Another FUD Year

It was a year when entrepreneurship was severely tested. It was a year when one
country stood starkly contradicted amid a meltdown in its immediate neighborhood. In short
it was another year plagued by Fear, Uncertainty and Doubt. Another FUD, Another year.
Chronicling the performance of the Indian IT, witnessing the phenom that happened, giving
a ball-by-ball account of all that happened, hailing the performers and hoping for better
times and senses, in its 15th year of endeavor-Welcome to DQ Top 20 1998.

SNAPSHOTS:

  • Domestic industry crosses Rs 10,000 crore, grows at 26 percent.
  • Exports grow by 48 percent, software exports by 75 percent.
  • Overall hardware market down by 7 percent.
  • PC numbers at 6.20 lakh, unit growth 33 percent.
  • PC value up by 10 percent.
  • Servers down! Unit growth (-)58 percent, value (-) 9 percent.
  • Pentium MMX cross 4.40 lakh units, value growth 35 percent.
  • Imports down by 11 percent.
  • Peripherals grow by 15 percent, DMP growth similar.
  • Inkjets up 50 percent in units, while laser printers grow by 44 percent.
  • Domestic software grows dramatically, up 110 percent; products and services grow in
    tandem.
  • Networking products grow 32 percent.
  • Overall training up by 30 percent.

key.jpg (31112 bytes)It was expected to be a tough year, it was. PC prices
were expected to move southwards, they did. Political scenario was expected to be mired in
confusion, it was. Economic outlook was forecast to be weak, it was worse. GDP growth was
pegged at 7 percent, it averaged 5. Corporate buying was expected to weaken. It did.

In the middle of all these predictions and expectations coming good, one did not. The
Indian IT industry was expected to flounder, it did not.

The Indian homes and the small office markets filled in the void left by an indifferent
and somewhat helpless corporate buying. Infrastructure did not take off, as the
bureaucracy could not make up its mind whether to break away from the political paralysis
and divorce the economics from politics. As luck would have it, after a point in time, the
decision was taken out of their hands. The 13-party United Front (many called it filling a
space between Disunited Front and a United Affront) finally fell, when the newly-elected
Congress President decided to withdraw the party’s support over yet another flimsy
issue-the remarks of a retired judge over a state government, reminding many of what her
late husband did to another party roughly seven years ago. Once the elections were
announced, economics-the act of wealth creation by satisfying the material needs of the
society by legal means-went out of the window. The result, a GDP growth of 4.5 percent,
industrial production of 4 percent, an export growth of 3 percent and a negative
agricultural growth.

rev1.JPG (81814 bytes)Conventional logic dictates that in such a situation, all segments
of the economy must suffer. However, conventional logic does not factor in human elements,
innovation, creativity and true grit. That Indian IT industry persevered in the face of
adversity and clocked a 26 percent growth is a testimony to these factors. In that sense
it was a year of up and up in the middle of decline and fall. It was an emotional year.
 

South of India is where the Indian Silicon Valley is located and South was the
direction that the Indian IT markets went. Ironically, South of Vindhya ranges are where
the deliverance in the year came from. The Indian software industry, and the Indian Home
rescued the Indian IT industry from what was decidedly a dismal year. Not that anyone was
surprised by the lackadaisical performance buying from corporate and the government
sectors; neither was anyone surprised by the software and services industry. What was
surprising, and pleasantly so, was the spirited defense put up by the Home for the Silicon
Magic. The second interesting fact that emerged from the Top 20 survey was that for the
first time in Indian IT, Education emerged as a significant segment. Between Education and
Home, roughly 12 percent of the domestic spending on IT was absorbed. This excludes the
entire gamut of `donations’ that were made by several MNC companies to premier educational
institutions in India. For instance, IIT Delhi was the recipient of such largess from a
galaxy of companies such as Microsoft, IBM, PTC, etc. That apart, the very fact that IT is
going heavily into education sector augurs well for the future of Indian IT.

cov2.jpg (21848 bytes)The Casualties
The first casualty was the government spending itself. In fact it is now fairly clear that
despite the ideology involved, the government spending is a very accurate barometer of the
state of the economy. For instance, in the US, government spending as a percentage of GDP
is close to 30 percent, as compared to 21 percent in India. The most telling denouement of
the state of the Indian IT came from the fact that Government buying as a percentage of
domestic IT spend nosedived sharply. From the heydays of 30+ percentage, the GoI spend had
stabilized at around 20 percent. Last year, this slid to EIGHT percent of the domestic IT
spend. This had the resultant impact on key infrastructure sectors. The energy sector,
which was till two years ago the subject of much optimism, literally went abegging in
terms of IT spend. The same was true of telecom. True to form, the two sectors combined
are the biggest spenders and their being mired in political and bureaucratic inaction had
the expected impact on the overall economy and the Indian IT industry.

The Silver Lining
If there was a silver lining, it was in the financial services sector generally and the
banking segment particularly. In fact the list of major orders for last year was inundated
with those from banks, and a significant majority amongst them were Indian nationalized
banks. This is heartening considering that the nationalized banks were under severe
competitive pressures, following the foreign banks and the Indian private banks going in
for sophisticated information systems. The investment made by the banks will help them cov3.jpg (48901 bytes)to shape up to meet this pressure. Given the advantage that they
have in terms of reach and the advantage that they offer to Indian consumers, the easing
of pressure is likely to lead to a higher competitive edge to these banks. Signs of these
are evident already. In the recent report published by the RBI on the health of the banks,
there is a very high degree of correlation between the health of the banks and the
information systems investments made in the last three years.

So what really happened? Overall, the Indian information technology industry grew by a
healthy 31 percent. Certainly robust enough to provide muscle to the industry to put
pressure on the government to give it a much higher degree of seriousness than what has
been traditionally accorded. That and the fact that software and services exports grew by
a whopping 75 percent. That is the good news. The bad news is that the systems hardware
market showed a negative growth of 7.4 percent. The overall hardware market comprising
systems, peripherals, imports and other hardware fell by close to 4 percent, mainly due to
the peripherals market growing by only 15 percent.

cov4.jpg (18394 bytes)One of the key findings of the Top 20 survey this year
is that corporates eschewed buying newer systems, but did not flinch when it came to
spending on software. The spending on domestic software solution and services more than
doubled. As a consequence, while data suggests that the corporate market did not spend on
IT, it must be borne in mind that while extending the life of the system, the corporate
MIS manager spent a significant amount of money on the solutions, without going in for
additional systems. This is exemplified in the value of hardware upgrades of server class
of machines that were supplied into corporate sites. For example, Tata-IBM sold close to
12 percent of its RS/6000 (in revenue terms) as upgrades, 19 percent of its AS/400 as
upgrades and a robust 27 percent of its S/390 mainframe servers as upgrades to existing
systems. This is in tandem with company-avowed objectives of focusing on ‘solutions’ as
opposed to Big Iron.

Emerging Trends
Tracking the industry numbers for the last three years, some clear trends are visible.
Firstly, the proportion of hardware in the overall value has been steadily dropping. From
constituting roughly two-third of the domestic IT spending in 1995-96, the share of
systems dropped to around 52 percent last year. This is significant in the sense that the
share of software has shot up from 19.2 percent to cov5.jpg (62854 bytes)32
percent in the same period. Last year, DATAQUEST decided to analyze the software and
services industry from another angle, i.e. the angle of services and products. Barring
that, the share of services has been going up, however modestly. However, if the
consultancy revenues are included in the services (which they are not, as per classical
definitions), then the services component would also rise considerably. Similarly, growth
of exports and services have also had their impact on the domestic systems revenues. In
fact, the systems revenue as a percentage of other segments of the industry dropped 10
percentage points, while software gained 7 percent and exports another 4 percent.

In fact, systems to systems, there was a drop in both numbers and value, as two biggest
sectors-the government and the corporates-went shy. The same was true for workstations.
However, this could well be a boon considering the fact that many enterprise users have
realized the wisdom in extending the life of the system by extending the application cover
on the system and not by extending the number of vanilla applications. As a result, there
was a tremendous surge in the mindshare of applications such as ERP, supply chain
management, logistics management, high-end design etc., applications which will add a
cutting edge to the competitive advantage of the enterprise.

Internet continued to have a mindshare disproportionate to its usage. With VSNL
monopoly still intact in the government, the number of Internet users still is tied to its
leash. That was evident when VSNL discontinued the student’s connection, pleading
bandwidth choking. Even as we write, there are barely about 100,000 Internet connections
in the country as compared to about 20 million users worldwide. While paying lip service
to Internet, the government has done precious little to ensure more universal
connectivity. And this will be one slip that the country might yet rue.

Corridor Games
Among others, a costly game that is being currently played in the corridors of power in
Delhi is the tug-of-war between the Department of Telecom and the Telecom Regulatory
Authority of India. While the matter is still subjudice, it seems to matter little to the
powers concerned in this imbroglio that the ultimate casualty in this issue is the common
man. While TRAI was welcomed enthusiastically, the reaction from DoT has ranged from cold
shoulder to stonewalling to plain refusal to submit itself to a third party. As a
consequence, not only is the telecom sector being caught in the crossfire, leading to
massive disillusionment of investor sentiment in this sector, the country’s infrastructure
is also being held to ransom.

cov6.jpg (25357 bytes)The high point in an otherwise pyrrhic year was from
another surprising quarter-the GoI. In his first televised address to the nation,
incumbent Prime Minister AB Vajpayee dispelled all notions of his party being anti-IT.
Clearly refuting swadeshi stance, the Prime Minister included IT as one of the five key
tasks for his government. The rhetoric was followed by action. Close confidante and Deputy
Chairman of Planning Commission, Jaswant Singh, was asked to form a task force under the
chairmanship of Andhra CM Chandrababu Naidu and Prof. MGK Menon. The only disquieting
thought about the task force is that at the core, there are only four industry
representatives and the rest is packed by bureaucrats. The silver lining is that with so
many heavyweights in the task force, what may come out will, hopefully, be worth waiting
for. DQ 

cov7.jpg (41049 bytes)Sectorial Spend Pattern: If Big Brother plays truant,
the entire industry suffers. Despite the spend on IT by other sectors, government spending
is clearly the key, for two reasons. A bulk of government spending is cyclical, and
therefore predictable; secondly, the government spend is typically large. If government
does not spend, then it directly affects infrastructure projects. As and when that
happens, the entire economy could suffer. One way out could be if the GoI reduces the
amount of non-plan expenditure and diverts that spending into the planned infrastructure
projects. That, while theoretically simple, remains not an economic problem, but a
function of political will. 

The Segments Continue To Suffer: Manufacturing, power, oil shut shops-in a manner of
speaking. Witness the steep fall in energy segment, and this was before the nuclear tests.
In the wake of the US sanctions, there seems to be little respite for these sectors. An
interesting manifestation of the potential in these sectors is that having realized that
the sanctions will be imposed fully, the US government spokesperson ‘warned’ other
countries not to take advantage of the opportunity offered by India due to US companies
not being allowed to participate. In the small office and home segment, the bulk of the
growth is still in the home, and the former is awaiting the Internet boom before
succumbing to the lure of silicon. 

The Quarters Continue To Level Out: Good year or bad year, the quarters still refuse to
go back to the Golden JFMs. While the market did lift in February and March, action was
limited to the PC front. As a result, the numbers comparison in PCs will show a marked
skew in JFM, but in terms of overall industry value, not much is evident. In a typically
‘good’ year in the future, the quarters are likely to follow the similar trend as
witnessed in 1997-98.

Indian IT Industry-The Top View

Note:

The main table giving industry totals is to
be read in conjunction with the clarifications given below.


  • 1. The definition of workstations has been
    changed again this year to differentiate between Intel-based and non Intel-based
    workstations.
  • 2. Like in the previous year, non PC-servers
    have been broken up into large, medium and small categories.
  • 2A. PC servers are Intel/clone machines sold
    as servers. However, unlike in the previous year, only those machines have been included
    that were configured as servers and not desktops which may have shipped with network
    operating systems.
  • 3.  Single user systems include
    desktops and clients sold by vendors. Informal market estimates are also included.
  • 4. Despite the fact that Pentium became the
    entry-level desktop in 1996-97, 486-based shipments continued through out the year due to
    the previous year’s inventory pending with the vendors.
  • 5. The data for Apple Macs is based upon the
    reported figures by its distributors plus machines which could have come from other
    channels. However, confirmation regarding the figures could not be obtained from the
    company.
  • 6. An estimated Rs 1,032 crore worth of
    system software has been removed from hardware and included in software. This could be one
    reason why the overall hardware market has shown a negative trend.
  • 7. Other items from hardware vendors include
    all
  • non-system exports and specifically all
    hardware exports from SEEPZ and other EPZs. All of Tandon Group’s exports have been
    reflected in this category.
  • 8. This includes the hardware component of
    domestic turnkey projects undertaken by CMC only. The software component is reflected
    under the software category.
  • 9. Hardware imports are those imported
    directly by users through Indian companies such as Wipro, Digital, Tata Elxsi etc. These
    are billed directly by the Indian company, and the Indian vendor collects only the agency
    commission. This also includes drop shipments.
  • 10 This includes only those printers that
    have been sold separately. Those bundled with hardware are not reflected here as the value
    is presumably included in the hardware revenues.
  • 11. Other peripherals include FDDs, HDDs,
    CTDs, CD-ROM drives, monitors, keyboards, etc sold separately and not bundled with
    hardware.
  • 12. This does not reflect the correct
    picture of the total size of the peripheral industry as a substantial chunk is bundled
    with hardware.
  • 13. Networking includes hubs, routers,
    bridges, network interface cards, etc which are sold separately.
  • 14. This only includes system software sold
    separately. Those sold alongwith hardware are included in the hardware category.
  • 15. All other software, except systems
    software, are included here. Again this includes only those sold separately and not
    bundled with hardware.
  • 16. Does not include services such as data
    entry etc.
  • 17. Total software includes an estimated Rs
    1,032 crore worth of system software which has been split from hardware values. However,
    it does not include services such as off-shore data entry.
  • 18. Domestic revenues do not necessarily
    mean spending by Indian users on IT. For instance, channel margins are not included to a
    great extent. Vendors such as Microsoft and Novell whose revenue are estimated, refer to
    the transfer price from those companies to their distributors. the end-user prices will be
    naturally higher.

Product Definitions

  • High-end Servers: Rs 400 lakh and
    above.
  • Medium-range Servers: Rs 40 lakh to Rs 400
    lakh.
  • Low-end Servers: Below Rs 40 lakh. Does not
    include PC servers, desktop servers.
  • PC Servers: Intel-based dedicated servers,
    including Apple workgroup servers.
  • Desktop Servers: High-end desktops to be
    used as servers. Not counted in desktops.
  • Traditional Workstations: Unix or Open VMS
    based with OS shipped from the vendor on RISC platform.
  • Personal Workstations: Windows NT or Unix
    based systems on Intel platform or Windows NT on Alpha/RISC platform.
  • Peripherals: Includes DMP, inkjet, laser
    printers, plotters, digitizers, scanners, keyboards, floppy drives, pointing devices,
    monitors, external storage devices, CD-drives and CD-writers.
  • Networking: Includes leased-line modems,
    structured cabling, network interface cards, hubs, switches, ATM, routers, multiplexors,
    VSAT hubs, VSAT terminals, ISDN adapters.
  • Accessories: Desktop modems, card modems,
    add-on cards, power supply units, UPS, point of sale terminals, media.
  • Packaged Software: Includes systems
    software, application tools, application solutions.

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