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.