Defying All Grays

The color gray is fast fading into inconsequence on the PC screen as the
down-and-out branded machine is switching back in.

Says who? The manufacturers.

The optimism of domestic PC makers and the MNC computing leviathans is not
totally misplaced. This giant unnameable matrix of component assemblers,
resellers and warranty servicing shops, stretching its feet into India’s
remotest taluks, had for too many years, too many shades of gray to it. The gray
market has local acceptability, an informality and service promptness, which
would put the most professional international banks to shame, an ability

to provide replacement components at very cheap prices and above all, a swift
‘friendly neighborhood techie’ customizability and embarrassingly personal
configurational efficiency. As a private PC assembler told Dataquest, "The
three golden rules the gray market follows are ‘customize, customize,
customize’."

Nice punch line, but it did knock the stuffing out of the branded PC Goliath
even as a gray market David fattened up at 5-8% CAGRs down the ‘80s, usurping
over 70% of customer real estate.

But post the first week of January, the golden goose now comes home to the
oven. Excise duties have been halved to 8%, duty on vital computer components
like microprocessor and storage (CD-ROM, hard disk and floppy drive) devices is
down to zero. SAD lies buried, and the gray market heart is beating faster than
branded PC makers dropping their price points. The aftershocks are setting in.
"We are operating on at least 10% lower margins since January, when the
duty cuts on components was announced," says Venkatesh Kamath of Taurus
Technologies. While others moan that eroding margins, often averaging Rs 1,500
per PC, are getting more and more difficult to support.

Shades of Black in Your Gray

January’s mini-budget had PC vendors scurrying to get rid of old stock and
get in their new hardware at the subsidized rates. That, understandably, gave
rise to a few instabilities in prices and availability of components where
replacements were needed. With things settling down back on track now, the
premium on certain components has been worn down, coupled with the advantage of
prices dropping between 8 to 10%.

The threat from branded PCs is grossly overrated, and the assembled PC market
will always co-exist with the manufacturer’s PC, says Shreyas of Bangalore-based
Shreyas & Co. "Lower margins are a temporary factor, because at the end
of the day, the duty cuts apply to both sides of the fence. We will always score
on prices and over 80% of first-time individual buyers will continue coming to
us," saysZaheer, a Coimbatore-based PC assembler. 

While corporates and call centers prefer manufactured PCs, a huge unaccounted
base of educational institutions–private schools and colleges–rely on the
assembler’s guy-next-door presence, says another assembler.

"These installations work on the basis of word of mouth publicity and we
make good money from tutorial colleges, which often order 30-50 units and
regular colleges, who are under pressure to save cash at the end of their
capital expenditure cycles every March," says Zaheer, even as market
sources estimate at least 20% of overall gray market revenues coming from
private educational institutions.

"After the mini-budget, its a question of growing the entire market,
where the price-sensitive customer is still a majority," says assembler
Shreyas, playing down the eroding margins on the gray market shelves. But the
narrowed price difference between branded PC and the white box is helping the
organized sector close in quicker than anticipated. Lower margins are just the
beginning when one purveys the decline which set in even before the duty cuts
were effected. Even as annual computer sales grew 19.5% to over 2.5 million in
2003, the gray market declined from 73.95% in 2002 to 68.70%, a negative growth
of over 7%, says research firm Gartner.

Past, Tense, Present Imperfect

The consumer’s allure to match the logo on the PC monitor with its
innards, was picking steam well before the duty cuts and SAD slash from 16% to
8% were announced. The manufacturing sector started finding its feet after a
long time in the April-June quarter of fiscal 2003-03, on the back of some
aggressive pricing. This was in the face of the vast gray unorganized majority
undercutting each other with the same dexterity as it swamped the big MNCs and
domestic brands. "We are going to the assemblers, hugely undercutting each
other like never before. It’s the piranhas eating the piranha," says a
spokesman for assembler firm Shreyas & Co. It was silicon music to the
price-sensitive Indian customer’s ears, when branded PC prices dipped to below
Rs 20,000 well before the price cuts. In November last year, a Rs 18,000 Athlon-powered
PC from distribution giant Ingram Micro had the unorganized market probing its
own gray areas. Spoiled on a 70% chunk of the PC market, the move made them sit
up and take notice of their inventories, optimum configurations, peripherals
like printers and UPS and the rest of the customer package where attraction
levels had to be increased.

Stock Answers

With the lowering of import duties on components and finished products to
zero from 16%, the sub-Rs 15,000 PC will be the next pricing playground, feel PC
assemblers. This is where the ‘Rest of PC India’ team plans to offer
stronger deals and turn the tables on the manufacturers by keeping inventories
very low and assuring customer retention through strong after-sales onsite
support and 3-year warranties. Besides that, assemblers will continue to bank on
their arsenal of value additions like bundled-in scanner, printer, and web
camera in and a host of software titles, which customers find hard to resist.

"The flexibility of configuring a computer to meet specific client need
can be done only by the assembler," says PC assembler Rakesh Shetty of
Bangalore.

Customer’s can pick and choose from a host of options in memory, hard disk,
monitor and other peripherals such as key board and mouse.

Even as MAIT announced, in the second week of February, that PC sales for the
fiscal 2003-04 could touch three million units, an upward revision from the
previous estimate of 2.7 million units, branded PC manufacturers were bullish on
their stronger warranty periods, and in-house customer services "at the
drop of a telephone receiver".

Precisely where the problem lies, retorts an assembled PC customer who swears
by his machine and the assembler. "I get immediate service from my
assembler who is on the job within 30 minutes of receiving my call. Most PC
makers can’t better that," he says. Most customers point to multiple
levels of engagement on the way to getting any problem rectified by the PC
manufacturer–from IVR to call center to section head to the engineer himself
and good amount of cumulative time delays–which SOHO-style businesses running
on urgent customer orders cannot brook.

Bang-for-the-Buck Customization Bothersome vagaries of the economy were not
of much concern to the assembler. But as the longer sales cycles, rejuvenated
competition, and thinner margins are taking the fun out of the white-box
business, assemblers reiterate that zero stocks and customization will continue
to be key gray market USPs. "We are able to dispose off stocks quicker, as
we often undertake on order. On the other hand, soon after the mini-budget,
branded PC makers with excess stocks were caught napping and had to sell them at
pre-budget prices," a Bangalore-based assembler notes.

The WYSIWYG (What You See Is What You Get) pitch really attracted the
individual customer, and knowing his needs continues to be the thrill behind the
game, says Coimbatore-based assembler Abdul Pasha.

"The market for personalized configurations will only continue to grow
at over 50% annually," he claims. Hardcore gamers and professional graphic
artists and studios handling high-end multimedia applications still form around
50% of gray market individual buyers, estimate industry sources, with the other
50% comprising price-conscious buyers. Now, with hardware warranty and reseller
support becoming part of the gray mix, people like Venkatesh Kamat of Taurus
Technologies are seeking new ways out of the impasse of low margins.

"The duties on motherboards, microprocessors and printers, which are key
in our bundling services for customers, remain more or less unchanged and we can
capitalize further here by offering proactive advice on configurations and going
to the customer first," says Kamath.

Customer configurations are still not a strong point with branded PC makers
and the tyranny of the showroom is more the rule than the exception. Besides,
their much-vaunted reputation for individual attention, which the assemblers can
continue capitalizing on, the savvier ones will try raising the margins bar by
including remote desktop management, domain registration, messaging solutions
and free virus elimination among their services- "at least before the
laptop market which is falling proportionately catches up with us," jokes
Sunil Kumar of Bangalore-based Lampo Computers.

Meanwhile, SMBs, who demand such value-adds, could see more assemblers
playing within niches. With CPUs getting a fair discount in the mini-budget,
there has been a noticeable drop in their prices, reflecting in the general
trend of PC makers like HCL, HP and Dell now flying their price planes in the
mid Rs 30,000 range. Bigger assemblers like PCS and Sogo Computers are not far
behind. Sogo has leveraged Intel economics by shipping a ‘bare-bones’
Celeron-powered PC with 15" monitor, AGP (Advanced Graphics Port), 40 GB
hard-disk space and CD-ROM drive for Rs 14,250. Stable Athlon processors will
soon bring assembled desktop prices below the Rs 10,000 mark, swear assemblers.

Return of the Brand

Off-the-shelf commodification could be something the 2.5-million strong
branded PC industry is looking to remedy through stronger hardware services
support, says an industry observer.

"Right now, we would strongly recommend further reduction in duties and
increase in depreciation to 100%. This will increase the sale of computers to
companies as well as SOHOs and individuals," notes a PCS spokesman.

On the assembled PC mart, localization and customer familiarity have been
keen bargaining chips. Undercutting on prices was hitherto not too fierce, but
will boil over in the coming months even on entry level PCs, where the assembled
PC continues to enjoy a minimum price difference of Rs 5,000 over competing MNC
brands.

S Rajendran, general manager (Sales and Marketing), Consumer Product Group,
Acer India, expects the market to grow in excess of 40%. In 2003, Acer doubled
its turnover and aims to repeat the performance in 2004. The narrowed price
difference is encouraging customers to buy branded computers on the back of
stronger after-sales support, add PC makers.

From a hardware industry, which lagged far behind its software twin, due to
high taxes and unfriendly government policies, more benefits are now being
passed on to the customer, chorus branded PC makers. For once, the customer
seems to be listening. So is the vast gray ocean he is used to bathing in.

DQ Report from Bangalore