devices with flagship Qualcomm solutions (with exorbitant price tags). It may very well happen that many products of B-brands focused on online sales will receive just such powerful hardware of the new generation.
Well, as for the sales model bypassing large federal retail, its effectiveness has already been proven, for example, by the Just5 brand. At the end of 2013, he offered the Spacer smartphone for 4,950 rubles, while analogues from other B-brands associated with large retail chains, due to the latter’s “appetites,” went for no less than 7-9 thousand rubles. As a result, Just5 managed to successfully break into a rather competitive market with small budgets and a single model, loudly declaring itself.
So let's wait to see what happens in 2015. It may very well be that people will start shopping for smartphones not in the showrooms of popular retail chains, but in the websites of “smartphone” and “tablet” brands with hastily attached online stores.
Read an interview with Marina Rozhkova and her partner Mikhail Fadeev about how their PR agency works.
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