Cheap to cheapest

By all accounts, the party has just started and mobile handset prices could drop even further.

The crash is without precedent anywhere in the world. The prices of entry-level mobile handsets have fallen 35-40 per cent in the last one year in the country. Customers can now buy CDMA handsets for less than Rs 800 and GSM handsets for a little over Rs 1,100.

Nothing works better than a price cut in a price sensitive market like India. A GSM Association study says that for every one dollar cut in prices, no fewer than 20 million subscribers could be added.

Experts say that while some companies are using aggressive price tags as a strategy to gain share in the world's fastest growing market (net additions top over six million every month), almost a third of the costs have been shaved off because of rapid strides made by technology providers in the recent past.

In the last four years, semiconductor companies have crossed two technology nodes. "With the passing of each node, the costs come down by 30-40 per cent. Earlier, you needed three chips for a modem, which is at the heart of the handset. Today, you need just one," says an industry expert.

Thus, the cost of chipsets has fallen from $20-30 in 2001-02 to less than $10 now, especially for entry-level GSM phones. Handset-makers say that the prices of key parts like memory and base band as well as the cost of semiconductor integration have come down by half from their 2001-02 levels.

Texas Instruments has introduced a single-chip technology called LoCosto ULC. "This has significantly reduced board space and system costs and has extended battery life," says Jithu N, director (wireless business, India), Texas Instruments.

The trend will continue in the days to come. NXP Semiconductors managing director Rajeev Mehtani says that his company is now coming out with a new chipset that will allow handset manufacturers to deliver sub-$20 GSM phones to the rapidly growing markets in emerging countries.

"Mobile phones using the NXP chipset will be released shortly in India at highly affordable prices."

Adds Nikhil Jain, chief technical advisor of Qualcomm, which owns the CDMA technology: "Qualcomm developed the single chip solution family aimed at low cost phones. We have teams working on all the cost drivers of handsets and we work closely with device manufacturers to help them reduce costs."

Technology apart, handset makers have been able to drop prices by also taking a hit on their profit margins. "Typically, manufacturers operate in comfortable 40-45 per cent margins. But, in India, they have lowered their operating margins to 10 per cent," says KPMG director Romal Shetty.

The reason is not far to seek. With sales in mature markets hitting a plateau, handset makers have no option but to focus on China and India. With China attaining high levels of mobile penetration, India has become the flavour of the season.

"Cutting the handset prices or bundling them (for CDMA) at the lowest minimum offers are the only ways to attract volumes," adds Llyod Mathias, director (marketing), Motorola (southwest Asia).

Motorola's cheapest GSM handset, the MotoFone, is currently priced at Rs 1,149, almost a third lower than the Rs 1,655 it cost in in 2006. The handsets business of Motorola, it is worth noting, is in the red, though the company's CEO, Ed Zander, said it was making progress in turning it around.

Devinder Kishore, director (marketing), Nokia (India), says: "The nature of technology is such that price reductions are dependent on volume efficiencies, technological advances, and so on." Nokia has dropped prices by 10-15 per cent across 40 handsets.

All projections suggest the party has just started "" prices could drop further as the Indian market continues to grow at a scorching pace.

Additional reporting with Aravind Gowda and Priyanka Joshi