August 09, 2019
With so much attention on trade in 2019, we find ourselves speaking often about the opportunity China represents over time, and our perspectives on the potential for small Chinese companies to flourish over time. Many emerging markets (EM) gain from leveraging the developed world’s technology innovations. This tendency is not new, nor unique to China. India, is another large market with potential to “leap” certain stages of development via the adoption of modern technology. India’s recent consumer technology trends – mobile adoption in particular – have broad ramifications for the Indian economy. As we will see below, however, it takes careful analysis to identify the best opportunities presented by technology trends.
The mobile effect
When investing in emerging markets, we often ask what’s next? What innovation will create meaningful results and who
are going to be the beneficiaries? India’s need for infrastructure is well-documented, and prospects for the country
someday having an influential middle-class consumer base have also often tantalized multinational companies and kept
investors of all stripes watching closely.
Recently, Indian smartphone penetration has started to increase from a relatively low base based on country data published by Reuters. Smartphone penetration is projected by Statista to increase from 26% in 2015 to 39% in 2019 (an increase of 175 million users), and by global standards there is an incredible amount of room to grow further. This type of growth in technology adoption speaks to burgeoning consumer appetite, and the potential within India to “leapfrog” certain stages of advancement – a key tenet of how technology can spur emerging market development.
Smartphones offer a gateway to many online applications, and mobile video consumption is a key winner with handset streaming increasing tenfold over the past three years. On average, Indian mobile-internet users download 8.5 gigabytes of data, or approximately 40 hours of video, per month; the highest amount globally and 12% more than China (source: Reuters).
In 2018, online video streaming, often driven by mobile, accounted for 75% of all data traffic in India. The rate of the country’s media consumption has been growing twice that of China and nine times the United States. YouTube recently experienced a 400% year over year increase in “watch-time” across its Indian audience and expects the current 245 million regular users to grow to 500 million by 2020. (Source: Reuters)
Smartphone penetration by country (2018)
A capable 4G network and highly affordable phones is enabling millions in India to stream content for the first time.
The aggressive pricing is being driven in our view by players like Reliance Jio, which has been offering 4G-enabled phones
virtually free of charge, with free unlimited voice calls and cheap data plans. This budget market, known as feature phones,
includes phones that lack a touch screen or advanced features. A July 2019 Wall Street Journal feature highlighted the
success of the segment overall in India, including how Reliance Jio’s sales of more than $60 million has driven the trend.
Average monthly data consumption per user
Source: Wall Street Journal
When we compare the time spent on mobile devices in 2017 and 2018, online video records one of the highest marks for
“time spent” and continues to grow, while other uses such as social networking and Internet browsing are in decline (source:
Reuters). A survey by YouTube found that, for most people in India, videos are their first source for financial, medical, travel,
and even religious advice.
Where the mobile economy leads
Growing smartphone use creates new consumer behaviors, which can bring massive opportunity for active investors.
Opportunities go beyond just the most obvious, like mobile applications or devices. In a country often cited for needing
better physical infrastructure, the speed of digital communications can spur economic activity and heighten the pace of
transactions across the economy very broadly.
That said, we believe it takes careful analysis to invest in India. We are focused on three key areas:
The necessity for India’s networks to accommodate this explosive online demand will be paramount. We believe 4G and
5G network suppliers will be obvious beneficiaries. With increased pressure on the networks, we think fiber optics, as a
necessary component for 5G, should be in strong demand and the infrastructure builders to continue to be busy.
If viewing demand is surging for content, then one would think content providers could benefit. However, in our view Indian
film studio stocks have faced a number of other headwinds. We believe active investors need to look deeper to understand
and invest in this phenomenon, and be keenly aware of the challenges of the space. We find the area of content particularly
attractive, but we are taking a prudent approach.
Applications and support
The seismic growth in mobile device usage comes with increased demand for mobile applications. The question is, who will
build it? We see particularly attractive opportunities for companies with the expertise and resources to build, support, and
provide mobile applications for consumers.
These are just a few areas we find promising within the mobile space in India. We feel it is essential to be selective
when seeking out the beneficiaries of fundamental change. For example, handset and device makers may seem logical
beneficiaries of the upswing in mobile use, and arguably device sales should continue to be strong. However, competition is
so fierce in handsets, for example, that it may still be difficult to turn profits.
Across EM countries, we often see personal technology trends that offer similar promise due to the broad social impact.
Connectivity, along with the speed and ease of consumer transactions, often create positive effects for an emerging
economy. Areas like ecommerce, video games, eSports operators, social networks, and payment processors / banking all
may be growing. Companies in these spaces sometimes aspire to becoming a hub for individuals’ digital activity, and each
competes for the consumer’s attention and “share of wallet.”
That is to say that identifying beneficiaries of these trends is another thing altogether, and requires the research and insight
found in active equity management.
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