Getting Back On Track

sys desktop.jpg (12945 bytes)The PC
market (including desktops, notebooks, and Macs) grew 32.75 percent in unit shipments but
only 9.63 percent in value terms (only box and operating system price included). The
average selling price for a PC dropped by 17.42 percent to Rs 40,000 as the sub-Rs 40,000
mark became increasingly popular as the year unfolded. The Home and Small and Medium
Enterprise (SME) segments were active, but corporate and government buying was lackluster.
To their joy, the assemblers and GIDs found themselves ideally positioned to address the
sub-Rs 40,000 market. Leading brands dithered about this market, with the exception of HCL
which opened a huge lead over the pack with Compaq and Wipro following in the pecking
order.

The enigma about PC market in India contin-ued in 1997-98.
A large number of promises, but all falling just short of expectations. Projected to be a
market with one of the highest growth rates in Asia, and perhaps even in the world, the
Indian PC market had a mixed year in 1997-98. In spite of being a tough year, in which PC
marketeers had to revise their projections downward, the Indian PC market showed signs of
new-found maturity and grit. Reflecting this is 32.75 percent growth in unit terms, almost
12 percent higher than the previous year.

Looking at the growth patterns of the PC market over the
last few years, the year 1996-97 stands out like a sore thumb. In 1994-95, the PC market
grew by over 60 percent in unit terms over 1993-94 and this trend continued in 1995-96
when the market grew by over 50 percent over 1994-95. However, in 1996-97, the PC market
grew only by 22 percent, casting doubts about the long-term potential of the Indian
market.

The improved performance in 1997-98 has belied such doubts
to an extent. The growth last year can be described as a comeback of sorts for the Indian
PC market. What makes it a comeback is the fact that the growth has been achieved in a
situation not different from what existed in 1996-97. In 1996-97 the country witnessed a
political and economic instability, and in the overall analysis the situation was no
better in 1997-98.

Indian PC market
boosters (1997-98):

  • SME market picks u
    Home market gains momentum
    Price band of Rs 40,00
    Expanded sales and service network in B and C class cities
    The GID surge

Indian PC market draggers (1997-98)
:

  • Lackluster corporate market
    Slow economic growth
    Political instability
    Weak distribution systems
    Limited portable penetration

Political instability continued throughout last year
and the sentiments on the economic situation were dull. Both the GDP and the industrial
growth were less than what was projected. In other words, in an almost unchanged scenario
the PC unit shipments grew from 4,67,387 to 6,20,493. From this level, the one million
unit shipments milestone seems closer, although it may still be over a year away. The
derailment that happened in 1996-97, in the journey to reach the one-million mark, has
been put behind with the performance last year.

Desktop Drama
The battle for supremacy in the PC marketplace is won or lost on the desktop. It is a
number-driven battle in which tactics change often and only the nimble survive. This is
best illustrated in a statement made by a vice president who was in charge of worldwide
sales of an MNC PC vendor. He said, “We can’t argue, we have to lead. We can’t
debate, we have to decide. Numbers are numbers. Get on with it.” Couldn’t be truer.
There is no time to argue and debate. In the desktop market, decisions have to be taken
quickly if the numbers have to come in.

Unit shipments or numbers did come in very well for HCL
Infosolutions. With a total shipment of 90,880 units, HCL has the highest marketshare of
15.5 percent. In fact the company sold more than the combined total of the second-placed
Compaq and Zenith, which finished third. A tremendous achievement for HCL, which in the
previous year smarted under the PCL onslaught. To get to such an enviable marketshare HCL
had to sell the 90,880 units at an average price of just over Rs 33,000 which includes the
price of the box and operating system only.

  DESKTOPS

Top
Vendors And Market Size (1997-98)

VendorUnitsValue (Rs
Crore)
Share
Unit(%)
HCL*90,880441.6015.54
Compaq39,962188.146.83
Zenith37,800126.276.46
Wipro34,874207.705.96
Unicorp33,499199.525.73
Tata IBM23,785130.664.07
Digital17,041124.102.91
HP14,82694.242.53
PCS Industries10,34278.091.77
Vintron10,07524.741.7
Total Market 5,84,9472,145.17100
*Includes Hewlett
Packard, Packard Bell

HCL was able to sell large numbers because it had a focus
on the segments which mattered at the end of the year, the Home and SME. The company was
proactive in creating a lot of action for the Home and SME segments by holding computer
carnivals in many cities. Other factors which went in favor of HCL were the absence of PCL
from the market and the lack of a suitable product in the lower price band from Wipro.

Leading the MNC bandwagon and climbing into the second
place was Compaq, with total shipments of 39,962 units. Considering that corporate buying
was below expectations, Compaq has done well to finish where it has. During the year,
Compaq set up the Indian subsidiary and also signed Godrej Pacific as a distributor. This
enabled Compaq to penetrate beyond its stronghold in the metros. In the corporate sector,
the company was able to increase its penetration in public sector and banking.

The year also saw a definite movement by Compaq to address
the lower range of the PC market. The average selling price for a Compaq box dropped below
the Rs 50,000 mark and, with the introduction of the Deskpro 1000, it joined the battle
for the lower end. In the price wars of the JFM’98 quarter, Compaq was an active
participant alongwith HCL and Digital, though it did not pay off as well as it did for
HCL. In the OND’97 quarter, Compaq not only did well, but was also above HCL. But there
could have been some amount of channel stuffing and that could have boosted the numbers.

Zenith stormed into the Top 5 PC desktop class by its sheer
marketing prowess. Breathing down Wipro’s neck, Zenith is proving to be its formidable
competitor. With 37,800 desktops sold in 1997-98, the ‘One-Up PC’ vendor garnered a share
of 6.5 percent. In terms of value, however, the share was 5.9 percent, at desktop sales of

Rs 112.2 crore. This is a clear indicator of Zenith’s price
competitiveness. The company launched a marketing blitzkrieg when it announced a
multimedia PC at Rs 33,500, the lowest among the branded vendors, triggering off an
avalanche of price cuts. The charm is that the sales were mostly to the SOHO/home and SME
segments, where Zenith is a strong player. In fact, the company claimed sales of 7,000
units in just two weeks after the much-acclaimed launch. Aiming to double the number of
its dealers (it believed in direct selling till 1996), the company expects to pierce
further into the PC market.

In spite of an unclear positioning in the mind of the
buyer, Wipro finished fourth in the desktop drama. Although the buyer did acknowledge Acer
as an MNC and that the quality and reliability of MNC products is good, he also thought
that US MNCs are more equal than Taiwanese MNCs. While the buyer debated the pros and cons
of the Taiwanese angle, HCL gobbled up the market for national brands and Compaq did well
in the MNC segment. During the year, Wipro’s USP was that of fresh technology, and so it
did not join the price wars in a major way. This tactic did help the company in the server
and portable segments but did not do the trick as far as desktops were concerned.

HP India has done well with shipments growing from 10,560
units to 25,000 units. The 136-percent growth has been largely possible because the
company got its distribution act in place. Unicorp grew marginally, while PCS and CMS
shipped less than the previous year’s shipments. PCS seems to have been affected by the
lack of AST’s strong presence, which had helped it in the previous year. Similarly,
Tata-IBM, which had exhibited more than 100-percent growth in 1996-97, found the going
tough with the corporate buying drying up, and shipped 500 units less than last year.
Digital on the other hand had a handsome growth of 70 percent because of revamping of
their distribution strategy.

Distributor for Digital, Compaq, and IBM, Godrej Pacific
was a rising star of 1997-98. Its shipments grew 493 percent to finish the year at 17,570
units. The excellent performance of Godrej does give a definite indication that large
distributors have an increasingly important role to play in the Indian PC market. The
likes of Godrej and Redington may soon be joined by other large worldwide distributors who
have been eyeing the Indian market, waiting for the right time.

The desktop shipments from the Top 10 club were 2,92,862
units-a little over 50 percent of the overall desktop market. This is more or less in tune
with the marketshare that Top 10 brands have worldwide. The exclusive Top 5 group has a
marketshare of 37.1 percent in which HCL alone contributes 15.5 percent. The total
shipments in the desktops segment were 5,84,947, a 31.32-percent growth over the previous
year. The average selling price for desktops dropped to Rs 36,670 from the previous year’s
figure of Rs 43,920 which is a considerable drop of 16.5 percent. Apple Macs did better
than the previous year, with an estimated shipment of 10,000 units for Rs 80 crore.

An interesting aspect is that beyond the Top 10 club lies a
50 percent marketshare. Even after accounting for other branded products there still lies
a 40-45 percent marketshare that is controlled by the assemblers and the GIDs. The price
band addressed by these players is sub-Rs 40,000, which is where the bulk of shipments
have been. To address this price band, the better-known brands need to get their pricing
acts together. Tough prospect, but not impossible, as has been demonstrated by HCL.

Giddying GIDs
The huge market that is currently being addressed by the assemblers and the GIDs would
make any market analyst get giddy with the latitude available. Factor into this the growth
potential, and the Indian market gets transformed into a goldmine that is waiting to be
tapped. Intel, for one, has realized this and has been working closely with this group of
players for the last couple of years with success that has been apparent so far.

DESKTOPS Growth Table

   1995-19961996-971997-98
   UnitsGrowth %UnitsGrowth %UnitsGrowth %
Units shipped3,58,67753.34,45,42424.25,84,94731.3
Value (Rs Crore)1,71453.91,95614.12,1459.6
ASV (Rs)47,79043,92036,670  

 

Desktops Marketshare (1997-98)

   Units %Value %
Top 5 brands3737
Next 5 brands1312
Top 10 brands5049
Other brands5051

 

Processor
Growth (Desktop Units)
 1995-1996-971997-98
 (%)(%)(%)
Pentium Pro/PII0.214.6
Pentiums/MMX14.862.375.4
48674.737.510.0
38610.5

 

   NOTEBOOKS 
Top
Vendors And Market Size
VendorUnitsValue (Rs Lakh)Share Units (%)Share Value (%)
Tata IBM4157572516.2722.23
Compaq4500480015.6618.64
Toshiba210029408.2211.42
Acer148016205.796.29
Digital4727121.852.76
Top 5 total122091579748.0061.03
Market Total2554625751
Avg. selling price 1,01,000  

 

Portable
Penetration In Overall PC Market
94-9595-9696-9797-98
Portable (Units)4,50011,32915,96025,546
Overall PC’s (Units)2,44,8003,83,0064,67,3876,20,493
Portable/PC Penetration (%)1.842.953.414.11

 

  
Notebooks
Notebooks Growth Table
Notebooks1995-19961996-19971997-1998
UnitGrowth (%)UnitGrowth (%)UnitGrowth (%)
Nos.1132915215960402554660
Value (Rs Crore)1241911915425835
ASV1,09,0001,19,0001,01,000

For starters, Intel identified that the Indian PC market is
price-sensitive and that new market segments can be created, provided the price is
attractive enough. Next was the reckoning that the players best suited to address the
lower price band market are the assemblers, because of their low overheads. The assemblers
also had the option to choose from an Intel, AMD, or a Cyrix chip. Into this scenario came
the GID scheme which, from Intel’s point of view, can be classified as a brilliant piece
of strategy.

Legitimacy was what the assembler lacked and that is what
Intel provided in the GID scheme, apart from the chip itself. The company spent a large
amount of money convincing the buying public that it had approved the erstwhile assembler
by making him into a GID. It was a victory for Intel as it ensured the company more than
90 percent marketshare and a victory for the assembler as he had got legitimized.

The GIDs and the assemblers never had it so good as in
1997-98 with their marketshare increasing to about 40-45 percent of the total market.
Contributing to this increased share was the near-total absence of PCL in the marketplace.
PCL was addressing the price-sensitive buyer and this market space has been grabbed by HCL
and a motley group of GIDs. Now that GIDs are controlling a huge slice of the market and
since many brands have plans to address the low-price brand market, a few issues have
cropped up.

By appointing GID, Intel is in a manner vouching for the
genuineness of the dealer and his operations. But in reality, Intel has no bandwidth,
whatsoever, to ensure that Intel-approved (or quality) components are used in a GID PC.
Murmurs have started amongst the branded vendors as to why Intel should provide a
legitimacy cover to players who are operating on the fringes of the gray market.

Portable Paradox
In 1997-98, the portables or the notebooks market grew by 60 percent over the previous
year with shipments of 25,546 units. The growth rate is 19 percent higher than that
achieved in previous year. The penetration of notebooks as a percentage of the overall PC
market is now 4.11 percent, up from the previous year’s penetration of 3.41 percent. The
average selling price of notebooks in 1997-98 was Rs 1.01 lakh, a reduction from previous
year’s average price of Rs 1.19 lakh.

Winning the numbers game was Compaq, which has dislodged
IBM from the pedestal. Compaq, in fact, has outgrown the market by a significant factor
with the Armada range of notebooks. The company’s performance is significant, since in the
previous year it was placed well behind IBM and Wipro-Acer. Compaq had a strategy of
focusing all resources behind a few models and a narrow price band where the volumes were,
and this has paid off handsomely. While IBM has sold 400-odd units more than the previous
year, the sales of Wipro-Acer have come down.

In value terms, IBM continues its leadership position with
Rs 57.25 crore compared to Rs 48 crore grossed by Compaq. However, it is lower than IBM’s
revenue of Rs 70 crore for the previous year. Toshiba has done well, to get the third
position. The Top 5 club also included Acer and Digital. The club contributed 50 percent
of the overall marketshare in unit shipments and 61 percent in value terms. That the
notebook market is in the hands of a few vendors is clear when a comparison is made to the
desktop market where it takes the contribution of the Top 10 to reach the 50-percent mark.

Compared to 1996-97, portables have done well in 1997-98 on
many counts. The number of units sold has increased by 60 percent, the penetration of
portables has gone up and the average selling price has come down. But still, a notebook
remains more than twice as costly as a desktop. This is the paradox facing the portables
segment. Affordability remains a major issue, and in tight market conditions and a
price-sensitive market like India, requests for notebook purchases are invariably going to
get rejected in favor of desktops.

Winning Ways
One of the most important trends, particularly in desktops, is the fast and continuous
blurring of buying segments based on brand-sensitive, brand- and price-sensitive, and
purely price-sensitive. Traditionally, MNC brands have been addressing the brand-sensitive
market, national brands like HCL and Zenith represent the brand- and price-sensitive
market, and the assemblers and GIDS the purely price-sensitive market.

With the volumes market being in the sub-Rs 40,000 price
range, some branded players-MNC and national-have realized that if they have to grab
marketshare then they would have to address this segment, from which they have been shying
away so far. In 1997-98, HCL has already done it and Compaq has stated its intentions of
doing so clearly. What this means is that the PC market can no longer be segmented
distinctly into purely price-sensitive, brand-sensitive etc. The ball has been set in
motion with a few well-known brands having decided that the way to win is to move
downstream into the price-sensitive segment and thereby address the entire spectrum of the
PC market.

There are, of course, doubts as to whether the purely
price-sensitive segment is a viable market in terms of profitability. The experience of
PCL is an indicator that it is not. On the other hand, some vendors are trying to learn
from the PCL example and come out on top in addressing this volatile market. A parallel
can be drawn with the PC market in China, where branded products have been positioned to
compete with the assembled products. The kind of volume shipments that China has would not
have been possible had the branded products stayed away from lower price points. In India,
the start has been made in 1997-98 and the trend of branded products addressing lower
price should gain momentum this year.

Supply Chain Situation
Distribution is the key in the PC game. The players who have done well in 1997-98 are
those who have been successful in their supply chain management. The overall movement in
the channels has increased in 1997-98 and is poised for further growth this year. Movement
for MNC vendors is almost 100 percent through the channels, while for the likes of Wipro,
HCL etc., it is in the range of 50 percent.

While the performance of the channels in terms of unit
shipments has been good in 1997-98, the strain of the tough market conditions is beginning
to show. There is a lack of financial resources in the channels due to the cash flow
problems which most dealers and distributors have been facing. Added to this is the fact
that in the face of increased competition the profit margins of the dealers have eroded
further than in the previous year. As a result of this, 1997-98 saw some dealers pack
their bags and head for products with better margins. This trend could continue if the
economic situation does not improve this year.

There is also a thought that the supply chain management in
India needs an overall improvement. The practices being currently followed have been
adequate thus far, with shipments below half a million mark. But now, with 0.62 million
units having been shipped in 1997-98 and the market gearing up for the one-million mark,
there appears to be a need for more professional practices, credit discipline, fresh
injection of funds, logistics control etc. This is where large international distributors
like Ingram Micro, Merisell, Inacom etc. could fit in.

Small Surprises
Small is beautiful. PC marketeers realized this factor in 1997-98. The small buyer,
typified by the Home and small and medium establishments saved the PC industry. The growth
in unit shipments (32.75 percent) has come almost entirely from these segments. After
remaining in wilderness till now, the small buyer is currently in the limelight in no
uncertain manner.

Today, he has plenty to choose from, what with almost all
PC players trying to woo him with their wares.

The disappointment was, of course, the corporate and
government segments. The leading brands expected the corporate buying to improve as the
year went; however, it remained sluggish-almost throughout the year. This upset the plans
of some leading players and they could do little to change tracks mid-stream. In the
affected category were Wipro, Tata-IBM, PCS, CMS etc. Proving to be an exception was
Digital, which grew 70 percent even though the company had a fair bit of concentration on
the corporate market. Compaq of course moved to the SME segment in a big way and HCL went
all the way by addressing SME and Home effectively.

Overall Outlook
PCs being the fundamental building blocks for the IT industry, they drive the demand for a
spectrum of other products and services. The performance of the PC industry is seen as a
reasonably accurate barometer of how the domestic IT market is faring. A good performance
by the industry would invariably result in other products and services also doing well.
The outlook in 1998-99 for the PC market is, in all probability, likely to be better.
However, it is also clear that it will not be a spectacular year, but probably just about
better.

Though the potential is there for the Indian PC market, it
is far too heavily dependent on the economic and political situation, both of which are
still waiting for a turn for the better. The 1998-99 budget helped in no way.

So the process of getting back on track could take a little
longer than what was initially thought.

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