Cyber-selling the PC

Krishnan Thiagarajan

IS THE Internet all set to change the channel dynamics in the computer hardware industry?

International players, such as Dell and Gateway which are using the Internet to sell customised PCs (or desktops) abroad, may be among the first to exploit this medium. However, these players have hardly made a dent in the Indian PC scene. Accounting for only a few thousand PCs out of the over million sold in 1999-2000, these players may not perceive India as the land of great opportunity.

Change beckons: But two developments are likely to change this perception. First, according to a forecast by research agency IDC, of Asia-Pacific country-wise shipments between 1999 and 2004, India, with a compounded annual growth rate of 47 per cent, is likely to the fastest growing PC market in the region. The PC-penetration growth rate for India is expected to be significantly higher than the 25 per cent for China, 18 per cent for Korea and 12 per cent for Taiwan. Even accounting for the small installed base of PCs, the high rate of expected PC growth shifts the focus on India.

Second, MNCs, such as Dell, Gateway, Compaq and HP, as also domestic players, such as HCL Infosystems and Wipro, are likely to exploit the Internet to widen and deepen the PC market in India. The Internet as a channel for distribution makes sense because of its inherent capacity for sharp ramp-up in volumes without significant investment in infrastructure.

Which brings us logically to the next question: Why the Internet, when other effective channels are available for sale of computer hardware such as PCs, servers, workstations and peripherals? Because, computer hardware (largely the PC players) has long been a high-volume-low-margin business, with players in India (and worldwide) surviving on wafer-thin margins of 5-6 per cent. Factor in the frequent PC price wars, and the margins may drop to as low as 2-3 per cent.

The traditional channel model: In the early stages of the PC revolution, the traditional channel model, involving distributors, dealers and retailers, evolved out of the need for companies to lower their selling and general administrative overheads. As the hardware manufacturers (such as HCL and Wipro in India) operated on extremely thin margins, the traditional channels offered them an opportunity to lower this cost, by letting the channel partners bear a part of the selling and related administrative costs. Besides this, the channel model also offered scope for manufacturers to lower the overall risk by cutting down on the fixed selling and administrative costs involved in direct sales.

Second, the channel model also offered the manufacturers an efficient way of expanding market coverage. To top it all, the manufacturers could use the entire channel chain to exploit the core competencies of individual players (such as distributors, dealers and retailers) in different legs of the channel chain.

The industry matures...: Over the past few years, realisation has dawned on the PC manufacturers and the channel partners that selling mere `boxes' was not the long-term strategy for survival. As the price points for almost the entire PC range (of different configurations) were on a decline and the scope for product differentiation blurred, the need arose for `value addition'. To bridge this emergent demand, a new breed of channel operators called systems/network integrators and value-added resellers emerged.

While a value-added reseller offered software/solutions expertise for customers, a systems integrator offered a total solution involving an integration of hardware, software, networking and allied activities. Given the scope for improvement in margins from these two activities, this new breed of players ushered in the `service age' in the computer hardware industry.

...only to face bigger challenge: Clearly, the evolution of the industry shows that there is no such thing as an ideal channel structure that can be applied uniformly. Instead, most players have been following the hybrid model, using a combination of direct and indirect channels (such as distributors/dealers and value-added resellers). But for the first time, the Internet may begin to reshape the concept of selling through the direct sales medium. As the installed base of PCs and Internet cafes zooms, all the three key target segments -- large, and small and medium businesses, and home users -- have the potential of being targeted through the Internet.

Given the distinct advantages of direct access to users, customised and configured to order PC, higher margins due to lower inventory carrying and marketing costs and quicker time-to-market, it is only a matter of time before key MNCs, such as HP, Compaq or Dell, and domestic manufacturers, such as HCL or Wipro, begin to fully exploit the Internet medium.

After the advent of the Internet, the distinction between the volume (catered to by distributors/dealers/retailers) and value (catered by systems integrators/value-added resellers) markets may blur and get subsumed into the direct and indirect sales medium. While the former will use the Internet as a potential source for generating higher margins, the latter (through the channel mode) will sustain its margins on closer customer contact and by offering total solutions.