Computer hardware -- Surfing a price-sensitive market

Krishnan Thiagarajan

THE RS 6,400-crore computer hardware industry took the economic slowdown and political uncertainty in its stride, delivering a reasonably good performance for 1999-2000 compared to the previous year.

Despite corporate- and government-buying remaining sluggish, the desktop PC market recorded a notable 37 per cent growth in sales volumes and a 13 per cent rise in value terms in 1999-2000. The desktop PC industry appears to have matured and stabilised, with growth rates of 30-35 per cent likely to be the industry norm. Though the desktop industry clocked a better performance in 1999-2000 compared to the 32 per cent growth (in volume terms) in 1998-99, the massive 60 per cent and 50 per cent growth recorded in 1994-95 and 1995-96 are clearly a thing of the past.

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As corporate- and government-buying stagnated, PC sales began to be pushed to the home and the SOHO (Small Office Home Office) segments. Several aggressive moves were made, especially by MNCs, such as Compaq, HP, IBM, Dell and Gateway, to penetrate the price-sensitive Indian market, both on the price and brand front. As the Internet took off in a big way in 1999-2000, almost all these moves were made largely on the home PC front. While HP, through the aggressive launch of low-priced Brio, decimated the market share of Zenith Computers (the domestic PC manufacturer), Compaq, through aggressive pricing, brand building and focus on the home front as opposed to its primary focus on corporates, gave the domestic manufacturers a run for their money.

Though HCL Infosystems, one of largest domestic manufacturers of PCs, emerged largely unscathed with marginally better volumes and value in 1999-2000, it is beginning to feel the pressure of MNC competition. To protect its operating margins, it is leveraging its hardware customer base to accent the high-end enterprise system sales, systems integration and services segments.

It is also planning to strengthen its software services division through its focus on electronic commerce. Zenith Computers, the other major listed player, bruised by the aggressive pricing pressures of the MNCs, recorded only a marginal improvement in volume and value terms.

Coming a full circle

Over the past decade, the broad trends in the hardware marketplace have come a full circle. In the period immediately after liberalisation in 1991, the high import tariffs of over 100 per cent, made manufacturing unviable. Through the early 1990s, most domestic companies forayed into the hardware segment through the joint venture route. This led to a flurry of joint ventures such as HCL's with Hewlett Packard, Tata's with IBM, PCL (Pertech Computers) with Dell, and of Wipro with Acer as late as in 1995.

This, in turn, spawned the trend of exclusive distributorships and ``committed box-selling'' of a single brand by different players. This worked well for a while, but as soon as volumes started building up and a finer segmentation of the markets between MNC and local brands emerged, former, as dominant players in the joint ventures began calling the shots. Most MNCs broke their ties with local partners and entered into multiple distributorships with a cross-section of players for their PC ranges.

For instance, in 1998, HCL snapped ties with HP, by buying back the 26 per cent equity stake the former had taken in early 1991. HCL-HP was rechristened HCL Infosystems and it manufactures its flagship's product, Busybee PCs, at its plants in Pondicherry and New Delhi. HP reinvented itself over the past two years, positioning itself as an aggressive player in the branded PC segment with the launch of its Brio range in the lower end of the price band, and the Pavilion at the higher end.

The other high-profile JV that fell by the wayside was Wipro-Acer's, with both parties blowing hot and cold over 1995-1999. In early 1995, Wipro abandoned its Super Genius range of PCs to forge a 55:45 JV with Acer, Taiwan. But when this JV failed to penetrate the price-conscious Indian market in a big way, Wipro decided to position the Acer brand as the premium MNC brand and relaunched its own range of locally manufactured PCs in 1998. While Acer was to cater to the higher end of the PC market, Wipro's local brand was to service the lower end. When this also failed to achieve Wipro's purposes, the JV was formally snapped in April 1999 with Wipro buying Acer's 45 per cent stake. Acer later set up its own 100 per cent subsidiary in India.

Industry performance and contours

According to the research agency IDC's country-wise forecast for the Asia-Pacific region of shipments between 1999 and 2004, India with a compounded annual growth rate of 47 per cent is likely to be the fastest-growing PC market, ahead of China, Korea and Taiwan. Against this backdrop, a study of the Indian hardware industry to identify the fast-moving segments, growth patterns and the key drivers of growth makes much sense.

According to an IMRB study, conducted on behalf of MAIT (Manufacturers' Association of Information Technology), the desktop PC market crossed 1.4 million units in 1999-2000, growing 37 per cent over the previous year. Based on the performance and feedback of end-users, the IMRB estimated that the PC shipments would cross the 1.9 million-mark in 2000-01, a 35 per cent growth over 1999-2000.

The other striking features of this study and their interpretation are:

MNCs/Assemblers dominate: Overall, the share of the Indian PC brands has shrunk from 25 per cent in 1998-99 to 19 per cent in 1999-2000. The biggest loser was Zenith Computers, while HCL Infosystems also marginally lost ground. The main beneficiaries of this shrinkage of Indian brands have partly been MNC brands and, to a larger extent, the GID (Genuine Intel Dealers)/assemblers. The share of MNC brands rose from 22 per cent to 23 per cent over this period, led mainly by the aggressive marketing and pricing postures of HP and Compaq. Over the same period, the share of assembled PCs _ GIDs, lesser known regional brands and unbranded systems _ rose from 53 per cent to 58 per cent, accounting for the major chunk of the loss of market share of Indian brands.

SME/households lead the way: Emphasising the sluggish demand from corporates and the government segment, the study reveals that PC shipments to the business segment grew 32 per cent in 1999-2000 over the previous year, considerably lower than the 57 per cent growth recorded by households. Another striking feature among PC shipments to businesses was the fact that the PC sale to smaller-sized establishments (with less than 10 employees) grew 50 per cent in 1999-2000, accounting for a fourth of the PC sales in 1999-2000. This clearly shows that the SME and SOHO segments are poised to be good demand targets for the PC industry.

Internet, a strong driver: Just as the printer-to-PC ratio is used to study the growth of the printer market, a new metric called `PC Sales to Internet Connections' was created to study the impact of the Internet on PC sales. As per this metric, 52 per cent of the first-time users in the business and 60 per cent in the household segments bought PCs with Internet connection. The Internet connectivity in the household segment grew sharply by 205 per cent vis-a-vis a 118 per cent growth for the business segment. These data have also been confirmed by the sharp growth in network interface cards, hubs and modems in the networking segment of the hardware industry.

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Notebooks/servers on solid footing: The other new and key segments of the hardware market, notebooks and servers, also did well in 1999-2000. The growth in the notebooks market was dominated by the small and medium business segment which accounted for 59 per cent of the total market, with large businesses accounting for the remaining 41 per cent. As a premium product, the metros dominated the shop, and the overall notebooks market grew 82 per cent to 41,670 units in volume terms and Rs 433 crore in value terms in 1999-2000 over the previous year. The MNCs, IBM, Compaq and Toshiba, led this market.

Similarly, the server market also showed strong growth, with the market growing by a solid 58 per cent to 56,670 units and 59 per cent in value to Rs 1,135 crore in 1999-2000 over the previous year. This clearly reflected the focus of business establishments towards networking and the Internet.

A refurbished market ready to be exploited: For a resource-starved country such as India, the refurbished market offers a good opportunity to tap the non-metro market and generate awareness of computers. According to the study, a potential two million PCs were available for refurbishing/remanufacturing. By conservative estimates, even if 50 per cent were upgraded, it would translate into a Rs 1,500-crore market, with PCs becoming available for a nominal Rs 10,000-15,000. This is expected to create an Internet market for an additional six lakh connections and another 18 lakh users.

Step-motherly treatment for hardware

Compared to software industry, the hardware segment has clearly been given short shrift. To add insult to injury, this step-motherly treatment has been followed by several promises from the Government, none of which have borne fruit. As recently as September, the Union Minister for Information Technology, Mr Pramod Mahajan, said he would request the Finance Minister to provide more concessions to the hardware industry in 2001-02. He also promised that the IT Task Force Report on Hardware, in limbo for well over two years, would be implemented next year. He added that a separate policy for the hardware sector was also on the anvil, to act as a blueprint for the entire sector.

The inaction on the Hardware Report has practically led to the withering of the country's manufacturing segment. The decline in the share of Indian brands (from 25 per cent in 1999-2000 to 19 per cent in the previous year) is an alarming instance. The Report of the Panel on Development, Manufacture and Export of Information Technology Hardware recommended the creation of the S-Bit (Soft Bonded Unit) infrastructure with the freedom to market the products domestically and to export, award fiscal concessions and reduce the cost of finance for the industry.

Through the reduction in the Customs tariff structure on critical inputs, such as microprocessors, storage devices, colour data graphic tubes in the 2000-01 Budget, the Government has only set the right tone for the fundamentals of manufacturing by bringing adequate duty differentials between input components and finished goods. The differential increased from the pre-Budget level of 3 per cent to 10 per cent, post-Budget. This, alongwith a progressive Exim Policy, augurs well for the IT manufacturing sector. However, the reduction in duties did not lead to a significant drop in PC prices. In any case, the fundamentals of the hardware sector may not improve significantly as long as the key policy needs spelt out in the IT Hardware Report remains on the backburner.

Pic.: PC volumes are growing, but values are stagnant

Picture by Bijoy Ghosh