Distribution: Enhancing Value

The pulse of the domestic IT industry could be best gauged by the health of
the channel market. This thriving community comprised of a whole gamut of
entities starting from large national distributors, to regional distis, VARs,
regional resellers, sub-distributors to the small retailers, the lowest entity
in the entire supply chain. In line with the changing market dynamics, most IT
vendors in 2005-06 re-looked at their distribution strategies launched a host of
new channel initiatives to bolster their channel partners.

The channel entities positively responded to the vendor overtures with a slew
of strategic initiatives on their own-increasing their focus on retail,
balancing volume versus value products, realigning their national and regional
distribution model, rationalizing their credit exposure, and adopting a more
solution-oriented approach. On the flip side, however, the market had to undergo
serious turmoil owing to the shenanigans of a host of fly-by-night operators;
the industry again responded by adopting remedial action to counter this
problem.

Retail: Boon or Bane?

Retail market strategy was identified as the way ahead for distributors of
all hues and sizes. The large ones in the Dataquest Top 10 club too initiated
measures to either strengthen their existing retail strategies or providing
stronger support to the retail channel and streamlining new activities around
them. The vendor focus to increase their retail presence also pushed the
distributors to invest heavily on retail, the effects of which are more likely
to be visible from this year.

The retail wave amongst vendors was strongly visible: Canon had 105 retail
centers known as Canon IT Image Zone; Samsung had 80 Digital Home Plazas, while
25% of Acer's revenue in 2005-06 came via its two retail formats, viz, the 200
Acer Points and Acer Malls across the country. And most importantly, HP had 700
retail outlets spread across 226 cities. However, the general consensus, at
least in FY06 was there would be no complete cannibalization, but retail focus
was only a sign of market maturity.

Understanding the Value Model

The channel industry definitely moved up the value chain and most
distributors looked at high margin, low volume business vis-à-vis low margin
high volumes business. In earlier years, the major emphasis was on price and
availability. However in 2005-06, the industry was keen on long-term initiatives
instead of short-term gains. The players were more customer oriented and tech
savvy with a lot of emphasis on offering custom made solutions at lower costs.
Factors such as increased competition, lower margins, geographical reach and
high operating costs made the industry a challenging atmosphere to work in.

Indian channel partners in sync with their principals were constantly
redefining their markets and business models - one such major shift occurred
when the market moved from a volume to a value model a few years ago. It
continued in FY06 when channel partners were keen to move up from the box
pushing role and vendors began investing a fair amount in training initiatives.

Most of the larger channel players like Ingram Micro and Redington and a few
vendors understood that the value model was a natural progression of a maturing
market. In an era of diminishing margins, it appeared to be the next driver of
growth - the model that allowed channel partners to move up the value chain.
However, since it was more of an evolutionary approach till now, most channel
partners of vendors at least this year have not got the overhaul they actually
required. Players like SES, Neoteric and Supertron too followed the value model
route by adding principals like Intransa, Molex, QNAP, Wacom and Twin Mos.

National vs Regional

In the industry, the basic business model rampant in FY06 was a real hybrid
one; vendors operating with one national distributor and number of sub
distributors/ regional dealers/business partners all across the country.
However, there was no general consensus on which model is better-national or
regional; all debates ended endorsing the hybrid model that had evolved. The
role of a regional distributor was to generate incremental business for the
company from niches that large, national distributors could not address.

Whether a company adopted a regional or a national model really depended on
the kind of its products. Products like printers, monitors, and scanners were
sold best through the RDM. For a product like high-end digital cameras, the NDM
seemed to be the best option, since such products required specialized service
centers and catered to a niche audience.

Basically, an RDM had multiple distributors; each distributor had a chain of
resellers operating in a particular region under him. Or it was a network of
distributors working in small towns who added to the vendor's overall channel
reach. This was significantly different from the NDM, which was a three-to-four
layered model, wherein a vendor had signed a memorandum of understanding (MoU)
with a national partner who distributed a product through his network of
sub-distributors and resellers. The shift to the RDM model helped vendors gain
better penetration into class B and C cities and cut down the number of tiers to
reach the end users. While the Ingrams and Redingtons already had nationwide
presence, even Tier 2 players expanded to upcountry locations-Neoteric went to
Patna, Rajkot, Raipur and Goa, Rashi, Iris and Savex all made inroads into
B&C class cities.

Vendor Slugfest

This was the first year following the merger of Ingram Micro and Tech
Pacific. This mega merger was like Coke and Pepsi coming together to wipe out
all competition. Result: the new Ingram Micro entity clearly remained at the
summit of our Top 10 club; its post-merger revenue was pegged at Rs 5,517 crore,
excluding the business generated from the sale of Sony Ericsson mobile handsets.
Similarly, we have excluded the HCL Infosystems revenue generated from the Nokia
handset business. Ingram was ahead of its nearest competitor Redington by more
than Rs 1,000 crore (Redington revenues pegged at Rs 4068 crore).

The year also witnessed the meteoric rise of eSys at the third
position-with the Ingram Micro-Tech Pacific merger, many vendors looked out
for an alternate strategy to mitigate the risk of having all eggs in one basket.
eSys best leveraged this opportunity and gained the maximum. The SES
Technologies acquisition by Sahara Computers was another key highlight of FY06.
It led the Tier 2 distributor category staying ahead of competitors like
Neoteric, Rashi, Savex, Iris or Supertron. There was a balanced geographical
distribution amongst distributors in the Top 10-the presence of 5 from Mumbai
and 3 from Delhi reiterated the importance of Lamington Road and Nehru Place in
the channel panorama. There was one from Chennai while one new entrant from
Kolkata proved the growing clout of GC Avenue as the new channel Mecca.

For Ingram Micro, 2005-06 was spent integrating the facilities, warehouses
and other support infrastructure. But the bigger challenge faced post merger was
that of credit enablement. There were also a few overlaps as both Ingram Micro
and Tech Pacific had similar portfolios, but the key difference was that Ingram
was stronger in the component business and grew the company close to 20% in FY
2005-06 post merger. On the vendors front, HP continued to be the largest
followed by Lenovo, Microsoft, and Cisco. In terms of revenues the combined
shares more or less were maintained, though it did see a marginal dip in the HP
peripherals segment. The total number of sub-distributors and resellers stood
close to 12,000 out of which 4,000 were the regular partners who enjoy credit
facility with Ingram. The overall growth in the market sponged of the marginal
dips in the share for Ingram. The PC consumer market was a growth area for
almost all vendors. Though there was a slight growth in the software business
the HP- IPG business saw a decline where as the other peripherals market grew
marginally.

Close on its heel, Redington recorded over 50% growth to end at Rs 4,068
crore; this came mainly from systems, peripherals and networking. Last year
Chryscapital, a private equity company took 11% stake in Redington valued at $15
mn. It also enhanced its product portfolio by adding Symantec, McAfee, Novell,
Sybase, BEA, Fujitsu, Tyco, Linksys, and Legato. It also invested heavily in
doubling its capacity for warehousing. Apart form its traditional offerings it
also moved its services to other verticals like consumer electronics and home
appliances. 

Though not yet in the league of Ingram Micro or Redington, one company that
stole the show in 2005-06 was eSys. Started in 2000 in Singapore as Technology
Distribution company, it ended FY06 at Rs 1567 crore with 112 offices in 33
countries. It followed an innovative approach for its PC business by setting up
plants next to its regional logistics hubs for technology components
distribution business. This brought in synergies and helped bring cost of
manufacturing PC considerably down.

Amongst other players in the Top 10 club, Mumbai boasted of four entrants
viz., SES Technologies, Neoteric, Rashi, and Savex, while the Delhi-based Iris
computers gave stiff competition to SES by remaining right at its heels. Other
than being acquired by Sahara Computers, the other highlight for SES
Technologies was its reduction of Intel dependence. This was achieved by means
of partnerships with a host of niche high-value principals like Foxconn and
Asrock for motherboard, Allied Telesyn and Molex for networking and QNAP,
Intransa and Tandberg for storage. The Iris competition came from its systems
business-Lenovo and HP contributed nearly 80% of the company's business.
Both SES and Iris also banked on services-while SES expanded its service arm
Optima to 18 locations, Iris bagged large services projects from NTPC and
educational institutions.

The rivalry between Neoteric and Rashi from Mumbai have always been intense
and an interesting sidelight for the industry. It continued this year, with
Rashi's impressive 82% growth bringing it very close to Neoteric. Neoteric
added new principles like BenQ, Lacie, Wacom, and Maxtor, while Rashi got NVIDIA,
Netgear, XFX, and Altec Lansing into its kitty. The 20% Savex growth was
conservative as compared to some others in the Top 10-even this growth owed
much to its partnership with HP for Presario desktops and notebooks. For the
rank newcomer in the Top 10 club, Supertron of Kolkata, the twin highlights of
the year were the acquisition of the once-popular Vintron brand of PCs and the
exclusive distribution rights for the Xenitis brand of PC components. It also
successfully represented principles like Pinacle's Dazzle, Acer, Canon, Intel,
Kobian, LG, Microsoft and Seagate. It was also chosen the national distributor
of Acer's TFT and CRT monitors and DLP projectors, as well as Twin Mos
Technologies for their memory modules.

Problems Faced

Though the Indian distribution market was on an aggressive growth path, all
the players across the spectrum were not been able to match the dynamic growth.
The spread of partners was not in pace with the growing business opportunities.
The growth continued to be concentrated with the larger players, especially
since the tier 2 or the tier 3 were not enduring the travails of the business
with the same seriousness. As the entry barriers at the tier 2 level were not
very stringent the churn out was very high causing high volatility in the
market. The industry was keen to take necessary measures to weed out these
fly-by-night operators. The travails of many players in Nehru Place following
the shenanigans of Sanjay Gupta of Gravis Computers served as a rude reminder.

Other than these non-serious players, the current ecosystem was tuned to
align and support only a certain category of players and as a result a select
set of players grew at the market pace with sustained support. Also another
trend was where vendors were asking distributors to consolidate and channelize
business through a restricted set of partners in a given market. Though this
ensured focus/ownership by the channel partners in growing a vendor's
business, on the other hand it helped in further cartelization of the channel
market amongst a set of larger players. 

The market needed to identify long term serious players to get a balanced mix
and not let the scale tip to just these limited number of players. For example
to credit crisis exposure in Middle—east channel was a painful experience for
the industry there and had dented the confidence of the channel fraternity.
India too should be in cognizance of the happenings around it and learn from
experiences outside.

Minu Sirsalewala

minuvs@cybermedia.co.in