Giovanni Domenico Tiepolo - The Procession of the Trojan Horse in Troy (circa 1760). Source.

Transsion's Trojan Horses

Follow the Ladder to Heaven

Follow the ladder,
Follow the ladder,
Follow the ladder to heaven,
(Sister follow); x2

-- Sister Agnes Iro

One of the most important yet underreported stories in African technology in the past 5 years can be told with these two charts:


Source: IDC via Bloomberg


Source: IDC via QZ

My father bought my very first mobile phone in early 2004; a Nokia 1100 that only saved up to 50 contacts and was mostly used to play Snake. In the years that followed, I ‘graduated’ to a Vodafone-branded Sagem MY V-55 that could send pictures and music via Infrared, a Sagem my401X with Bluetooth support but only 3 megabytes of storage, Nokia 5330 XpressMusic then 5530 XpressMusic, and many others I don’t even remember -- all before my first Blackberry.


Sagem MY V-55

I suspect this upgrade path feels familiar, if dramatic, to those of you who lived in an African country between 2001 and 2009; one European brand to the next, mostly Nokia, with each phone being more capable than the last. And as you climbed the ladder, the phones had better apps and more diverse use cases (for example, I read all the Harry Potter books as .jar files on my first XpressMusic), until now. This is why the above charts matter.

For years, the growth story for technology startups in Africa has been the ‘unstoppable’ rise in ‘smartphone penetration’. Of course, in reality, things are...not so simple. Since 2015, smartphones started losing market share to feature phones as a percentage of all phones sold on the continent.

This is likely for three reasons: 1) many African currencies have lost value against the US dollar, in turn, making [imported] smartphones too expensive for customers, 2) we have run out of ‘middle class’ to sell these expensive smartphones to, and 3) some countries with large populations, like Ethiopia and DR Congo are seeing their mobile phone markets expand, as many users are only just getting their first phones. Feature phone sales are growing stronger by the year, growing from 55.4% of mobile phone sales in 2016 to 61% in 2017.

Most of this momentum is driven by Transsion Holdings, owner of the Tecno, iTel, and Infinix brands. In July 2006, the company was founded by George Zhu Zhaojiang as ‘Tecno Telecom Limited’ to serve South-East Asia, but about two years later, it pulled out of all its markets and shifted focus entirely to Africa. The logic was simple: Transsion had no chance in China, but Africa also had 1.2bn people and much lower penetration (sub-30% vs. 60%). It was wide open.


Branded Storefront in Karatina, Kenya (April 2013). Credit: Niti Bhan

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The company optimized its production process to serve low-income consumers in Africa, e.g. a strong focus on lower prices for higher specs, dual-SIM support because consumers wanted to avoid high tariffs incurred by calling across operators (i.e. MTN calling Airtel), bigger batteries and low powered chipsets to account for poor electricity infrastructure, local language support, and even this weirdness:

“For African consumers, a main medium of entertainment is photos – they love to take selfies and share them with friends. The traditional camera was not optimised for the African consumer because often, for those with darker skin, the photos don’t come out well especially in low light. We did research using over 10,000 photos of African consumers to create a special algorithm to optimise the camera to attract 30% more light on the darker face. We call this ‘Africa Focus’. It’s been heavily popular. It improved our cameras and won the hearts of Africans who like to take selfies.

The result? Transsion has grown its sales from 310,000 to more than 100 million units per annum. Transsion’s brands have filled the void left by Nokia, and the upgrade ladder for the average African consumer today looks more like iTel -> Infinix -> Huawei/Tecno -> Xiaomi, and so on. In the early days, Tecno phones were perceived as cheap, low-quality knock-offs of actual phones, but much like its customers, Transsion has laddered up:


Source: IDC via QZ

Transsion’s Trojan Horses

One thing, though: the hardware ecosystems in Shenzhen and Huizhou, as well as the modularization of the phone supply chain that allows Transsion price their devices so low are not unique to them. The mobile phone manufacturing business is famous for its low margins, especially as most brands, undifferentiated, compete on the vector of price, driving margins even lower.


Global Handset Profits (Look at Apple go...)

Tecno, iTel, and Infinix have all built significant brand equity across the continent, but the same factors that drove Transsion’s growth -- consumers who count every penny -- mean that it must find other ways to gain value from them. (The assumption being that upgrade cycles are slower than in developed markets, where Apple sells new iPhones to old consumers every year.)

To that end, here’s Techweez:

We have evidence in our possession that Transsion, through a joint venture with NetEase – a Chinese Internet technology company is prepping to launch a service by the name PalmPay, under a newly registered company, Transsnet Payment Limited. According to Transsnet’s documentation, they describe themselves as a company that develops financial services for the mobile generation in Africa and aim to reach 100 million users within the next 3 years.

What we know so far is that PalmPay will offer mobile loans as well as a payments platform that will allow users to send money to each other, pay for bills and buy airtime. Additionally, there’s a mention of PalmPoints, which is some form of loyalty program to keep the customers engaged with the product.

Of course, Transsion is building a mobile payments service. There are many similarities between their approach and Xiaomi’s in other markets; now that they are getting phones into the hands of every African for cheap, they will try to make more money from them via online services. Sell cheap phones at cost or lower, and try to make the money back via online services. Rinse and repeat. This is not Transsion’s first rodeo: their phones already come bundled with PalmPlay (an alternative app store) and PalmChat (a messaging service they claim has 170 million subscribers, though I find that hard to believe), and the mechanism for getting these services in the hands of customers already exists: phone sales driven by brand loyalty.

But zooming out, we are witness to and participants in a global race to own the African consumer. Today, most of their economic activity is centered around the bottom of Maslow’s hierarchy of needs, but the expectation is that they will move up to higher value activity, and the companies that own them then will be that much better off for it.

So, we have products like Branch, Paylater, Piggybank, building at the application layer; M-Pesa and Airtel Money using the SIM Card as their chokepoint; Opera trying to become ‘the internet’ to funnel transactions through O-Pay (we will talk more about this next week, but this thread by Michael Kimani is a good place to start), and Transsion Holdings, producers of the phones they all get distributed on, venturing into financial services. O, boy.

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That’s all for today. Please share this edition if you liked it. Thank you for reading!

With love in my heart and two lukewarm meat pies from Roadchef in my belly,

Osarumen.

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