Cell Phone Manufacturing in Pakistan

Executive Summary
Pakistan telecommunication industry holds a tremendous potential for growth, investment and development. According to Pakistan Electronic Consumer Reports, mobile handsets sales are expected to grow at a CAGR (compound annual growth rate) of 15% to 28.3 mn units in 2015[1]. Irrespective of these overwhelming figures, there is no cell phone manufacturing facility established within Pakistan. The growing market also reveals that cell phone has now become necessity of life. An average Pakistani can afforded cell phone costing between $30 and $70. With this limited budget, they are left with limited option of either buying normal feature phones or low quality Chinese phones (which mostly come with out IMIE numbers). Keeping in consideration the Pakistani growing market for handsets and non-availability of low price quality cell phones, this venture takes up on the task of manufacturing cell phone within Pakistan. A cell phone by Pakistanis for Pakistanis.

Mission Statement
We aim at manufacturing quality smart cell phones; AirNet, which are Made in Pakistan. These Cell Phones are to be sold at affordable prices. These cell phones will be sold as Green Phones, linked to the color of flag and also to saving of energy.

EXECUTIVE SUMMARY ............................................................................................................................. 1 MISSION STATEMENT .............................................................................................................................. 1 1. INTRODUCTION .............................................................................................................................. 4 1.1. 1.2. 1.3. 1.4. 1.4.1. 1.4.2. 1.4.3. 1.5. 2. MOTIVATION ................................................................................................................................... 4 OBJECTIVES ..................................................................................................................................... 4 BASIC CONCEPT................................................................................................................................ 5 MANAGEMENT TEAM........................................................................................................................ 5 GENERAL PARTNERSHIP ..................................................................................................................... 5 LIMITED PARTNERSHIP ....................................................................................................................... 5 OTHER PARTNERS ............................................................................................................................. 5 LEGAL STRUCTURE ............................................................................................................................ 5

ANALYSIS ........................................................................................................................................ 6 2.1. 2.2. 2.3. 2.4. 2.5. TARGET MARKET .............................................................................................................................. 6 INVESTMENT INCENTIVES AND STATE LEVIES........................................................................................... 6 TECHNOLOGY................................................................................................................................... 6 COMPLIANCE WITH STANDARDS ........................................................................................................... 7 SALES ............................................................................................................................................. 7

3.

POSSIBLE IMPEDIMENT .................................................................................................................. 7 3.1. 3.2. 3.3. 3.4. 3.5. CHINESE PHONE ............................................................................................................................... 7 OTHER COMPETITORS AND THEIR MARKET SHARE .................................................................................. 8 POLITICAL SCENARIO ......................................................................................................................... 9 UTILITIES COST (POWER) ................................................................................................................... 9 SMUGGLING .................................................................................................................................... 9

4.

STRATEGY / PLAN / OPERATIONS ................................................................................................... 9 4.1. 4.2. 4.3. DEVELOPMENT PROCESS .................................................................................................................. 10 SKILL DEVELOPMENT PROGRAM TO CATER FOR THE NEEDS OF MANUFACTURING........................................ 10 EXPANSION PLAN ........................................................................................................................... 10

5.

ADVANTAGES ............................................................................................................................... 10

5.1. 5.2. 5.3. 5.4. 5.5. 6.

MADE IN PAKISTAN......................................................................................................................... 10 RELATIONSHIP WITH POSSIBLE CHANNELS / PARTNERS ........................................................................... 11 LOWER COST AND HIGHER QUALITY ................................................................................................... 11 SELF SUFFICIENCY ........................................................................................................................... 12 CUSTOMIZABLE .............................................................................................................................. 12

CONCLUSION ................................................................................................................................ 12

1. Introduction
This document aims at introduction of concept of Cell Phone Manufacturing in Pakistan, to potential partners, investors and equity holders as a viable venture. This paper scope is not expansive to cover setup or financial details but rather establishes the feasibility of the concept from a management perspective

1.1.

Motivation

According to Pakistan Telecom Association (PTA) statistics [2] in 2011, the number of cell phone users in Pakistan had reached 131 million, becoming the 5th in Asia, in cell phone users. In Pakistan 54.60% of population are cell phone users. This number reveals a sizable potential of sale of cell phones in Pakistan. Handsets of almost all top cell phone handset manufactures are available in the market in Pakistan. According to the data released by Federal Board of Statistics (FBS) [3], the country imported cell phones handsets worth $49.259 million in the month of July 2011, with an increase of 26.29% as compared to financial year 2009-2010. The countrys demand for cell handset requirement is poised to reach the mark of one -billion-dollar in the coming year. Despite a country with second largest growing market for cell handsets, in South East Asia, Pakistan does not have any Made-inPakistan cell handsets. Taking on this concept, this paper explores the feasibility of Manufacturing Cell Phones in Pakistan.

1.2.

Objectives

Main objective of this venture is to manufacture quality smart cell phones in Pakistan, which are affordable by the largest buying class in the cell phone price spectrum. The en-vogue features, price and quality will be the main sales pitch for this. For the related public organizations, setting up of a manufacturing facility within Pakistan will create more job opportunities for the people and equip them with skills in the said electronics and communications industry. The aim of the venture is to capture 2% of market share with in 1-2years.

1.3.

Basic Concept

The effort is focused on developing affordable; quality Android (OS choice may not be fixed till the decision of setting up) based smart cell phone handset with in Organization Pakistan. Initially, the manufacturing facility would be utilized to assemble SKD (SemiKnock-Down) Kits within Pakistan, under strict quality control. Later this may be transformed into a CKD (Completely-Knock-Down) Kits. Labor would be trained to undertake the task. The eventual goal is to achieve maximum self reliance. Above entails an agreement with a developed (under production) cell phone manufacturing company, herein referred as Foreign Partner. Quality Standards, Training and Assembly Line will be implemented and established in collaboration with the Foreign Partner.

1.4.

Management Team

Management team will constitute of Mr. Tom Wilson (CEO Teralight) and Zeeshan Mojib (President Operations South East Asia, Teralight).

1.4.1. General Partnership

Venture may offer option of a JY partnership, with management team as decision makers.

1.4.2. Limited Partnership

Limited partnership will be offered as consultancy opportunity to the partners, not as share holders.

1.4.3. Other Partners

All stake holders will constitute other partnership, depending upon the value they will carry with themselves.

1.5.

Legal Structure

As discussed in section 1.3 the technology imported from the Foreign Partner would be under compliance, dictated by PTA regulations. All cell phones would be available in market under strict compliance with PTA regulations and assigned IMEI (International Mobile equipment Identity) number. All management and operational matters will be handled at corporate office, located in Dubai.

2. Analysis
2.1. Target Market
According to statistics released by The Daily Times in May 2011; more than 60 percent of the market consists of $50 to $100 price range cell phones. In recent years, Pakistans market has shown solid demand of smart phones that are equipped with high -end features. On average a smart phone costs more than $500, which exceeds buying power of a sizable market. Also the mobile phone consumption pattern reveals that 67% of the market use basic feature phones, which cost on average $50-$60 [4]. They are utilized by almost all income groups, predominantly by low income group. Due to convenience it offers, cell phone has become necessity than luxury. Estimates show that smart phone share in Pakistan is 5% of the total market. This low penetration of smart phone is due to high prices. Larger group of cell phone users are salaried persons that would prefer a smart phone, if offered at a price of feature cell phone. Airnet cell phone would be offering a high quality smart phone at cost of feature phone, thus giving it a competitive edge in the market.

2.2.

Investment Incentives and State levies

The Pakistani government recently imposed a flat rate of $8.7 on all mobile devices being imported in the country, regardless of their price. This tax has increased the retail price of all type of cell phones. Airnet will be exempted from this additional cost due to its manufacturing being carried out within Pakistan. Also with establishment of cell phone manufacturing facility in Pakistan, 20% import duty will be imposed on cell phones being imported; giving Airnet a cost based competitive edge in the market. Other incentives offered by state, for investment in Telecom sector are decreased custom duty of 5% on imported plant, machinery and equipment (not manufactured locally). PTA exemption of General Sales Tax (GST) on domestically produced and imported plant and machinery is also an added benefit for the venture.

2.3.

Technology

At present in Pakistan 74% of mobile internet users use Symbian powered Nokia cell phones, where as Apple powered devices, mostly the iPhones, share 8% of the market share. Andriod powered cell phones are still catching up, mostly because of their high cost. As Andriod is a platform independent OS and in USA its market share has gone up to 42%, it is most likely to be future of smart cell phones. Airnet cell phone will be powered by Andriod OS. [5]

2.4.

Compliance with standards

Airnet cell phones will strictly follow major standards for wireless devices; including FCC regulations and abide by the privacy protection act for wireless devices. Airnet will comply with GSMA Universal Charging solution, to be more energy- efficient. Airnet cell phones will come with unique IMIE number, as compliance with PTA regulations.

2.5.

Sales

The mobile telecommunication sector is one of the fastest growing sectors in Pakistan. Review of statistics released by PTA shows that approximately 90% of Pakistanis live within areas that have cell phone coverage and more than half of Pakistanis have access to a cell phone. The statistics also reveals that about 77% of college educated people have their own cell phone and about 35% of uneducated or people with education lower than college have their own cell phones. A report published in leading news paper Express Tribune claims that by end of February 2011, Pakistan imported cell phones of an average worth of $55.76 million. On average Pakistan spends $1 Billion on cell phone imports, annually. This is not only burden on Pakistani foreign reserves but also increasing the trade deficit. Airnet will target the 77% of market that constitute of college graduates, because these groups of users are potential buyers of smart phones. The expenditure figures also reveal that there is a large market present for Quality, low cost phones.

3. Possible Impediment
3.1. Chinese Phone
Since the signing of Sino-Pak free trade treaty, country saw sharp increase in imports of China made cell handsets. By end of financial year 2009-2010, Chinese handsets worth $523 million were imported, increasing their market share by 66%.[6] These cell phones are fully equipped with the smart phone capabilities, at very cheap price. There are many other companies including NOKIA, SAMSUNG, LG, Q Mobile and others, that are making smart phones but the Chinese phones are available at very low cost. These phones are replicas of different smart phones and group of people purchasing these phones are more inclined towards basic functionalities offered with style. As cell phones have become a status symbol in Pakistan, most of the buyers opt for a Chinese replica phones due to its apparent similarity to high-end expensive cell phones. In such scenario, initially capturing big market share may become intricate.

3.2.

Other Competitors and Their Market Share

By end of 2009, Nokia held 60% of cell handset market share, followed by Sony Ericson with estimated share of 20% and Sony Ericsson with market share of 10% and Motorola holding 5% of the market. These figures have reduced to 2-3% after introduction of Chinese phones, to Pakistani market. Following table shows Pakistani market share of smart phones vendors:-

Market Penetration may become intricate for AirNet due to presence of mobile manufacturing giants.

3.3.

Political Scenario

The ministry of information technology announced its plan in 2009 to release Made-in-Pakistan phone within one year. It initially invited cell phone companies such as NOKIA, Siemens and LG to establish manufacturing facility within Pakistan. Which was later refused by the companies, one of the reasons of refusal is speculated to be instability in the country. The same challenges will be faced by AirNet. It will also increase the external environment threat level.

3.4.

Utilities Cost (Power)

Recently utilities costs e.g. Power has increased in Pakistan and also Pakistan is facing worse energy crisis. This has affected Pakistani manufacturing industry. This may also effect the manufacturing time and production cost of AirNet.

3.5.

Smuggling

Due to high cost of Smart / high end cell phones, cell phones are available through alternative channels and black market. They are very low cost as compared to phones available in the market. Sales through these channels are the key obstacle that the cell phone industry is facing in Pakistani Market. This will also pose a very big obstacle for Airnet.

4. Strategy / Plan / Operations

In the first phase, assembly of handsets will be undertaken, which will commence within a few months of signing of requisite contracts and mobilization. This will follow progressive manufacturing. Initially a low production of 1.5 million handsets a year would be economically viable. In the nest phase, manufacturing of an entire range of cellular phone, with increased volume, could be undertaken. Components and spare parts will be supplied to the OEMs under co-manufacturing arrangements.

4.1.

Development Process

Cell development process constitutes of five steps, AirNet will comply by standards to undertake them. ID (Industry Design) and MD (Mechanical Design): AirNet ID and MD will be undertaken in USA (Chandler) under strict standards compliance. Hardware Import: A cell phone consists of 40-60 components, most of which (e.g. Casing, Antenna) will be produced availing existing facilities within Pakistan, while key semiconductor components will be imported from the OEMs. Software Design (SD): AirNet OS and Value Added services will be developed with in Pakistan, under ISO standards for software development and implementation. Quality Assurance (QA): QA will be ensured through out the development process and will comply by ISO 9000 series of standards.

4.2.

Skill Development Program to Cater for the needs of

Manufacturing

To undertake the development process in accordance to standards, manpower will be trained to carry out the required tasks. The cellular handset industry is labor intensive and it will create additional job opportunities.

4.3.

Expansion Plan

Once AirNet matures and achieves significant local market share, it will be introduced in export markets as well. African, Afghanistan, Middle Eastern and parts of South Asian countries are growing markets for low-cost cell phones.

5. Advantages
5.1. Made in Pakistan
Made-in-Pakistan coupled with a reputed international quality standard is AirNet main competitive edge. AirNet will be marketed as cell phone By Pakistanis for Pakistanis and a green phone, which will try to preserve resources and still provide Pakistani Nation with a cell phone to be proud of. A venture that is meant to create job opportunities and provide skill sets for the nation.

5.2.

Relationship with possible channels / Partners

AirNet will offer opportunity to telecom operators to offer it as part of their pre paid packages. The cost of cell phone offered with the package may vary depending upon the requirement or buying power of the customer.

5.3.

Lower Cost and Higher Quality

AirNet cell phones will come with varying features, depending upon the buyer group requirement. Below figure shows the price segmentation of cell phone market. AirNet will target customers falling in the Low and Mid price segments. At price range between $30 and $90 only feature phones are available in the market. AirNet will offer smart phones to the consumers within the same price range.

At present Chinese cell phones available in market fall in the lowest price quadrant. The two types of Chinese phones available are cell phone replica or Made in China. The replica phones come with out an IMIE number and usually lack the functionalities offered

by original phones. Use of cell phones with out IMIE number is against PTA regulations. These cell phones manufacturing is not done in controlled environment therefore may contain harmful materials. The other cell phones that are made in china are not as cheap as replicas. They offer high end feature phones within a cost range of $85-$100. But they also lack quality which other high end feature phones offer. Keeping in consideration the competition in market, AirNet will be offering Smart phones, with metal body finishing and manufactured under strict quality environment.

5.4. 5.5.

Self Sufficiency Customizable

AirNet will try to be completely self sufficient.

AirNet cell phones will be customizable according to the requirements of the telecom partner requirement. It will also come with Urdu language option and for export purposes required language.

6. Conclusion
Pakistan cell phone market is one of the fastest growing markets in South East Asia, where yearly estimated 20 million cell phones are imported, costing on average $569.00. But none of the revenue generated by this market is contributing towards Pakistani economy. Therefore AirNet will be the first cell phone that will be made by Pakistanis for Pakistanis and will be contributing positively towards countrys economy by creating more jobs and creating investments opportunities for foreign investors.

References [1] Pakistan consumer electronic report Q4 2011, released by Business Monitor International. [2] Statistics on Mobile Phone users in Pakistan in 2011, released by Pakistan Telecom Association, 27th July 2011. [3] Statistics on Mobile Phone imports by end of fiscal year 2010-2011, released by Federal Board of Statistics (FBS), July 2011. [4]Pakistan Economic Survey 2010-2011 [5] Statistics released by Dawn News Paper, March 2011. [6] Statistics released by Pakistan Today, August 18 2011.

SWOT Analysis
Situation being analyzed: Manufacturing of Cell Phone in Pakistan
Strengths Advantages of proposition? Capabilities? Competitive advantages? USP's (unique selling points)? Resources, Assets, People? Experience, knowledge, data? Financial reserves, likely returns? Marketing - reach, distribution, awareness? Innovative aspects? Location and geographical? Price, value, quality? Accreditations, qualifications, certifications? Processes, systems, IT, communications? Cultural, attitudinal, behavioural? Management cover, succession? Opportunities Market developments? Competitors' vulnerabilities? Industry or lifestyle trends? Technology development and innovation? Global influences? Niche target markets? Geographical, export, import? New USP's? Tactics: eg, surprise, major contracts? Business and product development? Information and research? Partnerships, agencies, distribution? Volumes, production, economies? 7 5 6 8 8 8 7 7 8 8 8 8 5 Score out of 10 8 8 8 8 6 6 8 8 8 8 8 8 8 8 8 Weaknesses Gaps in capabilities? Lack of competitive strength? Reputation, presence and reach? Financials? Own known vulnerabilities? Timescales, deadlines and pressures? Cashflow, start-up cash-drain? Continuity, supply chain robustness? Effects on core activities, distraction? Reliability of data, plan predictability? Morale, commitment, leadership? Accreditations, etc? Processes and systems, etc? Management cover, succession? Score out of 10 4 2 1 2 5 5 5 3 1 1 1 1 1 1

Threats Political effects? Legislative effects? Environmental effects? IT developments? Competitor intentions - various? Market demand? Vital contracts and partners? Sustaining internal capabilities? Obstacles faced? Insurmountable weaknesses? Loss of key staff? Sustainable financial backing? Economy - home, abroad? Seasonality, weather effects? 7 5 7 5 7 5 1 1 7 1 1 0 4 5

Distribution Channels

Venture Composition / Building Blocks

Business Model

Pros & Cons

Pros of Smart Phone: 1. Can be offered to the operators, to be sold as a package with their SIMs. A package with cheaper smart phone will be an attractive offer and help increase sales. 2. As Android is an open source OS, SDKs are available for free and can be used by developers to develop variety of customized applications for customers and partners.

Cons of Smart Phone: 1. Initially a cheap smart phone may have almost no competition in the market, but with time the competition may start building. If other competitors like Chinese manufacturers try to undertake same venture. 2. A segment of market (un-educated customers) may not be interested in buying a smart phone.

Pros of Manufacturing in Pakistan 1. Create more job opportunities and facilitate employee to develop a skill set. 2. Contribute positively towards economy and reduce trade deficit. 3. If a smart phone at price of feature phone is available at market in Pakistan, complied by national Pride Pakistani will buy a Made-in-Pakistan mobile handset. 4. If a mobile phone manufacturing facility is opened in Pakistan, an extra 20% duty will be imposed on mobile phones being imported. This will give a competitive edge to NewCo with respect to price in the market. 5. Government has decrease custom duty by 5% on imported plant, machinery and equipment (not manufactured locally). PTA exemption of General Sales Tax (GST) on domestically produced and imported plant and machinery is also an added benefit for the venture. Cons of Manufacturing in Pakistan

1. production. 2. hindrance in sales. 3.

Scarce resources like water and electricity. Unpredictable power outages in Pakistan may cause delay in Mobile phones are available through alternative channels and black market in Pakistan. This may create With availability of low cost Chinese phones in the market, initial market penetration may not be easy.

NewCo Progress Phase wise

Phase 1 (1 Year) Establish infrastructure Design in US Import: Printed Circuit Boards (PCB) and Integrated Components form OEMs Establish local alliance Acquire IMEI number

Phase 2 (1-2 Years) Customized Applications (Region, client based) Production of 1.5 Million mobile phones Assembly in Pakistan Peripherals from local alliance Sales to Operators and Channel Partners

Phase 3 (1 Year) Customization: Regional language Production: 1 Million Establish Sales outlets Acquire manufacturing and design royalty

Phase 5 Production: 1.5 Million+ / year Customization for export Self sustaining manufacturing facility

Phase 4 (2-3 Years) Production: 1.5 Million Corporate Sales Individual Sales