How growth kills economy of scale: A case study

A newspaper article describing the losing sheen of tablets is on ET today. The premise is simple:

“The India tablet story is losing steam. After a 56% surge in 2013, tablet shipment fell nearly 28% sequentially in the first three months of 2014. 

As many as four million units were sold last year, compared with 2.66 million in 2012. But in the January-March quarter of 2014, only 0.78 million tablets were shipped, down more than 17% from a year earlier “

The growth of tablets industry has been phenomenal in the last few years. In 2012, a Hindu BusinessLine article showed a year on year growth of 673%. The growth this year has slowed down to 76%.
A 76% growth in any sector will draw deep cheers but so much has been the historical growth for this sector that a high two digit growth rate is a dampener.

But deep inside this development is a conundrum. The only difference between two manufacturers of electronic hardware is economics of production (or economy of scale). A smaller entity can’t make as much profit as a bigger manufacturer makes purely because the fixed cost per unit is lower.

In absence of any switching costs for the end consumer, price becomes the only difference. For laptops, mobile phones and tablets it is evident. There is just no switching cost for the end consumer. As a result, price or rather features per unit of price become the driving idea behind any transaction.

But with Google’s Android push in the last 5-6 years, almost entire onus of features have moved from hardware to software. There is just no difference between two devices! As a result, there is no differentiation and there is no switching cost for the consumer.

In absence of such demand side advantages, economics of scale becomes harder to protect. But harder still when there is growth involved.

As mentioned elsewhere in this blog, growth expands the pie and everyone becomes a competitor and no one the incumbent. This cocktail effectively makes the least efficient competitors quit the game. ET corroborates this:

“From a peak of 68 players competing in the market in the second quarter of 2013, the number has fallen to 30 now.”

A 50% reduction in the players implies a huge churn. This lack of stability is another indicator that there is no moat really.
However a small silver lining adopted is the new focus adopted by the companies. The manufacturers are going niche rather than going global. Increasingly making their tablets industry centric, they are re focussing on software. As a result they have a chance of creating durable moats, as professionals will (or should be made to ) spend considerable training time to master the different features of a software.
Reminds me of Bloomberg terminals.