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