Mid-year Review

If you looked at the numbers,
things don't appear so bad, but then, numbers don't tell the entire story. If you spoke to
the vendors, and take them at face value, things might appear somewhere in the
middleground between great and very good, which is pretty good. If you get under their
skin and seek deeper answers, it might be somewhere between 'pretty' and 'bad'-'pretty
bad.' If you spoke to the software industry, they would talk about exports, which is good,
and they will be silent about the domestic markets, which is bad. If you spoke to the
corporate user community, they would tell you how keen they are to implement IT solutions,
but "the cash crunch" you know. If you spoke to the microprocessor companies,
they would tell you that but for the government's tariff structure, the Indian user might
actually be better off. Scratch the surface, you will find marketing rhetoric, couched in
techno-babble. And if you asked the most influential but the least informed of the lot,
the government of India, they would promptly form a task force.

height="235" align="left" hspace="3">This is probably the finest precis that one cannot
condense the entire Indian IT industry in the first half of the current fiscal. With the
entire economy in the throes of the FUD factor (once again), the users demurring infotech
for investment and the government desperately trying to come to terms with the realities
of a global millennium, things are slowly, but surely, going from bad to worse. Cynics
actually are saying that we are even past the worse stage. They could well be wrong.
However, what is undeniable is that notwithstanding the talk that comes out of the PMO,
there is very little evidence of walking the talk. Vendors who have actually invested to
provide IT products and services are not echoing the confidence of the policy makers.
Critical policies are still taking time to get off the ground, and there appears to be no
end to the political flux that has been gripping the country for the last 24 months.

width="224" height="174" align="left"> align="right">That there is a double-digit growth under these circum-stances should, by
itself, be a highlight by itself. With a 22% growth in the first-six months of the current
fiscal, the overall Indian IT industry crosses the Rs10,000-crore mark. The high point in
this journey was once again the software exports industry, which, according to NASSCOM
estimates, was Rs5,500 crore ($1.3 billion). As a result of this consistent performance,
even the PMO was energized to form a task force on IT, which surprised the entire industry
by coming out with its full report within two months, and got the presidential assent
within three. Not only this, for the first time in the history of independent India,
industry joined hands with the bureaucracy and political will, to put IT right on top of
the national agenda. That the government decided to undertake this task in a year which
has three crucial assembly elections, speaks of its intentions.

The three 'I's

Perhaps, because of the Task Force, and all that followed, the din of the buyers was
drowned. Not that there was any major force. For instance, the first quarter of the
current fiscal year was better than the same period in the previous year. This raised
hopes of a resurgent second quarter, which were promptly dashed. The combined effects of a
rising inflation (which kissed 9% in this period), a tighter liquidity regime and a
government, which was surviving on a week-to-week basis, thanks to a cooperative set of
allies, took their toll on the corporate performance. Industrial production hit an
all-time low of 3%, while exports slid into the negative end of the scale. As a
consequence, we had the classic downward cascade in terms of growth, where the FUD factor
depressed the buying, which depressed the production, which squeezed the money supply,
which in turn squeezed the production, and so on. According to data compiled by IDC
(India), the industrial production has been witnessing a downward trend and touched a low
of 2% in July 1998. Similarly, in a survey conducted by a newspaper, over 500 members of
the CII were asked about their sentiments on the general business situation, where less
than 50% responded that they were less optimistic about general business situation now
than six months ago.

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If anything, the mood
in the IT industry still seems to be one of hope. Clocking a healthy growth of 22% in a
country where every other segment is clocking single digit, if not negative, growth rates,
buoyed by an export market whose appetite for Indian software is becoming bigger and
bigger, unhindered largely by the sanctions slapped on it by the global economic regimes,
led by the US, the Indian IT industry has at worst, missed a few beats, but appears to
have retained its momentum and trajectory.

After information and internet, the
next mantra on the players' lips is another 'I' word-implementation. With a slew of
recommendations from the PM's Task Force (a total of 192 all told), the general mood of
the industry is one of hope. 'The task before the force' as Managing Editor of Cyber
Publications Shyam Malhotra had put it in July this year, is less of recommending great
thoughts, but of finding out ways and means of implementing them. With very few of the
recommendations being put on ground, the industry continues to be divided between hope and
cynicism. Hope, because the pot of gold can at least be imagined; cynicism, because it
cannot be seen. However, not everybody sees the situation similarly. According to N
Seshagiri, who is the Member Convenor of the Task Force, "you can either say it has
not happened before and thus it will not happen now, or you can work together in creating
an atmosphere where IT can flourish." He is, rebutted by an IT CEO, who says,
"How many committees have we seen in the last decade? What has happened to them all?
Who has ensured that they get implemented? It is one thing for the committees to
recommend, and quite another for to get implemented." And everybody points out to the
telecom nightmare that the country is caught in as a prime example of the ineptitude of
successive political agendas.

And that could be one of the key
catalysts that could make all the difference. With the announcement of the much-delayed
ISP policy, many industry observers believe that there is a very good chance of the things
now actually happening. According to a consultant, "Whatever had to happen has
happened. We are now at the bottom of the curve and the only way to go is now up."
With close to 47 ISP licenses already signed within a month of the policy announcement, it
is more or less certain that ISPs will be one of the key markets in the JFM quarter as
well as Q1 of the next fiscal. Some ISPs have already announced their services and the
market will be inundated with several more as the scenario unfolds.

The second catalyst that could
impact buying could be the falling PC prices. With MNC brands such as HP also jumping into
the fray of the low-end market, there is every possibility of the SME market opening out
to the VFM PCs. If that happens, the domestic PC market will boom, even in the non-home
segment. In the first half of the fiscal, it was once again the homes that contributed a
lion's share of the PC numbers, followed by the medium enterprises. Both from the
solutions affordability viewpoint in the small enterprises segment and the general lack of
buying in the large corporates, there was sluggishness in these two markets. What the
depressed price line might do is push the inertia away from the small enterprise segment.
With HP jumping into the fray, the stage is now all set for an interesting JFM. The market
in this segment is likely to see heavyweight players like HCL, Wipro, Zenith and Compaq,
now joined by HP. That the falling prices are actually helping growth is witnessed by the
huge unit growth of 40% in the Intel/clones market as compared to the same period last
year. However, the same growth in terms of value works out to a modest 16%. It is no
secret that many of the vendors are attempting to buy market shares by slashing prices and
entering into homes in a sluggish market. The hope is that as and when markets improve,
this marketshare will give them the muscle to dictate from a position of strength and thus
make further inroads into smaller corporate markets and lead with solutions.

The pricing power


The biggest gainer in the first half of 1998-99 in the PC market was Zenith, who achieved
an impressive 51% increase in unit shipments over the comparable period in the previous
year. In fact, ever since the company positioned itself as 'the one-up' PC, about a year
ago, it has carefully followed the strategy of capturing marketshare by lowering threshold
prices and thus putting pressure on the rest of the market to the follow suit. So intense
is this pressure that not only are MNCs coming under fire, but the company's tactics have
also put several GIDs in jeopardy. "They are incredible," says a competitor GID
"even my gray market prices are not very different from their's." The heat is
on, as the both national competitors HCL and Wipro are racing with Zenith as far as the
numbers sweepstake goes. HCL, in a way has an advantage. The company has been the #1 for
such a long time that this sheer momentum will be able to carry it through in the current
year. HCL's advantage-its channel spread-is also Zenith's weakness. So vast is the reach
of the former as compared to Zenith, that given the reach difference and the history of
HCL's numero uno position, Zenith's performance is actually salutary.

Another equally impressive run was
done by Wipro. Having relaunched the Wipro brand name after a gap of two years, the
company achieved a growth of 18% in the six-month period. More importantly, the good news
for Wipro is the market's acceptance of Wipro brand name for the second time around. While
numbers are still low as compared to the company's potential and strength, majority of
Indian corporates seem to react positively to the brand. With its large accounts expected
to go in for purchases in the next fiscal year, Wipro will be in a clear position of
strength when the corporate markets resume IT investments.

What is true for Wipro as far as
the Indian corporates are concerned is also true for IBM as far as both Indian and MNC
corporations go. With Big Blue's traditional customer base shy of IT investment, the
company has done well to record an excellent 30% growth in numbers. In case of IBM, the
growth in value will be higher than the rest of the industry as the company has, by
design, eschewed the low end of the market and has continued to seek a premium in the
hardware market. As a result, it is estimated that a 30% growth in numbers will possibly
be accompanied by an estimated 20-25% growth by value. This is good news for IBM, as the
last fiscal was not exactly a very good one for the company. With the PC growth adding to
the its performance, the JFM for the company is expected to lead to an overall annual
growth of about 35% in units and a 25% growth in value.

A novel
opportunity

The Redmondian stride across the Intel server market continues, as does the Intel'lian
stride across the server market in general. Despite the fact that NT 5.0 (oops, NT 2000)
has got delayed by over a year, it has probably helped Novell fight to retain its 25.5%
share in the country. What is, however, of concern is how the enterprise OS markets get
played out in the coming months. If anything, the delay in NT, strangely enough, coincided
with Win '98 launch. In all probability, the NT 2000 delay will be long enough for Win '98
to completely consolidate its hold on the desktop market and recover investments. And
therein lies the rub. Having announced a year-long delay, Microsoft has actually opened a
window (sic) of opportunity for Novell and Unix vendors to get into the enterprise space
and wean marketshare away from NT. With NDS already in place for NW5, and a native NDS for
NT already under way, the task is tempting. The catch is Novell appears to have shifted
its focus from OS-centric to Directory-centric approach. In this scenario, it will be
difficult for the company, both in India and elsewhere in the world, to pull back from a
stated strategy and refocus on the enterprise OS market.

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What is unclear is the
Unix gameplan. With SCO and Sun leading the Unix charge, it is already clear that the
latter is more preoccupied with Java than anything else. This leaves SCO. The moot
question is whether SCO has the necessary marketing muscle to actually make a difference
to the Microsoft's marketshare?

As far as enterprises
go, another area where the war has just begun is RDBMS, where Microsoft has once again
challenged leader Oracle. With the launch of SQL server 7.0, Microsoft has shifted the
entire battle on to a new level. While it is clear that the war is being fought keenly by
both the sides, it might be a while before the Redmond giant is able to dislodge Oracle
from its leadership slot in this market. What might happen is that the high-decibel charge
by Microsoft, other smaller players, such as Informix, Sybase, Ingres, Progress etc., may
actually get impacted, and what Microsoft gains could well be from these vendors than from
Oracle. While this could be true for the current year, the next year will be another
story. Unless and until, Oracle displays an aggression, which matches Microsoft, and an
innovation that enables it to penetrate newer markets, it does face a problem. This will
be offset by Oracle's application portfolio, which allows it to reach into vertical
segments with greater ease than Microsoft. Once again, the key to this strategy will be
how well Oracle taps into the corporate mindshare on critical issues such as
datawarehousing, ERP and e-business-three issues that are expected to drive the IT buying
into the next fiscal year, from the large business point of view.

face="Georgia, Times New Roman, Times, serif" size="3">PCs: The Price And Processor
Alternative

The first six months of fiscal 1998-99 saw a lot of flux in the PC arena. While AMJ saw a
fall in the prices of Pentium systems, JAS saw the emergence of Cyrix as an alternative to
Intel. This was mainly due to the sudden stickiness of the PC price after AMJ. Despite
Intel’s efforts for the contrary to happen, the price of PC systems tended to stick
to Rs35,000 mark and this initiated a scramble for a cheaper alternative for Intel, which
happened to be Cyrix.

National Semiconductor India tied up with ACI Computers, the MNC component distributor,
and Priya International, the erstwhile distributor for Intel. These two distributors did
well in providing the much needed channel for Cyrix in the Indian market. Apart from this,
the branded PC vendors also launched cheaper systems based on Cyrix, in order to hop into
the worldwide phenomenon of the cheap PC, the trickle down effect of which is currently
being witnessed in the country.

For National
Semiconductor/Cyrix it was just the very set of conditions that it was looking for. And
its chips went up. About 30,000 Cyrix microprocessors were pushed in the JAS quarter
itself, of which an estimated 5,000 PCs based on the chips got rolled into the market. The
other thing that happened was Delhi Customs Department holding the consignments of Intel
chips, and then classifying them as populated Printed Circuit Boards (PCBs), which created
a gap in the market and gave further fillip to the demand for Cyrix chips. Thus the first
six months of the year laid the foundation for the entry of non-Intel processors in the
Indian market.

Another major
development was the formation of the National IT Task Force by the Central Government,
which gave the much needed optimism to both the vendors and the market. SME and SOHO
markets realized the importance of IT and started investing in it, the first item of which
happens to be the PC. But at the same time, the PC also underwent a tremendous change in
itself.

Metamorphosis of
the PC

The first half of the fiscal saw the growth of the PC from being confined to the higher
echelons of the society to moving toward becoming a mainstream product. Partly, it was
Intel’s evangelizing activities and partly it was the retail initiatives of the PC
OEMs, which helped broadbase the market. But the main thing was the change in the
definition of the PC offering from being a staid beige box to a multimedia consumer
appliance.

Spearheading this
transformation of the PC was the price factor. The price came to a comfortable Rs35,000,
at which multimedia became possible. The price band also broadened for the first time,
with the lower limit being set at Rs30,000 and the upper limit of the latest configuration
being at Rs70,000.

With all this happening in the first half, there is hardly anything left to happen in the
latter half as far as price and configuration are concerned. Of course, the config will
continue to go up in the premium segment and will trickle down to mass segments as and
when newer chips are launched by Intel & Co. What is needed in the next half,
especially in light of ISPs getting off the ground, is the need for the sales to go up and
touch the one million mark this year.

The most critical corollary of the
above is the increase in the SI market in JFM and into the next fiscal. With corporate
results expected to improve in the second half of the current fiscal and thereafter, the
renewed interest, and available money for IT investment will happen around the first six
months of the next fiscal. As infrastructure projects also get off the ground, as do some
of the large private sector buying in areas such as banking, finance and telecom, SI
capabilities and solutions availability will become the deciding factor for most
companies, except Microsoft and Intel-two of the IT infrastructure companies. In such a
scenario, companies such as Oracle will be faced with an opportunity as big as the threat.
For instance, if the decision of the Chief Vigilance Commissioner (CVC) N Vittal,
stipulating that the urban branches of all banks must be computerized by January 1, 2000,
is to be implemented in toto, then the banking industry alone will absorb close to 400,000
PCs in a single year. The cost of networking, putting in solutions, maintenance,
peripherals to support the systems, will be the single largest opportunity that any sector
has presented within a 12-month timeframe.

The first six months of the fiscal
appear to bear with them the hopes of the next. While the government will probably play a
major part in implementing the decisions of the Task Force, the industry and the country
will have to get used to issues such as the FUD factor, political dithering and inertia.
The bad news is that these will continue to exist. The good news, however, is that despite
these factors IT seems to be on its way to becoming the single largest reason for global
success. As Indian corporates realize this crucial aspect of globalization, the markets
will turn. They are bound to.