10 Million PCs: Are We There Yet?

December 2000 was the time when Dataquest re ported that the installed base
of PCs in India had touched the then magic five million figure and it predicted
that 2003-2004 would be the time when the installed base would double to ten
million.

While the first five million took us 16 years to reach, we did the second
five-million in about three years and now that we have reached that point, it
certainly is a cause for celebration, or is it?

Stumbling Blocks

For two basic reasons we can say that India has not yet reached a number
that could be the inflection point (borrowing from Andy Groove), a point where
the scales turn in our favor.

One, the year-on-year growth in units still continues to hover around the two
million mark. And two, domestic manufacturing activity is not something that the
IT industry is too happy about.

It took India about 16 years to cross its first 5 million mark and a little over three years for the next 5 million. Given the two million plus per annum demand, India is seeing manufacturing/assembling activity on the system side.

Let’s first look at the domestic market for PCs. Between 1999-00 and
2002-03 it has grown at a compounded annual growth rate of 18.7%. And in the
same time the share of the assembled PC within the whole pie has gone up from
51.6% to 64.4%.

What does this mean? It means that the growth in the numbers for the
assembler far outpaced the branded manufacturer. While in the same period the
branded players put together a CAGR of 10% the friendly neighborhood assembler
posted a CAGR of 25.6%. This huge difference in numbers was largely attributed
to the cascading effect of an unfriendly taxation structure.

The differential in the price point of the assembled PC and the branded PC
was achieved by the evasion of duties and taxes by the assembler, something the
organized sector could not match. A study by Manufacturers Association of
Information Technology (MAIT) indicates that the market for PCs will double if
the duties were halved. With the tariffs and duties now eased, the price
differential stands dramatically reduced.

Says George Paul, vice president, HCL Infosystems, "The vendors will
invest to grow the market further." And in an environment obsessed with
return on investment, Paul’s remark holds even more weight.

New applications that take the role of the PC beyond an information device
are being developed. A case in point is the Media Center PC. With the Media
Center the individual integrates all his information, education and
entertainment activities into one device. While the Media Center still holds
appeal only for a very small set of customers now, because of its premium
pricing, it is not an augury of the things to come. PC manufacturers are looking
at offerings such variants of the PC at price points that appeal to the average
customer. And this is expected to happen in the not so very distant future.

It would therefore be safe to say now that the growth curve will become
steeper, but in some more time. With easy financing options available and the
price points dipping, the PC will come to occupy a higher position in the
customers’ wish list of acquisitions. This will largely be driven by the fact
that the PCs deliver more value for the user at home.

Connectivity and Content

The drivers of this value for the individual (read home) user come from
connectivity and content. With the advent of the telecommunication wave that is
sweeping the country issues pertaining to connectivity have, by and large, been
addressed.

Content that informs, educates, entertains and helps improve the efficiency
of life will drive the PC usage by the individual user. Content has never been a
problem, especially on the Internet. But that is the whole irony of the
situation. The content caters only to the English speaking populace and that
stands at a miniscule one twentieth of the country’s total population.

And a large part of this population resides in the urban areas. "And it
would not be entirely incorrect to say that the PC has today come to occupy a
position of a must-have from a position of desire-to-have," says M Lakshmi
Narayan Rao, assistant director-marketing, Canon India. But that ring of truth
is only for residents of urban areas. Why? Because the aspect of content and
connectivity have been well addressed.

Assembled PCs outnumber the branded ones because the market favors price. Price point pressure therefore leave very little for the organized players to invest in and grow the market

And no such compelling reason exist for the population that cannot read and
write English. So its time to build that compelling reason: content. Content
that is regional in flavor. There is positive news on this front too. The
emergence of Unicode as a standard will definitely ease the creation of content
in regional languages. But that will again take some time!

The Manufacturing Equation

The price of a PC still ranges between Rs 25,000 and Rs 28,000, way above
the annual per capita income of an average Indian. Domestic manufacturing of PCs
will definitely help bring these prices down.

"Manufacturing is generally discussed at four levels- components,
boards, sub-assemblies and systems," explains Paul of HCL. "At two
million PCs a year, the market is not big enough to sustain component
manufacturing domestically," he adds.

And rightly so, with the pace of rapid change, components like processors are
left with just about a one and half to a two-year window at most to recoup the
investments. And with a per annum market so small, the window is not large
enough at least with respect to the market domestically.

But this number is big enough to support manufacturing at the system level.
Indian players like HCL and Wipro and also MNC majors like IBM and HP are
already manufacturing at this level domestically to address the demands of this
market. And take the case of monitors too. Almost all monitors shipping out with
desktops today are manufactured indigenously.

And it is because of the lack of a sufficiently large domestic market that
the country is unable to exploit the huge potential that exists as far as design
goes. To facilitate and grow the design capability, the industry must look at
growing and building an ecosystem. Industry watchers feel that this ecosystem
will bring together the entire value chain from design to testing to
manufacturing inside the country.

While it is right to say that we have missed the first round of investment
opportunity in this industry, we can still work towards boarding the bus in its
second trip. So the party hats will have to wait!

Mohit Chhabra in New Delhi