Cost reduction by OnePlus: How it keeps

Its product prices low.

Submitted by –
Aditya Krishna Srivastava
Division A, PRN – 18010224007, Batch – 2018-23

Symbiosis Law School NOIDA,

Symbiosis International (Deemed University), PUNE

In
January, 2019
Under the guidance of

Dr. Sweta Saurabh

Assistant Professor, Symbiosis Law School, NOIDA
 CERTIFICATE

The project entitled “Cost reduction by OnePlus: How it keeps Its product prices low.” submitted to the
Symbiosis Law School, NOIDA for Managerial Economics as part of Internal assessment is based on my
original work carried out under the guidance of Dr. Sweta Saurabh from December to January. The research
work has not been submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in the research report has been duly acknowledged.

I understand that I myself could be held responsible and accountable for plagiarism, if any, detected later on.
Signature of the candidate

Signature of the Candidate

Date : 6-01-2019
 Table of Contents

INTRODUCTION ................................................................................................................................................. 4
Literature Review .................................................................................................................................................. 5
1. M.D Shields and S.M Young, “Effective Long Term Cost Reduction: A strategic perspective”,16 JCM
(1992) ................................................................................................................................................................... 5
2. N. Figar and V. Ivanovic, “Cost Reduction Strategy – Process and Effects”, EOG Vol 12 (2015)............. 6
Objectives of the study: ......................................................................................................................................... 6
Research Methodology .......................................................................................................................................... 6
Results and Discussion .......................................................................................................................................... 7
1. Lesser Profit Margins ................................................................................................................................... 7
2. Production centers in the Asian countries..................................................................................................... 7
3. Less expenses on Advertisement. ................................................................................................................. 7
4. No retail stores. ............................................................................................................................................. 8
5. Focused production. ...................................................................................................................................... 9
Conclusion ............................................................................................................................................................ 10
References ............................................................................................................................................................. 11
Journal Articles .................................................................................................................................................. 11
Other Sources ..................................................................................................................................................... 11

3|Page
INTRODUCTION
Chinese smartphone manufacturer OnePlus has, for the first time, surpassed Samsung and Apple to become the
fast-growing premium (price of over ₹30,000) smartphone brand in India, according to Counter Point, a Hong-
Kong-based research firm1. From its first phone the “OnePlus One” it has been regarded as the flagship killer
which would give its customers flagship features at a mid-tier price. The company which first made a strong base
in China came to the Indian market and was a definite success due to the cheap priced phones at a time when the
smartphone prices were only beaming up. It covered 40% of India’s premium phone market. 2 In a few years of
it’s starting business in India and other Asian countries, OnePlus phones would be seen in most of the hands of
the people. One Plus with its motto of “Never Settle” ensured that the consumers never settled for a device with
lower specs just because of its price. OnePlus rise forced the major players like Apple to release the cheaper
iPhone Xr and make Google develop and stage a release on the Pixel Lite which would compete with OnePlus for
the cheap premium phones sector.

In this paper, the researcher will discuss the economic strategy of One Plus and how they provide the customers
with devices at such a cheap price when the other companies like Apple, Samsung and Google are increasing the
prices, and still make the fastest and most reliable phones in the market. This will help in understanding how a
small company can take on the technological giants in the current “survival of the fittest” market and even force
some of these giants to change their marketing strategy to survive in the market.

1 OnePlus beats Samsung, Apple to lead India’s premium smartphone league, https://www.thehindubusinessline.com/info-tech/oneplus-beats-
samsung-apple/article24566009.ece (Last Opened on 28th, January 2019)
2How OnePLus won 40% of India’s Premium Phone Market,
https://www.warc.com/newsandopinion/news/how_oneplus_won_40_of_indias_premium_phone_market/40865, (Last Opened no
28th January)
4|Page
Literature Review

1. M.D Shields and S.M Young, “Effective Long Term Cost Reduction: A strategic
perspective”,16 JCM (1992)

Shields and Young with the help of this paper provided the researchers with a comparison between the traditional
as well as the modern methods of cost reduction. The author’s focus on the fact that the traditional methods of
cost reduction have only focused on the short term gains and has also resulted to losses in the longer term. The
researchers conducted secondary research and came up with methods of effective long term cost reduction.

First discussing the traditional ways, they focused majorly on replacing human labour with technological
alternatives as it would reduce the meddling of worker’s unions and the wages and/or salaries would be replaced
by the cost of maintenance. Not only would this make the work cheaper but also ensure that it’s done more quickly
as well as efficiently.

The second point which was discussed by the researchers was to outsource the work to the Asian countries which
provide cheap labour and yet high quality of work due to the high population and weaker currency. Outsourcing
is one the most effective strategy for many manufacturers and thus is widely used by companies all over the world.

Other traditional strategies discussed by the authors is the “lean and mean” technique which focused on strict
policies to control and reduce the number of employees. This method focuses on ending the discretionary
programs and employees to reduce the cost of production. Even though, this method reduces prices in the short
run but leads to long term losses due to the extra stress and reducing motivation and determination.

They stated that the traditional methods only work to reduce the operational costs when a firm’s overall strategic
position is good.

The paper then discussed about the strategic approach which has the following methods. It stated that a critical
aspect of developing a strategic cost reduction program is by deciding the point at which they will be focusing on
and removing or reducing the subsidiary programs and thus focus on only a limited aspects of production at the
best quality. The other methods suggested by the authors was to reduce profit margins and focus on a larger market
to get an overall profit. Long term employment was also suggested as a great method to ensure the efficiency of
the workers thus making the words faster and easier.

The paper concluded by saying that the management’s efficiency, traditional as well as strategic methods of cost
reduction would help in long term profits with minimum losses in the way.
 2. N. Figar and V. Ivanovic, “Cost Reduction Strategy – Process and Effects”, EOG Vol 12
(2015)

The authors started their paper by covering the various factors which lead to the idea of the companies and firms
to delaying the plan of cost reduction, they stated the reasons to be the following, existing profit, existing effort,
tradition and increase in the number of employees. In the modern sense however, firms need to work on cost
reduction to stay in the market.

They gave a step by step method to understand the tools of cost reduction and then choosing the one which suited
there needs the best. They stated that the firm should first estimate the direct and indirect cost of production,
majorly the labor costs. In modern management the indirect labor costs are a lot more expensive than the direct
labor costs thus proper data collection is important for the same.

The next step as given as analyzing and using the tools of cost reduction. After research conducted they figured
out that cost reduction takes place by the following ways. Some of them are as follows,

1. Operational, standard and capital budgeting.

2. Cost transparency,
3. Outsourcing,
4. Focusing,
5. Avoiding major relations with workers’ unions,
6. Keeping employees for long term and adjusting the work to their physical abilities.

The researches stated that such methods when used effectively would result into an increase in the profits with
lower cost price and thus covering of a global base.

Objectives of the study:

1. To analyse the cost reduction strategy by OnePlus without losing the key selling points.

Research Methodology
Secondary research has been used to gather data for the purpose of the study.

The researcher has referred to multiple research papers, articles and newspapers to gather data and has then
analysed for the purpose of the study.
Internet articles and interviews have been referred for the study.

Results and Discussion

OnePlus has uses multiple technique to reduce the production price of its phones. OnePlus uses the idea proposed
by Shield and Young by focusing on the bare minimum for the production of their devices. The methods which
the company uses to achieve this goal are as follows.

1. Lesser Profit Margins

Unlike the other brands, OnePlus focuses more on capturing a larger market by reducing the price to the bare
minimum with low profits. The OnePlus phones are sold on only a small percentage of profits. In an interview
given by the CEO of OnePlus about why the cost of the OnePlus one is so low he said, "We are selling the phone
at cost, we are able to do that by redistributing our costs to better benefit the user."3

This acted as a marketing strategy for a new company to make its name among the major players. Since then,
OnePlus has kept a low profit margin for each of their phones thus resulting into a cheaper product price.

2. Production centers in the Asian countries.

Due to the cheap labor provided to the Chinese company, it reduces the production cost exponentially. On the
contrary the western competition outsources only the assembling of the goods. Apple for example develops the
phone in California, USA but assembles it in China. This adds on to the price of the phone due to the export tariffs
and the high price of labor and research and development which goes onto the production of the iPhone.4Due to
the main base of the company being in China, not only does it escape the price involved in exporting the goods it
also saves on the high labor costs in the western countries. OnePlus to add on to its price reduction strategies even
has a large number of production centers and funds due to the presence of the parent company, Oppo and its
production centers in different parts of China, India and other Asian countries.

3. Less expenses on Advertisement.

3OnePlus CEO Lau: We're selling the OnePlus One at cost, https://www.phonearena.com/news/OnePlus-
CEO-Lau-Were-selling-the-OnePlus-One-at-cost_id56131 (Last Opened on 28th January, 2019)
4How and Where iPhone Is Made: A Surprising Report on How Much of Apple’s Top Product is US-manufactured,
https://financesonline.com/how-iphone-is-made/ (Last Opened on 28th January, 2019)
Companies all over the world spend massive enough of amounts of money for the advertisements of the products.
The price on advertisement is added on the cost of production of the product and is thus added on the cost price
of the same. The advertisement and marketing projects of all the major companies include a brand ambassador,
multiple television and internet advertisements. As all of this is added in the cost price of the product, it also leads
to a massive increase in the selling price of the same as the companies cover that cost. OnePlus on the other hand
has a different method for marketing. It spends minimal on advertisement and functions more on word of mouth.
OnePlus started its company with an invite based selling strategy. OnePlus’s Cco-foudner said, "We’re not
spending that much on marketing or on our channel costs because in the end, consumers have to foot the bill.” 5
He even compared the price of marketing done by other companies like, LG by saying that, “I heard that LG is
spending [around] $200m a year just in the US on buying media. “We have nowhere near that; if we used the
same strategies as the big guys, we would drown.”6

4. No retail stores.

OnePlus just recently started forming retail stores. From the beginning it has had a strong online presence. All its
sales have been done in the form of invite sales, flash sales and online sales. It has partnered exclusively with
Amazon for the sale of its phones. The strong online presence of one plus has helped it reduce the retail prices of
its phones as marketing online reduces the overall cost of the product. 7 In 2016, OnePlus shipped over 2.5 million
devices online, thus acting as a really effective cost cutting as well as marketing strategy which has owed to its
success.

5 How OnePlus is taking on the mobile giants, https://www.marketingweek.com/2016/03/02/how-oneplus-is-taking-on-

the-mobile-giants (Last opened on, 28th January, 2019)
6 How OnePlus is taking on the mobile giants, https://www.marketingweek.com/2016/03/02/how-oneplus-is-taking-on-

the-mobile-giants (Last opened on, 28th January, 2019)

7(Khan, 2005)
 Source - https://www.statista.com/statistics/729942/china-oneplus-smartphone-
shipment-volume/

5. Focused production.
Focusing the manufacturing in a select areas of the company helps the company to reduce the production
cost of a product as the funds are not distributed in different sections. 8
OnePlus has focused its research and development solely in deciding the design of the phone and
developing the parts of the same. Unlike other companies like Apple, Google, Samsung, etc, OnePlus
usually doesn’t bring any new trends to the market, thus not spending extra money in the research and
development for the same. OnePlus also has only one set of product lineup and not a complete eco-system
of its products, which ensures that all the revenue collected will only be through the phones, thus reducing
the risk taking capacity. The company also outsources assembly of the phone, therefore reducing the extra
costs involved in the same. OnePlus sells phones only for the premium market, i.e the under $300 market
phones. It does not compete in the mid-tier phones, and therefore gives no competition to Vivo and

8 (Ivanovic and Figar, 2015)

 Samsung in the same. Lau on this matter said in an interview with the Bloomberg, “We try not to be overly
distracted by what’s going on in the market or our competition”9
On the contrary, if we take the example of Apple, it gains a large amount of revenue through it’s
subscription services like iCloud, iTunes, etc, which improves its capacity to take risks as there will also
be a constant flow of income for the company. Apple also introduces new technology constantly in the
market, whose cost of development latches on to the selling price of the phone10.

Conclusion
OnePlus has kept a focused approach in its pricing. It has kept a low price to appeal to the cost conscious
market. To do the same it has reduced the manufacturing costs and also reduce the price on the marketing
and advertisement which takes a huge chunk of the selling price of the product. OnePlus also focused the
production of the phone by only making the bare necessary and outsourcing the rest. The base being Asian
countries and OnePlus having the backing of another major Chinese company, Oppo also ensures that the
company can keep the product price relatively low.
The low product pricing was decided by OnePlus to make its name in the market, to tackle the problem of
being a small and new company going against the market giants.
The prices of the previous few phones have signified that now OnePlus is covering up the low profit
margins as the prices have significantly increased. However, it is still significantly lower than its
competition which are also increasing the prices as fast as OnePlus if not more.
OnePlus’s economic strategy not only tells us how a small company can tackle the market giants, but also
as to how a company can reduce the price of a product without losing on reliability and quality.

9 How OnePlus won 40% of India's premium phone market,

https://www.warc.com/newsandopinion/news/how_oneplus_won_40_of_indias_premium_phone_market/40865 (Last opened on,
28th January)
10 Apple Strategy Teardown: Where the World’s Most Valuable Company Is Focusing In Augmented Reality, Wearables, AI, Cars, And

More, https://www.cbinsights.com/research/report/apple-strategy/ (Last accessed on, 28th January)

References

Journal Articles

1. M.D Shields and S.M Young, “Effective Long Term Cost Reduction: A strategic perspective”,16 JCM
(1992)
2. N. Figar and V. Ivanovic, “Cost Reduction Strategy – Process and Effects”, EOG Vol 12 (2015)

Other Sources

1. Apple Strategy Teardown: Where the World’s Most Valuable Company Is Focusing In Augmented
Reality, Wearables, AI, Cars, And More, https://www.cbinsights.com/research/report/apple-strategy/
2. How and Where iPhone Is Made: A Surprising Report on How Much of Apple’s Top Product is US-
manufactured, https://financesonline.com/how-iphone-is-made/
3. How OnePlus is taking on the mobile giants, https://www.marketingweek.com/2016/03/02/how-oneplus-
is-taking-on-the-mobile-giants

4. How OnePlus won 40% of India's premium phone market,

https://www.warc.com/newsandopinion/news/how_oneplus_won_40_of_indias_premium_phone_marke
t/40865
5. OnePlus beats Samsung, Apple to lead India’s premium smartphone league,
https://www.thehindubusinessline.com/info-tech/oneplus-beats-samsung-apple/article24566009.ece
6. OnePlus CEO Lau: We're selling the OnePlus One at cost, https://www.phonearena.com/news/OnePlus-
CEO-Lau-Were-selling-the-OnePlus-One-at-cost_id56131