Industry overview: Domestic : Hand in Glove...No

A cursory look at the domestic market is sure to confuse some. Thats because
the market conveyed conflicting signalsthere was some news that was good, and
some not so great. On the performance parameters, the three key slices of the IT
domestic industryhardware, software and domestic serviceswere definitely not
at the same level.

While few IT services export companies were happy about their foray into the
domestic market and the fact that managed to pull off a very decent growth in an
extremely tough year, it was not a great year for most foreign MNCs that
operated here. While demand seemed to be strong, the purchase decisions (of
services, hardware and so on) by enterprises and consumers took painfully long
to make, or were delayed. Because of this, to a great extent, the spirit of IT
giants was down, especially in the second half.

Dwindling consumer sentiments and longer decision cycles for most enterprises
were more visible in the BFSI, automotive, retail, and manufacturing verticals.
Even the government sector, which was one of the biggest in terms of IT spending
during the last fiscal, added to the subdued market sentiments in the JFM
quarter, after the elections were announced. Though barring that quarter one did
see continued investments from the government, PSUs and the education sector,
among user segments. In the business segment, unlike in software and services
where SMBs continued to make investments, PCs saw subdued investment.

Vendors with a huge consumer focus suffered most including Microsoft, Xerox,
Lenovo or Samsung; whereas those with exposure to multiple verticals,
particularly software specialists like SAP, Oracle and Symantec, fared much
better.

The Services Story

This probably was the most fascinating piece of the entire domestic market
pieas undercurrents of a visible change (more in the approach to the domestic
IT services market) were being felt during the year like never before. In fact,
with almost all of the export driven companies pushing their way more
aggressively into the domestic market, it was the single most important
development one saw taking place.

CyberMedia Research DQ Estimates

The smartphones segment raced ahead with a growth of 78%, indicating that India has great hope as far as mobility is concerned. The printers segment on the other hand was the worst hit segment

The fact that the domestic services story had never really come out of the
closet was primarily due to its more prominent cousin, IT services exports,
eclipsing its presence. The story was different in the last fiscal. In FY 09,
Infosys, for instance, revisited its overall strategy. Since the last couple of
years the company had been making big announcements of a strong domestic focus
but there were no substantial steps taken in that direction. Last fiscal Infosys
finally did that, though rather subtly.

The global downturngood or badwas responsible for this realization to a
great extent, as Infosys did try and mitigate its over dependence on the US and
Europe (the two worst hit geographies, contributing 90% to the revenues); and
tried to beef up its almost negligible presence in the domestic market. During
FY 09 Infy pushed hard to get some big-ticket domestic projects, with a pretty
good success rateBharti Airtel and SBI core banking were some big wins.

Cognizant too made its much-awaited entry into the Indian market. Following
much speculation, it signed up for mjunction services with an e-commerce
company.

Another player that increased its focus in the domestic market was Mindtree
Consulting. The company charted out a three-year expansion roadmap for India,
with a thrust on the government and defense sectors. It made a few structural
changes within the organization to meet the goal.

Another big shift was more acceptance for newer pricing models and an effort
to grow larger transformation infrastructure (most of them BI and business
transformation) and consulting deals.

Besides this, despite the gloomy market sentiments, on the domestic services
market front there was a bullish demand for need-based solutions. So a lot
happened on the services side which is sure to reflect prominently in the next
few years.

The Hard Reality

The India hardware story in FY 09 was most disappointing, as it turned out
to be the worst hit sector. For the convenience of understanding, we are
primarily taking into account the combined PC market (desktops and notebooks),
printers, standalone monitors, servers, storage (hardware), storage peripherals,
and smartphones (a new category in DQTop 20).

During the year, all segments put up a performance which ranged from being
average to insipid. In fact, barring smartphones (a segment that did brilliantly
well growing at 78%) the hardware market did not grow at all in absolute or
percentage terms.

CyberMedia Research DQ Estimates

Surprisingly, while the global combined PC market grew by about 6%, in India there was a decline of 8%

Even though there was no dearth of action in terms of players launching new
products, and that with a concerted green thrust; an aggressive channel focus;
and so on, but nothing could save the segment from going down. Moreover, falling
hardware prices and a sharp decline in IT spending by organizations kept
drilling a bigger hole into the pockets of hardware vendors, more so in the
second half.

Unfortunately, one of the most important segments within the hardware pie (by
virtue of being one of the biggest contributors to revenues), the PC market,
went down by about 8%. This was a surprise, as for the same period global PC
shipment shot up by 6%. Though the penetration of PCs in India is relatively
lower as compared to developed countries, the market conditions that one was
operating in were more or less the same, if not worse in the current global
scenario.

So one is led to believe that CIOs holding back investments in IT capex in
the face of the uncertainty brought on by the slowdown had more severe
repercussions on the domestic market front. On the user side, it was
unfortunately felt most in the IT/BPO industry (which has traditionally been a
huge spender), which was disappointing as the industry on a standalone basis did
do well.

While the Indian consumer market saw no slowdown when it came to
non-discretionary spending, it could also not raise the spirits of hardware
vendors (though it is a different story that this segment still is a small
fraction of the overall market). For consumers, everything fell in the category
of highly discretionary spending. Though notebooks on a standalone basis grew
marginally at 4%, the drop of 18% in desktops was a major down.

As a matter of fact there were conflicting views floating in the market,
around September, that the downturn had not yet taken such an ugly turn in
India and that the festive season (around Diwali, Id, Dussehra when sales in
previous years have doubled or even tripled) will turn things around. However,
the market belied all hopes.

A direct corollary of a subdued domestic market, particularly on the hardware
side, meant dipping fortunes for distributors. From the biggies like Ingram
Micro and Redington to even the smaller ones, there was substantial decline in
growth of channel players in FY 09.

One has to admit though that Dell (PC market) was the only exception, as it
performed extremely well and grew by over 32%. Its share in desktops and
notebooks went up pretty significantly as it ate into HPs share, which sharply
went down (primarily on account of an inventory correction that it undertook in
the OND quarter of the fiscal).

In sync with the low-lying consumer segment, the printer market too went down
by over 18%, making it one of the worst hit segments on the hardware side. The
reason primarily was the cautious spending outlook that corporates and SMBs
adopted to meet the challenges of operating in a tough environment. There was
major reshuffling in the market. In the inkjet and lasers especially, HP again
lost huge points, this time to Canon and Samsung.

For standalone monitors too, FY 09 proved to be one of the most unfortunate
years as business suffered massively because of the declining price margins
between CRT and LCD monitors. This was more true for the second half of the
year. From the market perspective however it was good news as LCD became
mainstream in a big way during the year, as it grew by about 29% (calendar year
2008). And the transition from CRT to TFT monitors was nearly complete.

On the server front, which was a significant chunk of the systems pie, again
the sentiment was damp. Both x86 and non-x86 markets faced the heat of recession
and saw unit shipments going down. The big deals that used to pump in the
volumes did not happen in large scale.

On the enterprise side, there was some relief. For instance, in the storage
market, while the overall external networked market grew by 18%, the secondary
market too grew by a marginal 7%.

The Soft Power

It is true that India stands out from the crowd when it comes to its
software prowess, but back home the software story has never really taken off in
a big way. There are two reasons for that: one of course is that the industry is
still faced with high piracy levels, and two is the lack of software and
applications in local languages.

At 16% growth, though the business applications market did grow a bit, more
significant is the realization by enterprises that efficient processes is
something they cannot ignore for too long if performance is a top priority. So
FY 09, on the business applications side, was a momentous year in many ways.
Business intelligence was a bright spark in this story, the only entity that
added sheen to the business applications canvas. With a growth of 49%, it
compensated for the rather dreary growth rates seen by ERP and RDBMS.

As far as applications like ERP and CRM go there wasnt much scope for growth
as the markets are already mature.

In the BI space, it was a year of consolidation and growth as nearly all
vendors did well. Oracle and Microsoft grew in this space. Oracle added several
clients like Syndicate Bank and Hero Honda, and Microsoft also made some
additions to its BI client list with names like Infosys, Department of Posts,
Cognizant and TCS getting added. Even smaller local vendors like MAIA
Intelligence reported some major wins like Bharat Forge and HDFC Standard life.

Urvashi Kaul

urvashik@cybermedia.co.in