Monday, February 26, 2024

For Made-in-India Pixel phones to succeed, Google must nail the pricing

Google has announced that it would manufacture its Pixel line of smartphones in India. This is good news from several points of view; but, vitally, from the point of view of faster localization of the value added than in the case of most other phone manufacturers. –

Google’s current share of the smartphone market in India is low: 0.2% in all of the last five years, according to one estimate, and, in any case, definitely smaller than 1%. So, if Google were to make phones only to sell inside India, that would be no big deal, either for India or for Google. But Google says they would make phones in India for export, as well. That would make sense. Without volumes and scale, they would not be able to bring down costs and there are very few Indians who would consider a ‘made in India’ tag a booster of a product’s appeal. Most Indians are conditioned to believe local production to be somewhat inferior to foreign manufacture, applying an automatic discount for employee diligence, quality checks and accountability for quality. Therefore, a phone made in India would sell more readily only if the price of the India-made phone were lower than that of the imported one.

In theory, an import duty of 20% on smartphones and zero duty on many components should give local manufacture an edge, when it comes to selling in the local market. However, the cost of local manufacture depends on the scale of local production. If the production batches are tiny, the fixed overheads would be concentrated on a relatively small number of items produced, increasing the unit cost, and the quality and dedication of the contract manufacturers employed would also be adverse, when volumes are low.

Therefore, for local manufacture to be viable, the scale of operations would have to be big. And that would, for Google, with its extremely low market share at the moment, mean exporting a large part of the output from production volumes tailored to reap economies of scale. This, in turn, would incentivize additional degrees of localization of the phone’s value chain, leading to greater investment in physical and human capacity, to economise on cost.

One thing that sets the latest Google phones apart from most other phones is the extensive use of artificial intelligence and other bits of software, to give them an edge, compared to the competition. Sure, Google has its own, custom chips, just as Apple has, but the Qualcomm chips that most Android competitors rely on are, more or less, as competent as the proprietary Tensor chips that Google has designed for its phones, for most functions, except when it comes to machine learning and other bits of artificial intelligence. Google phones are powered by chips that are custom-built to make use of artificial intelligence to enhance camera performance and speech recognition/translation.

In other words, a major part of the Pixel phone’s value would be derived from its software capability. Software is easier to localize and develop, when the country concerned is a software powerhouse like India. While Google already has local Research and Development units, local production of its phones would give a greater impetus to invest in software development in the country. The net result would be faster progress in securing a high share of value addition contained in the final phone output, in Google’s case, as compared to phones that rely on their hardware to distinguish themselves from the competition. India is still a straggler when it comes to producing the miniaturized bits of hardware that go into phones.

Local phone production would boost not just investment in backward integration in software and further software development. Local production is meant to service greater local sales. The attempt to corner a higher share of the local market can only be achieved with a great deal of investment in marketing. That means a boost for the advertising industry, the media, and events that thrive on sponsorship/endorsement.

Google, when it starts producing phones in India, would add to the lure of India’s phone component ecosystem, inviting fresh investment in local manufacture of hardware as well. That would further boost manufacturing in the economy, and persuade young people to make education investment choices that feed local manufacture.

Google is a giant of the emerging artificial intelligence sector as well. Investment in AI tools for the phone would rub off on AI capability in general, and make many more Indians active players in this sector. That would be a welcome development in its own right, as well.

There is little reason to not greet the news of Google deciding to manufacture its Pixel phones in India with considerable enthusiasm.

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