The answer may also not be relevant anymore.

“The damage was done when the patent was granted to PCV13, ” said a senior executive of one of the three Indian vaccine manufacturers developing the pneumococcal conjugate vaccines. And how? The legal proceedings challenging the patent can go on for an indefinite amount of time.

While they go on, the courts may or may not put a stay on the existing patent. Either way, the ambiguity makes it difficult to decide if the Indian vaccine manufacturers should continue developing the vaccine. The delay works in Pfizer’s favour right now, and in the scenario that patent is revoked, Pfizer can appeal against the decision like EU and buy more time, he added.

Aurobindo Pharma, which refused to answer how Pfizer’s patent will affect its vaccine development, was the last one among the three to invest in PCV. In 2015, it bought 60% shares in Tergene Biotech in Hyderabad and formed a joint venture with an aim to develop the vaccine.

Panacea and Serum have been in the race much longer; both have received funding from Bill and Melinda Gates Foundation since they were chosen for Advanced Market Commitment (AMC) by Gavi, the international vaccine alliance, in September 2009. Boston Consulting Group, in a report published in December 2015, noted that of all the vaccine manufacturers chosen by Gavi, ‘Serum and Panacea are the most serious candidates for Gavi markets in the near term’. They still have the opportunity to export the vaccine at more affordable rates to other countries, just not in India.

Might is always right

“It is a neat strategy that Pfizer has adopted. First, offer the government vaccine at fairly low rates, then get a patent to monopolize the market for 10 long years. When the government is thinking of universal immunisation, the cost of this patent is huge, right when we are on the anvil of introducing the product,” said an upset senior executive of Panacea on the condition of anonymity as the matter is sub-judice.

Panacea has already developed a PCV10 and gotten it approved for Phase III clinical studies by the drug controller of India and is working on a 13/15-valent vaccine. It has not yet shared the tentative price of the final product, unlike Serum Institute which has pledged to price its vaccine at $2 a dose for government programmes.

A senior executive of Serum, which grossed Rs 4000 crore ($614 million) in revenue in FY17, said the company is not affected by Pfizer’s patent for PCV13, as their product would be different. However, since Pfizer still has more patent applications in the pipeline around the pneumonia vaccine, Serum continues to be vulnerable to infringement suits.

All Indian companies are up against two patented pneumonia vaccines in the international market—Pfizer’s Prevnar 13 and GSK’s Synflorix. In the Indian market, the former is priced at $65.38 per dose and the latter at $34.38 per dose. Consider this, even if preposterous. When the government expands its programme to provide three doses to every Indian child, Prevnar 13 alone at its market price would cost over $5 billion ($196 X 26 million birth cohort), while the entire vaccination budget for the current year is about $537 million.

Why then did it decide to become a mass buyer of Prevnar 13?

The answer lies in the $500-million aid that Geneva-based public-private body Gavi is giving to India’s immunisation programme (between 2016 and 2021).

When the government entered this partnership, its plan was simple—buy affordable and locally manufactured vaccine once the Gavi funding ends in 2021. Since now Pfizer has patented PCV13, the government has only one option, which is anything but simple.

The last resort

Pfizer is currently offering each dose at less than $3.30 to Gavi-supported countries like India. This will be provided to 5.15 million babies in the first phase—20% of around 26 million children of India’s birth cohort whom the programme plans to cover eventually.

There is already some insecurity about the vaccine as it is dependent on donation right now, said Menghaney. Once the donations end, either the government will have to buy the vaccine from Pfizer itself to scale up to cover every Indian child (as it has now become the first patented vaccine which is part of the government programme) or it will have to secure a compulsory license.

Delhi-headquartered Panacea, which grossed Rs 555 crore ($85 million) in revenue in FY17, is not the only one. Serum Institute in Pune and Aurobindo Pharma in Hyderabad are feeling the pinch, too. After all, who doesn’t want a piece of the Rs 3,500 crore ($537 million) estimated budget for the national immunisation programme growing every year. In May, when the Minister of Health JP Nadda included PCV in the government-funded programme, he had said: “No child should die in the country from Vaccine-Preventable Diseases”.

The dominoes do not stop falling at Indian companies’ disappointment for losing the revenue government tenders would have brought if Pfizer had not secured the patent. The potential sellers are nervous, and so are the ultimate users of the vaccine. The international humanitarian not-for-profit Médecins Sans Frontières (MSF) moved the Delhi High Court to set aside the patent in October. It spoke for the ultimate user—millions of Indian children, who will likely get the vaccine only if their government can afford it.

Is Pfizer just bigger or better?

Both Panacea and MSF right now have the power to do just that. Their respective businesses and public health interests aside, they are standing their ground that the patent itself is undeserved. And they are not the only ones to object to the patent. The European Patent Office (EPO) in 2014 revoked the patent for Pfizer’s vaccine which sells under the brand name Prevnar 13. (The number 13 stands for the number of pneumococcal bacteria that the vaccine protects against.) The patent is disputed in South Korea and the United States as well.

While MSF and Panacea are girding up for a legal battle against the Indian patent office and Pfizer, the Indian ministry of health holds a trump card. It has its first real opportunity to bring the MNC to its knees and use a compulsory licence—a World Trade Organisation (WTO) provision to override a patent to secure affordable vaccines.

As it is the only time the large-scale public health relevance of the vaccine was proven when it was included in the government programme early this year, said an official in the know who requested to not be named.

Office of the Controller General of Patents, Designs & Trade Marks (CGPDTM) reports to the Ministry of Commerce and Industry. The real question is: when the time comes to make a choice, would the commerce ministry be on the side of the American giant Pfizer (the one it granted the patent to) or the health ministry?

“It is queer that the controller of patents took Pfizer on its face value. EPO’s decision to revoke the patent is a substantive one,” the official told The Ken. He was referring to the patent pre-grant opposition by Panacea, which was heard on 18 March 2015. Although the patent holds because Pfizer has appealed against the revocation of the patent in Europe, it is only a procedural delay which is an opportunity for Pfizer to buy time. It should not have affected the final decision to grant a patent, he added.

Pfizer already holds the patent on PCV7 (an older vaccine protecting against 7 bacteria) and GlaxoSmithKline on PCV10 (which protects against 10 bacteria), the real question is if the PCV13 vaccine under dispute is indeed ‘novel’ to deserve the patent. Is it merely an ‘incremental’ innovation?

“It is obvious that it is an inventive step, and there are not enough questions put by the patent office to Pfizer to prove their innovation. Why did they not do a rigorous job before granting the patent?” asked the official.

The answer is not obvious. It may be increased interaction: training of Indian examiners and a fast-track examination option, between the traditionally more conservative Indian Patent Office and the liberal counterpart in the US. A trend that began with Prime Minister Modi’s first visit to the US in 2014, as evident on the Patent Office’s website.

A public health perspective is an essential bulwark for considering pharmaceutical patent applications, said Leena Menghaney, the petitioner representing MSF.

 

He shows analysis of claim receipts from Kokilaben Dhirubhai Ambani Hospital in Mumbai. In June 2016, the average monthly cost of a balloon—an implant used in the angioplasty procedure—was Rs 26,620 ($404); in April 2017, it had almost tripled to Rs 74,576 ($1,134). Similarly, average costs of consumables were up 8 times over the same period, from Rs 8,000 ($121) to Rs 69,200 ($1,052).

If the hospitals are trying every trick in the trade to get the patient or the insurer to pay, the stent manufacturers are reducing the choices available to the patient.

The stent manufacturers have asserted that they have no intention to keep high-end stents in a regulated market. In September, US-headquartered Abbott withdrew two stents (Absorb and Xience Alpine) from the market*. The price of these stents was Rs 1,80,000 ($2,737) and Rs 1,60,000 ($2,433) respectively, which was capped at Rs 29,600 ($450) without taxes. Other stent manufacturers are slowly withdrawing their new generation stents, and flooding the market with older generation ones.

“Generation 1, 2 and 3 stents by MNCs have flooded the market since price control. So have Chinese stents. The drug regulator could say that the newer stents’ efficacy is not proven. But how do you prove that iPhone 8 is better than iPhone 4? The rich, who want iPhone 8, are the real losers,” said an office-bearer from the Cardiologist Society of India.

It was these margins that hospitals claim were cross-subsidising the poor, making hospitals ensure easy revenue and treat patients covered by state schemes and still deliver good clinical outcomes. The rationale may be valid for large corporate hospitals, but they constitute only about 10% of all hospital beds in the country.

What about the poor, who find themselves at the doors of public-funded government hospitals, which house about 20% hospital beds?

A zero-sum game

Dr Sundeep Mishra, Professor of Cardiology at the All India Institute of Medical Sciences (AIIMS) in Delhi, does not know why he is being asked questions on the impact of price ceiling for stents. Because at AIIMS, like many other public funded hospitals, the price has been negotiated and capped for a couple of years now. A price that was already lower than the cap decided by the drug regulator. The high volume of patients makes this negotiation possible.

At AIIMS, where 1200 angioplasties are conducted annually, the price of stents is ceiled at not more than Rs 25,000 ($380). Dr Mishra, also the former chairperson of the National Intervention Council and editor-in-chief of the Indian Heart Journal, says that only drug-eluting stents, which are approved by the US FDA, are used at the hospital.

Similarly, at GB Pant Hospital, New Delhi and Jayadeva Hospitals, Bengaluru, where a total of about 10,000 angioplasties are conducted every year, higher than any other public hospital in the country, the prices of stents were capped at a maximum of Rs 23,000 ($350) and Rs 28,000 ($425), respectively.

“Public hospitals were not affected by capping at all,” reiterated Mishra. “Price control is a good concept but if the government wants to pass on the benefit to patients, it needs to be thought in a holistic way. Stent pricing is just one component,” he added.

The more important question here is: is the drug regulator capping prices of ‘essential’ devices?

Cardiologists from private hospitals have argued that coronary stents and knee implants—two devices whose prices are controlled by the drug regulator this year—are hardly essential as other options exist, like medication. They are lucrative for hospitals as they generate revenue from patients who are looking to improve their quality of life, as was reported by The Ken in August.

The patient is the loser in this cat and mouse game. So is the government, which has not been able to ensure that the benefit reaches the patient over the long term.

Healthcare in India is financed in three ways—via a government scheme, insurance provider, and by cash. Though it is accepted wisdom that the first two make healthcare affordable over time, the government chose a short-sighted move and the quick credit that came with it.

No healthcare policy borne out of only one narrative that ‘private hospitals are thieves’ is going to be a long-term solution. “At some point, the government will have to realise that it provides healthcare services to a quarter of the population, while rest of the population depends on profit-motivated hospitals. Crossfire between regulator and hospitals hurts the patient, collaboration does not in the long run,” said the CEO of a health insurance company in Gurugram.

 

“One corporate hospital’s revenue was hit by about 3%—when stents that were being charged at up to Rs 2,00,000 ($3,041) were fixed at Rs 29,600 ($450)—and the easiest way to recover was to increase the price of medical procedure by 40-45% for patients who pay out-of-pocket. In the last seven months, hospitals have reached the same monthly revenues as before the price was ceiled,” he added while talking about large corporate hospital chains.

As is evident in the graph above. Prices of angioplasty procedures have risen significantly since these were negotiated with a public sector insurance company. (The January 2016 prices are sourced from an RTI application and the current prices are sourced from MediFee.)

The strategy was not very different, just the increase in the price of the procedure was less in hospitals whose primary aim was not profits, said a cardiologist with Christian Medical College (CMC) in Ludhiana. Everyone increased procedure costs, CMC increased it less than other hospitals, he said.

The drug regulator, National Pharmaceutical Pricing Authority, which fixed the ceiling price of stents, was right in shining a light on markups (as much as 650%) which were largely benefitting the hospital. But it was plainly wrong in assuming that hospitals were so blinded by greed that they’d forget to price angioplasty packages efficiently to attract patients.

Why are hospitals not settling for what should be a reasonable margin on stents?

“Don’t ask me how it came about. People would negotiate on procedure costs but once a US multinational manufactured stent came into the picture, no one negotiated. At some point, hospitals realised that it was one of the best ways to ensure profits,” said a senior executive of Narayana Hrudayalaya on the condition of anonymity.

The cardiologists are obligated to educate the patient on all their options, ranging from stents that cost Rs 10,000 ($152) to the ones that cost Rs 2,00,000 ($3,041). The rich make the obvious choice for high-end stents. “Consider buying shoes. The ones with purchasing power would want to buy the expensive one,” he added.

The winner takes it all

The unreasonable margin on stents, in turn, cross-subsidised the angioplasty procedure. It also gives hospitals some room to provide free treatment to emergency patients and poor patients, as obligated by some state governments. By curtailing margins on stents, hospitals now have no incentive to design operationally efficient standardised packages for angioplasty. Patients will have to pay the real cost of healthcare services, the senior executive explained with a sigh.

About 400,000 angioplasty procedures are conducted annually in India, a number that is consistently growing as demand is met by healthcare infrastructure being developed largely by private hospitals.

At Narayana, about 60% of nearly 2.1 million patients that it treated last year, pay cash. And they have no option but to pay the increased price and thus lose out on the benefit of price control of stents that the government had promised. The cash patient has already lost the battle for affordable angioplasty with increased procedure costs. The insurance patient is the winner for now. But is she really?

If Narayana succeeds in negotiating with insurers this month, the remaining patients would have lost the benefit of price-controlled stents, too. Because that’d mean Narayana increasing the angioplasty procedure costs for insurance-covered patients.

Will the insurers give in?

The former CEO of one of the largest private insurance companies explains that some insurance companies may be prepared, like Max Bupa, which tracks prices of four procedures (angioplasty, cataract, knee and gallbladder surgery) closely to have smart negotiations. “Major hospitals have the muscle to pull the negotiation in their favour, but not all of them would be able to,” he said.

Even if they do not succeed in negotiations to revise procedure costs, the hospitals have already started to play tricks with patients on other implants, says a General Manager, Health, of a public sector insurance company in New Delhi.

 

What comes next is anyone’s guess.

After three months of discussions, the World Health Organisation (WHO) has convinced the health ministry to make certain diagnostics affordable. When the price regulator studied hospital bills in February, it found that diagnostics constituted over 15% of the bill, and the prices varied significantly across labs. The policymakers have begun the process to expand the scope of price control but the path to regulating the price of a diagnostic test is far more challenging than it was for drugs and devices.

This is primarily because there is no regulation for pathology labs in India. Only voluntary accreditation by the National Accreditation Board for Testing and Calibration Laboratories (NABL). Something only about 1% of the 100,000 labs possess. Unlike medical devices, for whom the Medical Device Rules kicked in from January 2018, and, of course, drugs, whose quality is monitored by the Drug Controller General of India. Diagnostics sector is neither bound by law nor a regulator.

Further, the policymakers have missed the one factor they cannot control—the price of treatment. If the health ministry fixes the price for diagnostic tests this year, it still would not be able to ensure that the benefit reaches the patient. It appears the lessons of stent price control haven’t reached the policymakers’ table.

To refresh public memory, we are re-publishing our earlier story and making it free.

As far as the popularity of any health policy goes, price ceiling for stents has made it right to the top. Just before Uttar Pradesh elections, Prime Minister Narendra Modiused it at a rally to woo the voters. The PM claimed that he was committed to providing affordable healthcare to everyone by reprimanding and controlling the profit-motivated businesses. Only if its simplicity and popularity made healthcare affordable.

Eight months later, the cheer from the crowds is followed by some behind-the-door discussion in fine print. Hospitals’ message: you can control the margins of devices but the price of medical procedures is ours to decide.

The recovery phase

Hospitals have already recovered from the loss in revenue that followed price ceiling for stents from about 40% patients, who pay them directly. Now they have raised their game to begin negotiations with private health insurance companies, who pay for about 20% of the patients. The patient is already losing. Will the hospitals succeed again?

“The negotiations can go either way depending on the power of the insurance company. How much a small hospital needs to stay on their panel? And on the expertise of the hospital. No insurance company can afford to lose a big cardiac speciality hospital if they are adamant [on increasing the price],” said a senior executive of a private insurance company, who is currently involved in a few such negotiations.

Some hospitals are adamant. Recently, Ashutosh Raghuvanshi, CEO of Narayana Hrudayalaya, which runs a chain of multi-speciality hospitals across the country, made it clear that he’d have to increase the price of the procedure, and that the patient would not really benefit out of price reduction of stents. As many as 12,000 angioplasties were conducted across all Narayana’s hospitals in the financial year 2016-17.

Raghuvanshi’s argument is about the hospital he runs, but does it ring true for most patients? Is the patient, whom the government wanted to help, better off now? Did the government, who took a big pat on the back, accomplish what it set out to?

The policy is as the policy does. Well-intentioned intervention into the private healthcare space by the drug regulator was a short-sighted move. Its benefit has not reached the vast majority of patients. Neither those who never had any access to medical procedures like angioplasty nor the ones who pay for angioplasty.

The remaining patients, protected by health insurance and government health schemes, have a thin wall between them and increased medical procedure costs, which will negate the benefit of the price ceiling. Hospitals are bringing the wall down. One brick at a time.

In March this year, a month after the prices were capped, hospitals began to come up with ways to make profits again, said an executive who works on pricing with a Delhi-based health tech company. The company partners with over 600 hospitals across the country.

More than 50% of the 3000-people strong R&D team of OPPO in China, work on the India market, the largest market after China, Yang had added.

So, the Chinese got the product strategy right—sleek devices with mass-appealing features such as selfie cameras at under Rs 20,000.

The other strategy piece the Chinese got right was their distribution.

“They appointed individual distributors at the regional level to maintain a tight control over the distribution and pricing, as opposed to the traditional three-tier distributor network consisting of national, regional and local distributors,” says Pathak. This meant that a company like OPPO wouldn’t tolerate if a vendor sold its phones at a different or a lower price, be it offline or online (where it started late 2015). This gave it a good reputation in the distributors’ community.

To reach consumers first and fast, Chinese firms offered distributors a 5-7% higher margin than their Indian counterparts, say industry experts. Over and above, they rewarded them with generous incentives. Like trips to the Maldives or other countries, if they met their targets. Which was not a big cost for these firms having already reached economies of scale.

Next came branding and marketing

They invested in Bollywood and cricket. And since 2015, it has become a battle of sorts. From signing Bollywood stars as brand ambassadors to sponsoring reality shows, movies and cricketing events like the Indian Premier League (IPL), the Chinese smartphone makers went all out. For instance, Vivo became IPL title sponsor in 2015, while OPPO was a sponsor to IPL 2016. This year, Vivo grabbed the IPL opportunity, and OPPO brought Indian cricket team’s sponsorship rights.

Not that the Indian companies didn’t try to gain control over the distributors’ network or invest in enhancing their brand image. Going any extra mile would have eroded their gross margins—at a time when they were already losing market share.

“They [Chinese] literally bought market share with money,” says Convergence Catalyst’s Kolla.

Made in China vs Make in India

Most of the Indian smartphone makers had announced their ‘Make in India’ plans in 2015, investing large sums of money into assembling units. Only to face supply constraints very soon thereafter.

“The ODMs that built microchips, memory cards, screens, etc., their entire factory capacity was getting absorbed by the Chinese [smartphone] manufacturers,” says Jaideep Mehta, managing director – India and South Asia at IDC. “So Indian companies were hit by component shortages.”

Pathak agrees. “The moment they [OPPO and Vivo] started rising in China, supply chains were tilted in their favour because they [component makers] knew who were the ones doing high volumes,” he says. “It raised the cost of the components, primarily the memory chip and screens by about 5%. Each contributes to one-fifth of the total component cost.”

Adding fuel to the fire, many Indian firms made the mistake of over expanding. “Micromax and Intex decided to launch televisions for example—in hindsight, it wasn’t a wise move because it drained their resources,” says Mehta.

Over the last two years, the cost for Indian smartphone makers has increased, in manufacturing, distribution, marketing and branding. And for the lack of innovative products, their market shares have kept declining so much so that today, none of them rank in the top five.

The Ken sent multiple emails and made many phone calls to Vivo, OPPO, Gionee, Micromax, Karbonn and Lava but none of these companies were willing to speak.

Each for their own reasons—the Chinese firms are prepping for a more aggressive fight, and the Indian firms have taken a step back, choosing to lie low for a few months to bounce back with a new game plan.

“At a time, when the Indian guys were mainly targeting the entry-level smartphone market, the Chinese companies targeted the price points between Rs 10,000 and Rs 25,000 which were growing the fastest,” says Tarun Pathak, senior analyst at Counterpoint Research.

Between 2014 and 2016 the Chinese companies went after users who were buying their second and third smartphones. “Now that the consumers were experienced, those using Indian phones moved on to the Chinese brands,” says Meena.

This hit Indian companies twice over. Firstly, because the entry-level market didn’t grow as fast as they had expected, so their new customer base didn’t expand much. And secondly, because their existing consumers upgraded to the Chinese models.

“OPPO, Vivo and Gionee grabbed market share from existing [Indian] guys, who were catering to the mid- and low-end market. And when the Indian players gradually started moving up the value chain targeting the top 30-50 million users, there, OnePlus and Xiaomi came and hit them,” says Kolla. “While the biggest losers have been the Indian companies, Samsung has also been hit to some extent.”

When partners turn competitors

Briefly, the playbook followed by Indian mobile phone makers, which rose to fame during the last five-six years was this: import devices from China after cannily sensing the mobile phone opportunity in the country. Iterate rapidly and offer dozens of phone models with features that customers wanted, at prices much cheaper than those of Samsung, LG, Sony and HTC.

Powered by entry-level smartphones priced as low as Rs 2,000-3,000 and channel margins as high as 18-20% (as compared to the 8-10% offered by global brands), explains Kolla, Indian brands came to be seen as giant killers.

In the second quarter of 2014, Micromax briefly trumped Samsung to become the largest smartphone company in India. Otherwise, it stayed a clear number two. Meanwhile, Intex, Lava and Karbonn also climbed up to join the top five league.

But the ground was beginning to shift underneath their feet.

While the Indian mobile companies had spent good money on their distribution networks and branding initiatives, they underestimated the ambition of their Chinese ODM (original design manufacturers or the component makers) partners.

“OPPO and Gionee had been the ODM partners for Micromax, Karbonn, Lava, Spice, etc., based in Shenzhen and China,” says Kolla. “So even before they entered the Indian market, they had a fairly good grasp of the product features and price ranges that would and wouldn’t work. It was our guys who educated them for a good two years, from 2012 to 2014.”

The Chinese firms also had an innovation edge, unlike the Indian companies, which failed to invest in R&D and depended entirely on the Chinese for product innovation. “Indian brands were the traders, who saw the opportunity in India and launched their own smartphone brands by importing Chinese phones and distributing them. Being manufacturers, China’s economy grew manifold.

They had the cost advantage, thus they started to innovate and research,” says OnePlus’ Agarwal. “Today, much of the new innovation is coming from China—the battery innovation, the camera and a lot of those features. They were somehow able to build a business model in which they reached economies of scale. All of which gave them differentiated advantage.”

The final straw came at the turn of 2014, when the Chinese market was slowing down and the Indian smartphone market had begun to pick up. The Chinese entered India and took away the cost advantage that the Indian smartphone companies enjoyed.

Selfies and Bollywood

In an earlier interview last October, Will Yang, Brand Manager for OPPO India, said that the company had spent almost three months doing research on the Indian consumer behaviour just before it arrived in the country.

“For instance, our research showed that Chinese or Southeast Asian people like a little bit of red colour on their cheeks and lips. But Indian consumers are much more focused on their hair or skin, they like it clean,” said Yang. “That is why we focus so much on the camera and selfie features here. If we didn’t do this research, I don’t think this product would get this good feedback from the market.”

 

For a company that entered India in 2014, Xiaomi’s growth has been scorching. In just two years, it claimed to have hit one billion dollars in revenue. This January, it said it sold over one million of its Redmi Note 4 smartphones in just 45 days of its launch.

“Two years back, if you had asked me, whether we would cross a billion-dollar revenue in India in two to three years, I would have laughed at you,” says Manu Jain, who joined Xiaomi as the India head and its first India employee in May 2014. “We never imagined to be this successful when we started.”

Jain is now doubling down further, on offline stores. Because even though 90% of Xiaomi’s sales comes from online, 70% of Indian smartphone sales still takes place in offline stores.

Then there’s OnePlus. The online-only company with a rather passionate following (no mean feat in the crowded smartphone market) recently signed on Bollywood’s superstar thespian, Amitabh Bachchan, for its new campaign for its flagship OnePlus 3T smartphone. Easily among the most expensive and most desirable brand endorsers in the country, Bachchan is said to charge around Rs 5 crore for a one-year contract.

While Xiaomi and OnePlus had created enough buzz using fan clubs and user communities even before entering India two and a half years ago, there were other Chinese companies that made quieter entries.

OPPO, Vivo and Gionee entered India rather quietly in the second half of 2014 and started racking up market share by selling premium-looking phones at relatively low prices.

Today, the Chinese smartphone firms command about 50% of the market share in India while covering 40-50% of the country’s geographical area. And there’s no sign they’re about to slow down.

The Chinese squeeze

When Xiaomi entered India in 2014, most of the large Indian mobile companies dismissed it.

“Everybody we spoke to that time, said it was going to be a big disaster because smartphones were traditionally sold offline,” says Jain. “Initially, we got only 10,000 units, because 10,000 people were following us on Facebook. We thought at least they would buy our phones.”

At that time, Samsung had recently launched its flagship smartphone Galaxy S5 in India at a price of around Rs 51,000. So Xiaomi launched its Mi3 smartphone, with somewhat comparable technical and hardware specifications, but at Rs 14,999, less than one-third the price of Galaxy S5. Value-conscious Indian buyers crashed the site of Flipkart, where the Mi3 was being sold via a flash sale.

“Many competitive brands made public statements saying this [business] model is completely flawed and it would never work. And within six to nine months, the same brands were launching sub-brands and products specifically for the online segment, trying to copy what we did,” Jain remembers.

Later that year, OnePlus entered India with the OnePlus One at a price-point of Rs 21,999 and an invite-only model. Though more powerful than Xiaomi’s devices, OnePlus, too, priced itself at a good discount to high-end Samsung Galaxy smartphones and Apple iPhones.

“Most of the Indian companies were sub Rs 10,000 and sub Rs 20,000. The medium to the high-end territory was open to Chinese players like OnePlus because there were no Indian companies that matched them in terms of the product strength,” says Satish Meena, an analyst at Forrester Research.

Furthermore the invite-only model, that OnePlus came with—to ensure that it supplies what it commits—added to its advantage. “The invite was considered as something prestigious at that time. There were times when invites were sold on eBay for as high as Rs 1,000,” says Vikas Agarwal, general manager, India at OnePlus.

“This created a sensation in those 30-50 million online users at the top of the pyramid,” agrees Jayanth Kolla, founder of research firm Convergence Catalyst.

In a stark difference to what Xiaomi and OnePlus did, Gionee, OPPO and Vivo started offline. It’s worth noting that OPPO, Vivo and OnePlus have the same parent company, BBK Electronics Corporation. So while they compete aggressively against each other globally, they dominate the markets together. And India is no different.