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Evolution to the global deviceHow market trends demand shifts in traditional OEM device strategies

Terry Steger, Adam Hutchinson and Cara Howieson

Tier 1 OEMs have led the technological advancement in smartphone development in the past decade. They have gained a competitive edge with innovative features and functions and captured bottom-line growth through premium smartphone offerings. However, as growth in the premium smartphone segment slows and turnkey solutions become available, Tier 1 OEMs face increasing competition from rising Tier 2 and 3 OEMs. These companies are looking to expand their footprints outside of China and boost their smartphone market shares. Tier 1 OEMs are responding to the challenge from these hard-charging competitors by changing their device strategy. For example, they are creating portfolios characterized by a greater use of global devices and fewer SKUs. Such global devices enable access through all network modes and frequency bands, which is critical to addressing changes in network complexity and market dynamics.

To continue their growth, Tier 2 OEMs must enter new markets and compete with the Tier 1s. Adopting a similar global device strategy is a key lever in this effort that can be done without adding to the total cost of ownership for the OEM. By creating a global device, Tier 2 and 3 OEMs can achieve cost savings and drive market upside through SKU consolidation. However, they will also need to deeply understand shifting customer sales models and ensure that devices’ features and functions match customer preferences.

Tier 2 and 3 OEMs have a massive opportunity and challenge before them. The extent to which they capitalize on this opportunity depends on how well they adopt the capabilities necessary to respond to the latest chapter in the mobile phone industry’s ongoing evolution.

2 | Evolution to the global device

As mobile device OEMs seek to expand their market shares and geographic footprints, they must adapt to the increasingly complex 4G LTE networks across the globe. Adoption of smartphones continues to grow, led by new customers with higher price sensitivity in emerging markets. Carriers are largely doing away with device subsidies in favor of leases and installment plans. And customers are buying smartphones in different ways, with a growing number purchasing devices directly from OEMs. As a result, the capabilities OEMs need to gain a competitive advantage are changing.

Tier 1 OEMs face increasing competition from rising Tier 2 and 3 OEMs.

>10%>5%Market Share1:

HuaweiLenovoXiaomi

LGYulongMicrosoftZTEOppoSonyVivoHTC

AppleSamsung

>1%


Three factors are redefining the mobile phone marketSince its inception, the mobile phone market has been characterized by rapid change driven by innovation and a continual drive to reduce Bill of Materials (BOM) costs. Today is no different. The current global mobile phone landscape continues to evolve, as numerous factors are converging to reshape what OEMs must do and provide to be competitive.

Three factors, in particular, are having the biggest impact:

Acceleration of 4G network coverage

In 2015, there were more than 1 billion global 4G LTE connections across 151 countries. This represents a doubling from the previous year and more than a tripling in developing markets. Such dramatic expansion in 4G LTE has made networks increasingly complex: the number of frequency bands and combinations required to support mobile demand has skyrocketed by more than 800% since 3G’s roll-out.2 And complexity will only continue to grow through 2020 and beyond as 5G is introduced and connected experiences driven by the Internet of Things (IoT) dominate the mobile ecosystem.

Greater smartphone availability and affordability

Increasing broadband connectivity, expanding network coverage, and growing customer data needs have accelerated smartphone adoption. In 2020, OEMs are predicted to ship 1.7 billion 4G smartphones. That’s 90% of the total smartphone market and a 70% increase over the number of smartphone units shipped today.3 But the aggregate figures don’t tell the whole story. Premium smartphone growth is actually slowing while mid- range smartphone growth is on the rise, largely driven by new smartphone consumers in developing markets. In fact, such markets will account for 75% of all smartphones sales by 2018 and will be the engine for overall market segment growth.4 A strong OEM base across the mid-range smartphone market is needed to serve this growing population.

Changing channel dynamics

The ways in which consumers buy mobile devices are also undergoing dramatic change across the ecosystem. For instance, the percentage of phones sold directly to consumers continues to rise. In fact, in China, over 60% of sales are now expected to come through open channels that do not require consumers to be tied to a carrier contract. Rising Tier 2 OEMs—which enjoy 130% year-on-year revenue growth from the open channel—are leading the way.5 The shift to the open channel has forced OEMs to focus more strongly on customers, who demand faster data speeds and more portability across carriers.

Carriers also have recently changed how they sell smartphones. For more than a decade, carriers have offered substantial subsidies on phones in exchange for long-term customer contracts. In other words, they’re absorbing the up-front cost of the device to attract new customers. However, the efficacy of the subsidy model is waning in mature markets. That’s why carriers in mature markets are eliminating subsidies in favor of a leasing or installment-plan model, which emphasizes a smart-phone’s longevity and residual value.

Three actions for OEMsThese market changes can create challenges OEMs must address. But they also create significant opportunities— particularly for those Tier 2 and 3 OEMs trying to position themselves as Tier 1.5 players. By developing global device solutions that enable access to both mature and developing markets, support connectivity to all network generations and frequency bands, and provide customer-compelling features in a price-competitive package, OEMs can gain competitive advantage over their peers while driving profitable growth. Three actions will be key to OEMs’ global device solution strategy.


Consolidate SKUs to reduce total cost of ownership and drive market upside

Respond to shifting customer sales models

Develop for features and functions that most closely meet carrier and customer preferences


Consolidate SKUs to reduce total cost of ownership and drive market upside

In today’s era of customer centricity, marketers’ instinct is often to create a distinctly different version of a product for each customer segment. That’s the opposite tack of what’s needed. Instead, smartphone OEMs should reduce the number of SKUs across their product portfolio and consider making one device within each target segment that meets customer demands and can be used globally. This is the path leading OEMs have already taken.

Benefits of a consolidated SKU approach

Although a single device will incur slightly higher BOM costs than a lower- utility handset, its strategic benefits and total cost of ownership savings will far outweigh the upfront costs. Six benefits, in particular, will result from fewer SKUs:

1. Lower direct material costs. Decrease direct material costs through reduced verification testing.

2. Higher resource efficiency. Improve resource efficiencies by reducing human capital costs or strategically reallocating resources to focus on either enhancing current-generation product features or developing the next generation of products.

3. Lower manufacturing costs. Reduce manufacturing overhead costs by requiring fewer line changes and spending less time on engineering change orders.

4. Better forecasting and inventory reallocation. Improve working capital by reducing safety stock, increase revenue by reallocating inventory to secondary markets, and minimize product overstocks and stock-outs during launch.

5. Lower carrier global development and deployment costs. Lower carrier- specific software development costs and carrier-mandated in-market testing and certification costs by leveraging reference designs and re-flashing previously developed software for a new market with no hardware changes.

6. Faster time to global market. Increase profitability by reaching more markets faster, enabling an OEM to command a higher Average Selling Price (ASP) and attract a larger market share.

Although a single device will incur slightly higher BOM costs than a lower-utility handset, its strategic benefits and total cost of ownership savings will far outweigh the upfront costs.


Respond to shifting customer sales models The ways in which key players—OEMs, carriers, consumers, and retailers—buy and sell-back mobile devices into the ecosystem are changing rapidly. Three shifts in the current customer sales model are especially impactful and require OEMs to respond.

First, the number of smartphone handsets that are sold directly to consum-ers through open channels—OEMs or retailers—continues to rise. In highly fragmented markets like China, the shift is even more pronounced: over 60% of consumers in that country purchase smartphones through the open channel. This increase in open channel sales makes device pricing and features even more important, which means Tier 1.5 OEMs can grab a greater share of that business by pricing devices aggressively and “up-featuring” phones to compete with Tier 1 OEMs. In certain countries (e.g., Brazil), retailers reign supreme: they often choose the carrier to push, and subsequently the handset to sell, based on the cost of the activation fee and the promotional kickback for that specific day. Any device that would allow a retailer to stock one SKU that can be sold with any carrier’s plan would offer a tremendous value proposition to the retailer.

Second, the shift in the carrier sales model toward leasing and installments has increased the focus on device longevity and residual value. This has directly affected how carriers procure smartphones from OEMs. Carriers are paying close attention to a smartphone’s depreciation and resulting resale value in the auction markets. Additionally, carrier’s shift away from the subsidy model creates more erratic device purchasing behavior among consumers—and, often, a longer lifecycle—because there is no contract or upgrade program forcing a turnover. That’s why “future-ready,” carrier- agnostic devices are so important. They will enable OEMs and carriers to either re-lease or re-sell refurbished phones for a higher residual value— especially to consumers in a highly complex mobile market.6

Finally, with 120 million refurbished units expected to be sold in 2017, refurbished smartphones play an increasingly important role across both mature and developing markets.7 The demand for premium refurbished smartphones is especially high in emerging markets, as such devices attract users who normally could not afford them brand new given the high price point. The implication for Tier 2 and 3 OEMs is clear: they will have to improve the quality and features of their smartphone handsets to compete.

Over 60% of consumers in China

purchase smartphones

through the open channel.

120 million refurbished smartphones are expected to be sold in 2017.


Develop for features and functions that most closely meet carrier and consumer preferences

Mobile devices and the supporting network infrastructure have become increasingly complex in the past decade and there’s no end in sight. Complexity will continue to grow in concert with consumers’ demands for greater speed, power, portability, mobility, and connectivity. While techno-logical and consumer demands are increasing overall device complexity, improvements in smartphone technology have resulted in little more than incremental enhancements in the past few years. And that has had a dampening effect on new purchases: unconvinced these enhancements are critical, consumers replace their device less frequently.8 To change this mindset, OEMs and carriers have to do a better job of demonstrating the new technology’s value and tangible benefits for the consumer.

One way for OEMs to demonstrate the value of a global device to carriers is to focus on potential cost savings from improved roaming rate negotiations.Unlike 2G and 3G roaming, which presented few challenges for carriers to match to many other carriers both domestically and internationally, the increased complexity of 4G makes global roaming a very difficult and expensive proposition.9 A global device that can access all types and combinations of frequency bands would enable a carrier to match to more roaming partners and, therefore, offer more options and increase leverage during roaming agreement negotiations. With global roaming revenue projected to reach US $90 billion in 2018 compared to nearly US $60 billion in 2014, and leading carriers with roughly 50 million subscribers paying US $100 million to US $300 million each per year to their roaming partners, the improved roaming agreements could represent a huge financial upside for carriers.10

For Tier 2 and 3 OEMs, competing head to head on premium smartphones requires striking the right balance between competitive pricing and differentiated features and functions. One way to do so is to leverage integrated mobile phone solutions. Such solutions take advantage of chipset reference designs and qualify other components to optimize a mobile phone’s overall design and function. This allows OEMs to drive down BOM cost and reallocate R&D resource time to focus on developing next-generation features and functionality. If an OEM can increase customer appeal by providing improved smartphone features and functions such as improved battery life, IoT connectivity support, and cross-carrier portability, it may be able to boost sales and ASP from the customer or carrier. This is especially true in highly fragmented markets such as China, where consumers are willing to pay for enhanced geographic support and increased carrier flexibility.

Data traffic is expected

to grow by a CAGR of

49% from 2015

to 2020.

Global roaming revenue

is projected to reach

US $90 billion in 2018.

Unlocking the potentialAlthough the premium smartphone segment is no longer red-hot in mature markets, the overall global mobile phone market continues to grow. In fact, the expansion in 4G and 4G roaming, coupled with the growth of emerging markets, has contributed to a substantial increase in the total addressable market. This market growth, coupled along with the changing power dynamics within the carrier, open market, and retail sales channels, has created an opening for OEMs to grow revenue and gain market share.

But to unlock the potential of this strategic opportunity, OEMs need to view competitiveness differently, shifting their focus from BOM cost to value generation. New technologies that address device and network complexity make this possible. Although these technologies will increase BOM costs on a per-handset basis, the value added from a global device with maximum frequency band support and connectivity will far outweigh those costs. In addition to generating top-line growth, a global device will drive cost savings in the form of fewer required SKUs in an OEM’s portfolio. In fact, when a mid-tier OEM uses a global all-band modem to shift from a market-centric, many-SKU approach to a product portfolio with a global device and fewer SKUs, the company typically will experience a 2.5x return on investment.11 And in a hyper-competitive, highly dynamic market where OEMs are always looking for an edge, that figure is hard to ignore.


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Contact the AuthorsTerry Steger Dallas, Texas [email protected]

Adam Hutchinson Chicago, Illinois [email protected]

Cara Howieson Seattle, Washington [email protected]

Other Contributors Syed Alam Austin, Texas [email protected]

Ryan Genkin Minneapolis, Minnesota [email protected]

Notes1 Euromonitor International: Consumer Electronics—World Smartphone Company Shares (2010-2015), 2016.

2 GSMA: The Mobile Economy 2016

3 IDC: Worldwide Smartphone Forecast Update, 2015-2019

4 Gartner, Forecast Overview: Mobile Phone Production and Semiconductors, Worldwide, 2015, Published: 21 October 2015

5 Huawei Annual Report 2015

6 Accenture Strategy Analysis

7 Gartner: “Apple’s iPhone Upgrade Program Impacts the Market for Secondhand Phones” (2016)

8 Gartner: “Top 10 Smartphone Technologies and Capabilities in 2016 and 2017” (2016)


10 Informa Telecoms & Media: “LTE Roaming: Global Market Status and Drivers for Growth” (2013); Juniper Research: “Mobile Roaming to Represent 8% of Global Operator Billed Service Revenues by 2018” (2014); Accenture Strategy Analysis


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