SLOWDOWN: No Need for Panic

Ever since Andy Grove came up with his now-famous theory of inflexion, the

industry appears bent upon re-confirming it. First, the dot-com hiccups, and now

the talk of the general slowdown, as industry-watchers scurry around looking for

the source of the problem. (And after all that came the killer earthquake.)

In a situation like this, the tendency is akin to the stock market sentiment,

where the pendulum swings between euphoria and despair. The truth is usually is

far from these extremes. The reality is that an aftershock in these conditions

leads to large-scale correction in any system, and all those who have been in

the hardware industry will agree that a correction was long overdue. The

pretenders had to be separated from the performers.

When the dot-com crisis hit the market, the viability of the entire

e-business was put to question. What really happened was the startup dot-commers

went bust, while the fundamentally strong e-com companies came out stronger.

After the global euphoria, the pretenders who were after the venture capitalists

and the stock market gave way to the fundamentally strong technology and e-com

ventures. This correction had to happen. It will continue to happen in the

future, too.

Now, the question of the hardware industry’s slowdown.

Let’s take a closer look at it from two points of view. At a macro level,

the drivers of the business are the software industry, government, corporate and

home. The software industry has shown no signs of slowdown. The latest updates

from Nasscom and all other reports corroborate this: there is no slowdown. On

the contrary, the opening up of Europe is being projected as the next big

catalyst.

Nor has the government given any indication of a reversal in its automation

initiatives. There may be a re-look at the PSUs going in for disinvestments, but

the banking industry and the government departments, both at the center and in

the states, have not pulled back in any manner to cause a major concern.

Enterprise business in this segment is alive and kicking.

The home segment, which is the sweet spot for the industry, is possibly the

reason for despair, if any. Two factors influence this segment the most: the

first is priority, and the second, the novelty. The first is a non-negotiable

factor with more and more first time users, especially from the school-goers. As

for the second, it is the industry that drives it. As the Intels of the day

battle it out for processor speeds and with the advent of more and more PDAs and

appliances, the PC continues to be a central machine, and the home market will

keep coming back. The current scenario is at the worst an aberration, not a

phenomenon.

That leaves us with the corporates, where the slowdown is actually

noticeable. Several factors have contributed to this, including the slowdown in

the economy to start with, and some of the core sectors under-performing. The

segments of the IT industry who have been traditionally strong are the ones now

feeling the pressure.

Much has been written on the slowdown of the US economy and its impact

elsewhere. As I write this, there’s news that US Federal Reserve head Alan

Greenspan has announced a 0.5% cut in the interest rates, but the industry

expects another 0.5% cut shortly. Whatever may be the reduction, the fact is

that the US government has taken notice and is responding, and that is good

news. A strong signal from the world’s largest spender is the stimulant the

corporate sector now desperately needs, at least for market sentiment.

Back home, this is followed shortly by Greenspan’s Indian counterpart Bimal

Jalan’s announcement of a similar cut. Meanwhile, the mandarins of our own

finance ministry would be giving the final touches to our annual Budget, as this

issue hits the stands. The reason why I mention the Budget here is lest it

become the next "reason" for the slowdown. By all indications, it is

not expected to be a soft budget. But from a basic standpoint, the IT industry

and more specifically, the software industry will probably not be targeted for

any extraordinary dosages of bitter medicine. Similarly, the budgetary support

for automation across the departments will not come down, as too much is already

at stake. If at all, we’ll probably see a clear continuation of the previous

initiatives. Yet, at the same time, expecting the Budget to address the slowdown

in specific user segments of the IT industry is also asking for the impossible.

Among the various suggestions our industry has been requesting, a significant

one is the rationalization of the CVD component at the 8% level for those items

currently at the 16% level. The net benefits that can be passed on to the

end-customer from all such savings in absolute terms have now become so small

over the years, that they can by no means be accelerators of demand. As

mentioned earlier, the prioritization of the purchase by the users is the single

most significant factor, and not the exact price of the hardware.

Having said that, what is it that the members of the supply chain

(manufacturers, distributors, channels) need to do at the micro level?

Manufacturers who have driven up capacities over the years have already

started sounding more realistic in their estimates. This was one more correction

that was long overdue.

In the channels, there is an urgent need for belt-tightening. The biggest

contributor to cost in the supply chain is the inventory that lies across the

chain. This flab has to be gotten rid off: we need slimmer inventories across

the board. The traditional stock-dump-cash model will no longer work at the

channel end: it will lead to large-scale bleeding. Profitability will have a

direct correlation to the cost of inventory. This in effect also means the need

for a closer look at the business model currently in place. Maybe the time has

come for the Indian reseller to ride the wave he has helped create: the Web.

Maybe the time has come for all of us to embrace the virtual store, to let the

customer be with the reseller, and the inventory with the brick-and-mortar

distributor. Herein lies probably the long-term solution for all.

As Andy Grove said: Every inflexion point throws up a challenge and an

opportunity. Rather than watch the pendulum swing between euphoria and despair,

let us start winding the clock.

NY Prasad is COO of Ingram

Micro India