NETWORKING: A Shaft of Light Beckons

Market sentiment was at its lowest, and most of the factors that had fuelled
growth in previous years were missing. Simple result–dot.coms all but
disappeared, ISPs faltered and an overall economic slowdown only added to the
woes. At the end of the year, networking players had no cause for cheer, except
the fact that they were still around and that while some other sectors had
witnessed negative growth, they had at least 10% growth and a market size of Rs
2,235 crore to talk of, up from Rs 2,023 crore in 2000-01. Admittedly, the
industry was prepared for tough times at the beginning of the year itself, as
signs of a global downturn were visible towards the end of the previous fiscal.
The ferocity and length of the slowdown, however, left most players reeling–despite
the formulation of new strategies, realigning of business focus, curbing of
costs, and pushing hard at every little market opportunity. Nevertheless, larger
network vendors were able to minimize the damage—small players who were hit
hardest.

The networking segment grew by 12% in a tough year, thanks in particular to the ITeS wave The big players retained their market positions The education, call center and telecom segments were the growth drivers The overall market grew by 17.5% to Rs 252.4 crore In 2001-02, there was a perceptible shift toward outsourcing and services

The saviors

It was in networking that the government really took to IT in fiscal
2001-02, with massive central and state investments in infrastructure and
defense projects, and quite a roll-in from public sector units as well. Other
than the government, it was primarily banking and finance (BFSI) that drove the
networking market–major orders included those from Life Insurance Corporation
of India (bagged by Cisco), ONGC (Avaya), South Indian Bank (Nortel), ICICI
Prudential, General Electric, Gujarat Narmada Finance and Royal Sundaram
Finance.

The spurt in the call center segment and expansion in the telecom market
created the only new opportunity. Top telecom players such as BSNL, MTNL, Bharti
Teleservices, Spice Telecom and BSES all kicked off large projects, ensuring
long-term business for the network vendors. Another significant market driver
was the education sector–Punjab University, the IITs and some engineering
colleges began networking projects.

Vendor strategies

Whether it was a result of smart business realignments, repeat orders from
existing large customers, or their sheer size, the bigger players managed to
retain their market positions quite effectively. Cisco, Enterasys, D-Link,
Nortel, Avaya, and CommWorks all consolidated their businesses. Most vendors
began offering comprehensive solutions with multiple products and services
rather than focusing on just one or two core products. This is mainly being done
to ensure additional sources of revenue and is considered a safer business bet,
given the tough market.

Vendors who were able to define a niche and deliver that ‘extra something’
managed to pick up market share. Whether it was in VSATs, IP telephony, contact
centers, wireless or network security, only players who had the necessary skill
sets or developed expertise to exploit the changing market grew well in spite of
a generally flat year. In many cases, companies also went in for alliances or
acquisitions to enhance their offering. The new generation biggie in the making,
Juniper Networks, formally entered the top league with its $750 million buyout
of Unisphere from Siemens. In the packet processing space, Juniper is now an
end-to-end provider of carrier routers–both in the core and at the edge.

Cisco has also been actively projecting itself as an end-to-end solution
provider for a long time. It continues to focus on training and specialization
programs to prepare its channel partners for customer service and support. The
company wants to tap the large SME segment through competitive pricing and
support. Its thrust on VoIP and contact centers also continues with the same
fervor. Nortel is also getting more aggressive on the call center segment and is
focusing on optical networking and bandwidth on demand. It is gradually losing
its stronghold in the LAN equipment space to new entrants like Avaya.

Among the other established players, Enterasys continues to be steady in the
switches’ category. It joined hands with Ramco and Wipro to increase
specialization in providing a wide variety of solutions to customers.

Also, 3Com and Commworks, on the other hand, are trying to establish their
individual positions after the split that happened last year. While 3Com, which
has a strong enterprise-side focus, is banking on a stream of orders from the
government, Commworks is trying to tap the fast growing telecom service provider
market with its newly enhanced IP-based product portfolio. D-link, meanwhile,
remains strong in the low-end market segment and is banking on volumes to fatten
the bottomline. The company is learnt to be targeting the chemical,
manufacturing and government sectors.

Segment-wise performance

While the vendors’ aggressive restructuring exercises helped them minimize
the impact of the slowdown, some of the product categories were hit hard. As
customers became more cautious in investing on networking equipment, sales
started dipping.

What helped the market survive the tough year Network vendors, especially the large ones, were able to minimize the impact of the recession by formulating new strategies, realigning business focus and curbing costs. Instead of just focusing on single product sales, networking companies looked for multiple growth options such as value added services. The banking and finance sector continued to invest. Some major orders came from South Indian Bank, ICICI Prudential, Gujarat Narmada Finance, Royal Sundaram Finance, and LIC. Telecom majors such as BSNL, MTNL, Bharti Teleservices, Spice Telecom, and BSES have all initiated large projects that will ensure long term business for the network vendors. The government and PSUs invested in creating infrastructure.  Another significant market driver was the education sector as many universities and colleges started networking projects.  Demand also came from the SME segment, which added to volumes. IT-enabled services such as call centers emerged as a boon for growth. The network integration business is picking up with a distinct shift towards outsourcing and services.  The arrival of VoIP and wireless LANs have come as new opportunities.Â

The NIC (Network Interface Card) market saw a huge drop of 24% from Rs 82.94
crore in 2000-01 to Rs 63 crore in 2001-02. This was because NICs are now being
integrated with motherboards. Another segment that seems endangered is hubs,
where the revenues plunged by 22% from Rs 49 crore in 2000-01 to Rs 38 crore
this fiscal. With the prices of unmanaged switches falling sharply, hubs are
likely to gradually disappear from the market.

Routers, which had witnessed a whopping growth of 86% last year suddenly fell
flat to a measly growth of 3.6% at Rs 423 crore. However, Cisco retained is
dominance with over 80% marketshare. Although enterprises did not go for
largescale deployments this year, the market is expected to revive in the coming
months. Telecom bigwigs have many large projects in the pipeline and will be
investing in creating infrastructure. BSNL has already initiated its network
project in a big way and other telcos such as Reliance, Tatas, and Bharti are
also expected to make big investments this year.

The RAS market was severely hit by the ISP meltdown. As ISPs collapsed one
after the other and investments from that front started diminishing, the sales
of RAS equipment also dropped. Although sales of equipment with enhanced
features took up the average price levels of RAS, the market did not sustain the
sales revenues of the previous year. Overall RAS sales amounted to only Rs 170
crore, 14.3% down as compared to Rs 199 crore during the previous fiscal. But
market leader Commworks retained its top slot at 62% as it bagged some major
orders from telecom service providers BSNL and MTNL and repeat orders from
Bharti Teleservices, Tata ISP and VSNL.

Another segment that did well was LAN switches, which grew by 28% to record a
total revenue of Rs 783 crore. Major demand came from banking and finance and
the education sector. RBI, SBI, Bank of India and IDBI were among the largest
LAN projects executed. In the manufacturing sector, companies such as Bayer,
Pfizer, Godrej, and Boyce also invested in large deployments. At the high end,
gigabit Ethernet switches have gained popularity and are expected to do well in
the next year. The expected drop in prices in the managed switch category will
also add to market growth.

Business dynamics

The drop in prices of hubs, NICs, dial-up modems etc is affecting the
distribution business. The distribution segment saw a dip in revenues from Rs
687 crore to Rs 591 crore due to depleting margins. The reason is that most of
the distributors have been handling the products on the low-or mid-end areas,
where price-performance is always the most important consideration while making
buying decisions. The network integration business on the other hand, is picking
up and is increasingly aligned towards outsourcing and services. The expected
arrival of VoIP and wireless LAN, continuation of WAN implementations and
centralized computing set the ball rolling.

Here too, what separated the winners from the rest was the ability to clearly
rebuild and refocus. Wipro, Datacraft, HCL, and NetSol have been the top
integration providers without a presence in the VSAT domain. HCL Comnet and HECL
have substantial revenues coming from VSAT connectivity and services too. A
significant attribute of the VSAT providers has been their ability to elevate
themselves to offering value-added services in security, remote management, and
facility management.

Outlook

The year 2001-02 was perhaps one of the toughest the networking industry has
faced. But many believe that an upswing is still far away and it will be at
least another year before the industry can start recovering from the widespread
impact of the slowdown. However, in spite of adverse market conditions, it is
heartening to see that the networking industry managed an overall positive
growth.

This was primarily because the companies focused on improving margins and
generating significant revenues from services on one hand and looking at
minimizing operational costs on the other. The strategy was to have better
project management and cost control. Also, sectors like banking and finance and
call centers were major contributors to growth.

TEAM DQ With inputs from Voice &
Data