AFTER THE PARTY: A Mixed Bag of Tricks

It began as the year of dreams, and ended as the year of the slowdown. But in

the midst of the wreckage of some segments were highs in others, and the only

cementing constant across the industry was cautious change. It was a year where

the IT industry recorded its highest growth ever of over 50%, but also a year

that some sectors recorded negative growth. It was a year of heady financials

for the new DQ Top 20, with their combined turnover in 2000-2001 making up 94%

of last year’s total industry revenues! It was also a period of huge numbers,

with the total IT industry netting revenues of nearly Rs 50,000 crore… but it

was also a time for despair, in the death throes of dying dot-coms and the

collapsing B2C space.

As the US market battled its first-ever tech-led slowdown, most Indian

companies realized the folly of having pinned all their hopes on one Big

Brother. The result was a scramble to lay eggs elsewhere. Europe and the

Asia-Pacific region emerged as the new darlings for software exports and

services, but this did not mean an end to the affair with the US. If anything,

the number of offshore outsourcing deals coming India’s way only increased.

That India was a relatively cheaper market with a sound knowledge base was only

ground home more vehemently. The result–IT exports jumped by a massive 64%.

And while a major chunk of the exports still went to the United States, over a

tenth went to other countries–another new high.

The bustle in a market flush with outsourced projects, meanwhile, led to the

hustle of competition, leading to crashing prices in most segments. This was

great news for the end-consumer on the lookout for cheaper buys, and the SME,

SOHO and home-user segments multiplied manifold. The same price wars, though,

led to a bloodbath in some segments as profits turned wafer-thin or negative.

Printers, for instance, registered a negative revenue growth of nearly 9%, even

though unit sales were up almost 10%.

Clearly, 2000-01 was one mixed bag.

The juggernaut rolled on

In the final analysis, much as India IT Inc groped into this bag, all that

emerged was one signal–while the slowdown punch had India reeling for a bit,

it had survived the rollover effect far better than any other country in the

region. Also defying the slowdown were Indian enterprises, who stuck to their

automation plans and implementation of e-business solutions. The government

juggernaut also rolled on regardless, with the PSU computerization program

dishing out massive orders along the way. Network integrators were part of the

festivities, as they handled never-before orders from banks, financial

institutions and corporates. Server vendors joined in too, recording an overall

year-on-year growth of 76% and emerging as this year’s best performing

segment.

It was also a year that ended in fear–as the US economy slowed and

benchings began, as software professionals started returning home, as the impact

of the slowdown started hitting Indian companies by the fourth quarter, as more

dot-coms downed shutters, as Indian IT companies started sackings, as

appointment letters issued to future engineering passouts weren’t honored, as

salary hikes were frozen, as cost-cutting binge began… a long fear-list. Then

there were companies that used the garb of the slowdown to lay off dead wood,

sending out further shock waves across the industry with their get-rid-quick

drives. The training sector, which was used to software hopefuls jamming up

their doorways, was suddenly staring at empty chairs in classrooms…

prospective students wanted job guarantees before signing up. Then these

institutes started crashing, stories of students left with half-done courses,

hopes belied, professionals with years of experience left with no upgrades and

no jobs… a dismal picture.

The good, the bad, and the cuddly

But there were always the brighter spots that kept things moving–the PC

components shortage was resolved and India emerged as the only APAC country to

have double-digit positive growth in this segment. Internet penetration spiraled

upwards, but increased competition again led to massive price cuts. Then there

were free ISPs functioning in the same space and providing the same services–value-adds

emerged as the ISPs’ only milch cow, as mere Net access was not enough to

sustain operations. Private international gateways were allowed and the

bandwidth stranglehold, though still painful, was no longer near-fatal.

All in all, it was a year of action. Viewed segment-wize, most of IT India

ended the year healthy, but you’d better this adjective with a pinch of salt–the

impact of the slowdown on balance sheets will be reflected only in the next two

quarters. Remember the profit warning by Infosys Technologies chairman NR

Narayana Murthy that broke the stock market’s back, and Ketan Parekh and his

shenanigans… the Sensex is yet to recover from the dual shock. It’s been a

year that has tested to the limit the mental toughness and adaptability of those

that run Indian IT companies. It’s been a year that has provided a clear

warning–to consolidate, widen the horizons, cut down flab, plan for the future

and implement…

PCs and desktops

With components shortage a thing of the past, India was the only country in

the region to post a positive double-digit growth rate in the last quarter. The

old and faithful home and the small-office-small-business (SOSB) segments, which

were driving sales over the last two years, drove demand even harder. All but

one top vendor, Dell, focused strongly on the fast-growing market, leading to a

price war that had buyers buying branded PCs for only a little more than an

assembled one would cost. In the commercial desktop segment, it was banks and

insurance companies that led the demand drive. Compaq, which did so well this

year in server sales, was a strong force in the notebook segment as well,

upstaging last year’s leader IBM to the top slot this time around. Toshiba,

under HCL’s strong sales force, managed to grow by over 50%.

It became clear to the big names in the market that the potential was huge,

if only they could take on the assemblers. Companies like Zenith and PCS

continued to lower prices until they threatened other big brands, and assemblers

as well. While MNCs and domestic players have slugged it out, the assemblers

remained a strong force. However, while PCS did really well and all but doubled

its numbers, Zenith seemed to have lost its way and seems destined to remain

rudderless for some time still. The real battle is happening up there–between

the two Big Guns, Compaq and HCL. As for the assemblers, they ended as the

kings, retaining their over-50% hold on the SOSB market and over 75% of the

home-user segment.

Packaged software

Despite the slowdown that hit late in the fourth quarter, the industry saw a

healthy growth of 37%, with Indian companies launching 92 new software products

and upgrades in the domestic market, while MNCs launched another 152. Oracle’s

11i, mySAP, iBaanERP, QAD’s eQ–all launched this year–are collaborative

e-business solutions addressing the issue of complexity with varying degrees of

success. Other than showcasing the growing import of automation in Indian

enterprises, these also indicated a clear move away from ‘point solutions’

that tackle just one aspect of e-business. The onus is on comprehensive and

integrated solutions that are Web-enabled and support hardware from almost every

major vendor. While it is simpler to integrate versions from the same vendor,

the challenge lies in cross-upgrades.

The year 2000-2001 was projected to usher in the application service

providers’ boom. However, the ASP revolution failed to take off due to

bandwidth and infrastructure constraints. As with PeopleSoft’s CRM 8, a pure

Internet solution was considered a shortcoming that needed to be upgraded to

integrate with mobile connectivity. In February 2001, Onset Technology

introduced Metamessage, a wireless service that displays Web pages and more than

25 different file types on wireless e-mail devices.

As for Microsoft, its Office suite continued to occupy over 80% of the

market.

The year also saw the emergence of applications being delivered over the

Internet as services that allow customers to interact with them dynamically, and

not just as static programs that sit on a desktop or run off a server. And

perhaps therein lies the future of HailStorm, Microsoft’s next big push, based

on the Passport authentication system.

Internet and bandwidth woes

Plunging Internet access rates and deregulation by the

government led to a rush in the ISP market but few succeeded. The initial few

months of 2000-2001 witnessed a lot of continued activity and setting up of

networks by most ISPs. By December 2000, DoT had issued more than 400 licenses.

But today, what remains of them are 150 players. And the marketshare of the 150

operational ISPs is pyramidal, with the seven top players controlling 75% of the

market. With lower operational costs and upgrades, value-added services will see

spiraling demand from corporates who demand reliable communication and

connectivity.

An IDC India report shows that Internet access rates came

down by about 70% in leased line and 60% in dial-up connections. Against this

backdrop was born the concept of free ISPs, with Caltiger emerging as the

largest in three of the four top markets. Infrastructure remained the biggest

and most fundamental issue faced by the Internet industry. The total bandwidth

in the country went up to about 1.2 GB, still well short of the estimated

requirement of 2 GB. Private operators hope to fill the gap by setting up

gateways and networks. Meanwhile, VSNL continued to lead the ISP pack by far,

while Caltiger was the pick of the lot when it came to free services.

Networking

Internet service providers (ISPs) continued to scale up their

infrastructure, the global slowdown had its impact, and those depending heavily

on the ISP and the Internet data center segments found their targets running

away from them. The more seasoned and mature players reacted by reworking their

targets. This helped them tackle the situation, with the top five growing at an

impressive 89%. India remained a thrust and growth area for most of the larger

networking vendors, with Cisco, Lucent and Nortel setting up huge development

centers for outsourcing activities.

The country was certainly growing in its importance as a

major growth area in the networking segment. The best equivocation of this trend

were the visits by Cisco’s John Chambers, Nortel’s Clarence Chandran and

Juniper’s Scott Kriens, among others. When ISP activity slowed down, software

houses entered the picture, setting up development centers to handle increased

offshore activity and making good purchases. Investments also poured in from

banks and Old Economy sectors like manufacturing and insurance, which emerged as

heavy buyers of routers and switches in their ramp-up quest.

While the use of VSATs for village telephony was not allowed,

accessing of the Internet using VSATs also remained a non-affair due to unclear

regulatory norms. The networking industry grew at 45% to touch Rs 1,789 crore,

with ISPs being the primary demand drivers in the first half of the year. As ISP

activity slowed down, the banks, financial institutions and insurance companies

got into the act. As increased automation and networking saw the demand for LAN

switches shoot up by 57%, hubs were hit hard, crashing by 35%. Wireless LANs

were deployed by large integrators like IBM Global, CMC, HCL Comnet, Supreme and

HCL Infosys.

Peripherals

In this segment lay the bloodbath of the year. As top vendors

of printers lowered prices regularly to ward off the competition, the industry

saw a sharp rise in numbers. No one, however, seemed to be keeping tabs on

bottomlines, sparking off the inevitable–volumes scaled up, revenues crashed.

While the segment witnessed a growth of 9.5% in unit terms, in terms of value,

the growth actually slipped from last year’s Rs 820 crore to Rs 750.7 crore.

This was mainly because of the reduction in price points of inkjets, which

induced low-key buying in other printer categories. Impact printers actually

showed negative growth! Inevitably, Hewlett Packard remained the market leader

in this category.

With the overall printer market closely tied up with the PC

industry, vendors were taking the bundling route like never before. Samsung

dominated the monitor arena, commanding the maximum share. The biggest driver

for growth can be attributed to the spurt in multimedia-related activities.

Seagate remained the undisputed leader in hard disk space, commanding a market

share of around 70%. As for compact disk drives, they have really moved towards

becoming a default choice for PC users. This is a major shift from the device

being seen as a costly accessory barely a couple of years ago. In the last

fiscal, on an average, an estimated 72,000 CD drives rolled out.

Servers and workstations

Unprecedented server sales catapulted the erstwhile low-lying

segment to a star-performer status. And what a performance. A growth of 76% in

value terms, compared to a mere 7% in the previous fiscal. In terms of units

too, it was a heady elixir–63%, compared to 31% in 1999-00. In the first half

of the year, ISPs and dot-coms generated most of the server demand, though the

industry also saw heavy sales to financial institutions, the fast-mushrooming

insurance companies and the government sector.

This was also reflected in IT spending by the public sector

and government, which saw an increase from last year’s 30.7% to 34% in

2000-01. For instance, insurance major New India Assurance automated over 600

branches–a straight demand for over 600 Intel servers–in just nine months!

Core banking remained the top application where the servers were implemented

with some of the names on the core banking binge being HSBC, ICICI Bank, HDFC

Bank, Bank of Rajasthan and UTI Bank. Post-half year and still clueless about a

viable business model, the demand for Internet infrastructure sank. As things

stand now, demand is not expected to rise in the coming months as most existing

players have already built up capacity substantially.

The major beneficiary in the high-end RISC server space was

Sun, which notched up seven of the ten-odd deals. Compaq did an excellent job in

the PC server market with over orders exceeding Rs 250 crore. Hewlett Packard

held second spot in the Unix server space, with sales of around Rs 240 crore.

Services

Network integrators continued to lead the growth chart as

they handled big orders from banks, financial institutions and corporates.

Internet data centers and CRM led the path, ushering in new business

opportunities. Network integration evolved from being a product-margins earning

industry to one concentrating on value-adds in terms of network design,

planning, consultancy and other related services. Systems integrators too made

serious bids to incorporate high-end technologies like Java and do other

value-adds in their offerings. Enterprises, especially in the financial and

banking segments are keen on moving up the technology ladder. Among large

network integrators, Wipro Infotech with over 200 projects, emerged at the top

with sales revenue of Rs 270 crore.

A number of non-IT majors entered the industry with a range

of IT services on offer. At the other end of the spectrum, several state

governments came up with IT-friendly policies–most of them planning to

increase the role of IT in their own functions, thereby accelerating the growth

in services. With disinvestment in the offing, many public sector undertakings

also provided abundant opportunities for IT companies. These trends are likely

to continue.

Software exports

Software exports emerged as the King–the dominant segment

of the Indian IT industry. Over the past few years, software exporters had

dominated mind-share with big branding, huge market caps and reams of newsprint.

Now, they have begun to dominate where it ultimately matters–share of the

revenue. India emerged as the preferred software-outsourcing destination of the

world, with the DQ Top 20 still accounting for 55% of all exports. The Top 20

software exporters accounted for 62% of the total software export revenues of Rs

24,813 crore.

Customized software development and software maintenance

remained the breadwinner with close to Rs 15,547 crore coming from here.

Notwithstanding analysts’ predictions of this being the slowest growing

segment worldwide, Indian exports of customized software and maintenance

services actually grew at a very respectable rate of 51%.

The US continued to be the hot destination, with 63% revenues

coming from here. But for the first time, the rest of the world brought in over

a tenth of the revenues. In the applications segment, Web-based and e-commerce

applications continued to draw in the big bucks. This can be attributed to the

fact that the b2b sector has emerged almost unscathed through the dot-com bust.

However, because of the dot-com debacle, the contribution of e-commerce

applications to total revenues remained near-stagnant at 19%. All companies

(Indian exporters included) will now be looking at increasing their revenues

from Europe and the APAC market. By the end of the year, many companies,

including Wipro and Infosys, had set up offices in the continent–mostly in

France, Germany and the UK.

Storage

The storage market has never seen better days. DAS is out.

SAN and NAS are being embraced by many organizations teetering on the edge of a

data explosion. And forget the slowdown. The year 2000-01 saw storage fast

becoming a vital part of IT infrastructure, and emerge as one of the forerunning

segments bucking the downturn, with most vendors recording their highest growth

figures. The increasing deployment of Web-based architecture across various

industry segments meant an exponential increase in data. The resulting

inefficiency of the direct attached storage (DAS) came into sharp focus, causing

firms to look at new storage options. Storage area networks (SAN) and network

area storage (NAS) were suddenly taken far more seriously. Data storage

requirements in large Indian firms also crossed the 1-terabyte (TB) mark for the

first time.

The future, clearly, lies with NAS and SAN, even though India

is still way behind the developed world, where DAS is now down to near-60%

levels (80% of Indian storage is still on DAS). An interesting trend in the year

under review was that hardware giants positioned themselves in the storage space–HP,

IBM, EMC, Sun and Compaq competed in the SAN segment, while Net Appliance was

the market leader in NAS. All server vendors were active in the DAS segment as

well.

The year was a great one for most vendors, with Compaq posting 400% growth

and Seagate tagging an upswing of 125%.

Training

While most of the training sector cried slowdown, the bigger

players quietly consolidated their businesses and emerged stronger. Training

companies posted an overall growth rate of 48%, much in consonance with the

growth of the IT industry itself, and much higher than its five-year CAGR of

35%. In 2000-01, the clear training cry was fundamentals. Post-dot-coms and

slowdown, there was a definite swing towards fundamentals-oriented long-term

basic courses. A majority of the industry prefers in-house training to

outsourcing, Not surprising, then, that the domestic corporate training market

posted a massive growth of 74.5%, compared to a meager 4% growth last year. But

a black mark in the industry was the winding up of Zap and Wintech, which

disappeared from the scene; they had been launched with great hype and fanfare

earlier.

Among the important events of the year were:

• Microsoft’s aggressive positioning of C# along with its
  
  .NET strategy saw a number of courses being launched

• Courses like ASP, VB, Java went out of fashion as
  
  projects dried up

• Large training vendors went on a media blitz in the
  
  slowdown to reaffirm their position as market leaders

• Online education began to pick up with increasing Net
  
  proliferation, but access charges and connectivity may still be prove to be
  
  a hitch

• Interactive Distance Learning (IDL) emerged as a new
  
  concept with ZILS and Hughes Escorts Communications (HECL) taking the lead

• NIIT, Aptech and Educomp Datamatics bagged state
  
  government projects for computerization of schools and universities in
  
  Karnataka, Tamil Nadu and Punjab.

Human Resources

HR was always stronger in the IT industry than in any other industry segment.

This year, intellectual capital became an IT company’s most precious asset.

Dataquest called 1999-2000 the ‘Era of the Knowledge Worker’. By that

yardstick, this was the ‘Year of the Knowledge Capitalists’. The first half

of the year was a time of double-quick hiring rates, big salaries and crazy

perks. In the second half, new hiring slowed down and finally in Q4, came almost

to a halt. For those in love with sheer numbers, the IT sector workforce jumped

by 24%, from 425,000 to over 525,000. This was the B2B or ‘Back to Basics’

year, but finding good talent with long experience remained a major problem

area.

Outlook

Even at the risk of being labeled an optimist, one can say that the worst of

the slowdown seems to be behind us. Not because there’s suddenly going to be a

let-up in the grim situation. Not because Indian companies are going to find

some magic formula to win all outsourcing contracts in the world. Certainly not

because the government policies are going to change so dynamically that MNCs

start making massive investments in India, overlooking economies like China. The

slowdown will be left behind, because India Inc has shown the acumen to see the

slowdown in the correct manner–as a challenge, and the opportunity beyond that

challenge. Our companies have acted fast and wisely, spreading their market

horizons and making strong forays into the European and APAC regions. Stronger

fundamentals and judicious revenue distributions will now ensure that the next

slowdown, whenever it happens, doesn’t send shock-waves like this one did. The

consolidation that Indian IT has undergone promises that.