Demonetization Hits Indian Device Makers Hard

The Indian government's controversial "demonetization" move in November, which involved taking 500-rupee ($7.3) and INR1,000 ($14.7) banknotes out of circulation, has led to a crash in the Indian devices market.

With high-value notes accounting for more than two thirds of the cash supply, the policy has led to a severe cash crunch in India. As a result, device sales have dropped markedly in India's Tier 2 and 3 cities and towns, where the unavailability of digital services has made cash transactions the dominant form of payment.

"We believe the drop in sales is as much as 30 to 40%," says Pankaj Mohindroo, the founder and national president of the Indian Cellular Association. "The cash crunch is more severe in Tier 2 and 3 cities, and so the impact is more on feature phones and entry-level phones, which are primarily manufactured by domestic device makers. The companies are resorting to cash conservation and wait-and-watch policies."

The crunch looks set to have a significant impact on earnings this quarter and next, according to Anshul Gupta, a research director at Gartner Inc. , who puts the decline in demand at about 20%. "It has impacted all the sales channels, including online," says Gupta.

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Sluggish demand has also led to a slowdown in production, triggering job losses at manufacturing units. Media reports indicate that leading domestic device players Intex Technologies (India) Ltd. , Lava International Ltd. and Karbonn Mobiles are laying off between 10% and 40% of their workforces.

Meanwhile, unsold devices stock is piling up because of the impact on consumer spending power. Foxconn Electronics Inc. has asked nearly 2,000 employees to go on paid leave for two weeks. Lava has been forced to temporarily shut down its manufacturing plant, which employs around 5,000 people.

Adding to device makers' woes is that the third and fourth quarters are typically sluggish periods anyway. Manufacturers usually witness a slowdown after the festival of Diwali (one of the biggest festivals in India) in November every year.

"Considering the poor sales due to the current cash crunch in the country, earlier estimates for mobile phones have been revised downwards by 4.5%," said Jaipal Singh, a market analyst at IDC India. "Q3 2016 smartphone and feature phone shipments were 32.3 million and 39.9 million units respectively. Q4 2016 feature phone shipments are likely to decline sharply by 24.6% [sequentially] and smartphones are expected to see a 17.5% decline sequentially."

— Gagandeep Kaur, contributing editor, special to Light Reading

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