How do Chinese Smartphones offer great specs / features at a very cheap price?

Ever wondered why Chinese smartphone like OnePlus, Oppo, Xiaomi, etc have great Build, Specs, Features and yet they cost very accessible? And why only Chinese smartphones are that cheap? Why not other player like Samsung, Asus, LG? And what happened to our local brands like Micromax, LAVA etc?

If you have this questions and thoughts in your mind then this article is for you!

Let's understand this with an example. Imagine you are producing a Pen. To produce that pen you need tools and machinery. Let's say you sell the pen at 10 Rupees and with the machinery the company owns and all the raw materials the cost price is around 8 Rupees. by this you make a profit of 2 Rupees by selling it.

Now there comes some Chinese pen manufacturer with similar pen with selling price of just around 6 Rupees! and what's more Interesting is that this Pen could be even better than the local Pen!

How is it possible? Well when we say pen we see it as a complete product, but if we start breaking it down to its individual parts

• Ink

• Refill tube

• Pen pointer

• Surrounding body

• Rubber grip

• Body wrapper with your company logo and so on.

Damn that's a lot of component for a product as small as a Pen.

To manufacture this Pen. let's say our local company cannot produce all the components

In-house, let's take the Pen tip which is extremely small and may need a Special proprietary machine to manufacture. Let's say this Special machines cost is very high around 1 Crore rupees. Since our local companies budget is very limited better decision is to buy this component from some other company. from here things gets Interesting!

Since the local company couldn’t produce the pen tip, It buys it from someone else.

that company which produces this pen tip will keep a fair share of profit. If the selling company is in some other county then there will also be Shipping costs, Import tax, GST what not. let's say by the time the Pen company gets the pen tip it will end up paying around 4 Rupees for the tip alone.

Now for the pen Ink let's say the company has all the equipments to produce Ink. But if there is no local supply of raw material then, that raw material should also be imported.

All this additional costs for Importing, Labor charges, Electricity etc, ends up making our local pen cost 8 Rupees to manufacture.

Coming to the chinese company pen, How can they sell it for 6 Rupees which is less than the manufacturing cost of 8 Rupees?

Let's break it down!

Consider that Special proprietary machine. What if the company can afford it? Then the cost of pen tip can be reduced. to lets say 2 Rupees. But what if the technology from that special proprietary machine copied even if it is someone else proprietary? and you tweek it a little more to be even more efficient? and now the cost price comes down to 1 Rupees?

Let's start with buying that machine. How do they get that much money to buy? Here comes the role of government. In our country we can apply for some industrial loan with a little concession on interest and buy it. But to repay it back you need to make huge sales to cover the cost of the machine you bought! Till then the company will certainly be in dept. If the competition is less and you are the only player in the market then you can take an year or two where you start making revenue. Assuming pen industry is huge and there are many players? Then probability of making profit itself is at risk!

But that if the government itself buys the company the expensive machines and waits until the company makes profit? What if there is one big parent company which has many sub brands and provides all the equipments and components for its sub brands?

What if the proprietary machine be copied with in the closed doors of not just the company but an entire nation itself. Well in a democratic country it's more like impossible. But everything is possible in a country which is ruled by one party!

Now coming back to the example. lets say the government bought the company the special equipment from some developed nation and waited for the company to repay the money until they make profit. then the cost price of the pen tip will come around 2 Rupees. Now within the companies closed door lets say if they cloned the machine themselves. then their production capacity is 2X.

Coming to the labor part. Let's say minimum wages fixed by the government is 100 Rupees for month. then the company must may the minimum wages! at least in a democracy. hope you got the point.

For any company to be super competitive in the entire industry beating all the big giants definitely needs a strong support from the Government. When the government is communist there are lot of things which goes under the cover than we see on the surface.

Only way we can help is to pay a little extra for a product which is manufactured here. proudly and in India.

These are just my personal thoughts and not ad driven.

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