Hi-tech Products: An Expanding Market

The Indian high-tech products market holds tremendous potential in the future driven by multiple factors such as a rapidly evolving ecosystem, increasing availability of newer products or variants, rising awareness, and usage and growth in affordability. These factors are driving companies to transcend traditional structures and adopt newer distribution structures.

The ecosystem of the Indian high-tech market has expanded from operators, application developers, and platform providers to key opinion leaders where the view of each stakeholder has gained tremendous importance leading to greater demand for newer products. As a response, many companies are rapidly introducing newer products or variants, with an aspiration to increase and maintain their market share.

In 2011, nearly 650 mobile devices were launched in India (Source: www.themobileindian). This has led to new pressure points across the supply chain.

Further, increased usage of devices and affordability is driving the growth of the market. For example, in 2010, nearly 250 mn people in India, leveraged mobile phone for accessing the internet (Source: AC Nielsen). While, 8% of the urban mobile subscribers access mobile web, at least on a monthly basis (Source: Forrester-June 2010).

 

Changing Dynamics

One of the critical factors impacting the mobile devices market is a rapid shift in the buying pattern of consumers, with preference for technology advanced products increasing. In 2011, the Indian computer hardware market in India was estimated to be $3.1 bn, with computers accounting for 72%, peripherals 21%, and storage devices 6%. Within the computers market, the share of laptops vis--vis desktops is on the rise, and was expected to reach 40% in 2011 from 29% in 2008. (Source: Market Line Industry Profile-Computer Hardware in India and Datamonitor)

A similar trend is being observed for mobile phones, with share of smartphones expected to increase from 3% (2010) to an estimated 7% (2012). (Source: Convergence Catalyst - India Smartphone Outlook for 2012, EY Analysis)

Computer Market in India

Another critical factor has been the increased spending of consumers and usage in rural and semi-rural areas. Given the increased number of offerings at various price points, the rural and semi-rural consumer segment has grown significantly. According to Trai, of the total 884 mn mobile connections in the country, 303 mn are in the rural space. The rural segment contributes to around 40% of the total 2 mn connections added each month. Trai data shows that share of urban subscribers decreased from 65.86% in October 2011 to 65.73% in November 2011, whereas share of rural subscribers increased from 34.14% to 34.27%. The rural and semi-rural markets accounted for 65% of sales for most Indian manufacturers in FY10. (Source: Frost & Sullivan)

Further, the competitive scenario in Indian mobile device market is changing rapidly. In 2010, it was estimated that there were nearly 70 players, which has now increased to more than 150 manufacturers, with players offering products across different pricing spectrum (Source: Gartner). In 2011, between these players nearly 650 mobile devices were launched in India (Source: www.themobileindian).

In context of these changing dynamics, companies are revaluating their distribution network. Realizing the implications of the changing environment in which the Indian companies are operating, many of them are gearing up more towards a customer-centric distribution model. The earlier distribution structure was more streamlined with high involvement of the manufacturer and redistribution stockists, with support from a national distributor. The modified distribution models are resulting in a much larger network and also have a significant involvement of regional branch offices and regional distributors.

 

Framework for Determining Distribution Strategy

Given that technology obsolescence or replacement rate is very high in this industry, time to launch and reach the market and cost are key imperatives for any player. To achieve this, it is critical to have a right distribution strategy along with a strong distribution network.

Any distribution strategy is primarily based on the 2 key strategic elements, ie, target market/customer segments and the positioning adopted. These elements determine the impact on time and cost to launch and reach the market.

For instance, if a company is intending to target the urban market and position itself as a player focused on higher-priced innovative products, time-to-market plays a very critical role, while the cost to serve tends to have lower focus. This in turn impacts the distribution strategy and the network to be created. The company would then need to build a strong urban distribution structure with own or flagship stores and select partners, leverage other modes such as online retailing and create a strong platform for customer service.

Network structure for high-tech players where global sourcing is typically present is dependent broadly on the manufacturing strategy to be deployed, inbound distribution structure and outbound distribution structure.

The manufacturing strategy is dependent on the manufacturing model deployed (make vis--vis buy vis--vis assembly. Framework outlined below.) and manufacturing location. While considering options for manufacturing location, one needs to consider multiple factors such as proximity to major customer markets, connectivity, tax/other incentives, and labor environment, etc. For example, a company deciding to set up plant and warehouse in Goa to benefit from the lower CST rate, would also need to consider the logistics connectivity, which may not be comparable to other states such as Maharashtra.

 

While determining the inbound distribution structure, the companies which import a large share of their product/parts from other countries need to factor in the inbound logistics cost and time. The inbound distribution structure is based on 3 factors: Transportation mode for inbound imports (air/sea), port or airport for receiving inbound material, and mode of inland inbound transport (air, rail/road). While generating options for the above factors, the overall cost and time to reach factory or warehouse and the impact of this on time-to-market and value depreciation, need to be kept in mind. For example, Delhi, Chennai, and Mumbai airports have very high degree of connectivity and international cargo movement as compared to other airports in the country; however time and ease for custom clearance varies across these 3 airports, thereby impacting the overall time.

 

The third aspect is outbound distribution strategy, which is determined by the warehousing model to be adopted (can be a mix of company owned/outsourced), number and location of different types of warehouses (mother warehouse/regional distribution centers/depots) and mode of outbound logistics (in case of exports, mode could be air or sea and in case of domestic, it can be air/rail/road). For example, companies with major markets in North and West may tend to have their own RDCs in these locations, while preferring for an outsourced model in other regions

In context of strategic objectives and desired distribution strategy, companies need to rigorously evaluate the above parameters which are relevant, both from qualitative and quantitative aspects, to arrive at possible options.

 

Conclusion

Thus, given the changing industry dynamics, many of the companies in high-tech space are today realigning their distribution strategy and network structure to leverage multiple channels to achieve their strategic objectives. However given the complexity involved in changing the network structure, companies should take a long-term view based on their future strategy, as any change based on short-term gains may lead to challenges in future. Involvement of top management in designing and implementing the network structure is critical to success and companies sometimes falter in the latter part. Having a strong focus on implementation and long-term view would become one of the critical enablers for any player intending to succeed in this market.