Taking IT to Bharat

The agenda for most IT companies in FY 07 and FY 08 has been reaching out
to a much larger part of Indiathe tier-2-3 and-4 cities. It is a no-brainer
that all of them have relied heavily on the distribution channel to help achieve
this. And distributors have accepted the challenge. They have not only expanded
presence by opening new offices, but have proactively tapped new locations by
organizing road shows and increasing marketing activities to woo
sub-distributors, much the same way vendors do. This proactive market creation
approach has been a fundamental shift witnessed in the last two years, with
activities intensifying in FY 08.

At the same time, leveraging on their strengths of reach, agility, and
understanding of the local markets in many small towns and cities, most IT
distributors are taking advantage of the digital lifestyle being adopted by the
average Indian to get into non-IT areas like consumer electronics products.

Growth Drivers

The PC business grew by almost 25% and was the highest growth area for
almost all distributors. The laptop market grew by almost 80-90%, while the
desktop PC market saw only 2-3% growth. The launch of HPs new commercial range
of products comprising the Compaq brand of laptops was also a key driver. Also,
as laptops picked up more demand, sales of desktops and the so-called white
box declined. Sales revenue and market share of HP, Dell, and Lenovo increased,
which directly impacted the assembled PC market. With go-to-market strategies of
some big brands like Intel becoming more streamlined, the components segment as
a whole had some respite, and, though sluggish, did not fair as badly as FY 07.
Slow moving assembled PC market was a deterrent, but processors, hard disks and
monitors business saw high growth with brands like Intel, Seagate, Western
Digital, Hitachi, Samsung, LG, and Logitech being the major revenue generators.
The UNIX hardware and software market also continued to grow steadily.

Last year, Dell entered direct selling which made some vendors wary and
take-up more aggressive distribution strategies. Apart from laptops, the hottest
selling products were TFT-LCD monitors. In the display components segment, TFT-LCD
monitors constitute 70% of the market while CRTs fell to 30%. New power saving
technologies employed by TFT monitor manufacturers and the growing demand among
enterprises were the key drivers.

Distributors also preferred LCD to CRT due to low shipment and logistics
costs involved. The brand that received maximum traction over the last year was
AOC, and this slightly affected Samsung and LGs monitor business. AOC became
the third largest monitor brand and appointed Compuage as its national
distributor. While AOC and Acer thrived on the lower end of the market,
Viewsonic gained market share as a premium brand.

External storage devices such as flash drives and SD memory cards/sticks saw
explosive growth and were among the fastest moving products attributed to the
burgeoning mobile market and declining cost of products. Some distributors also
witnessed a sudden surge in demand for gaming products such as high-end gaming
graphics cards and high performance gaming PCs, panels, and joysticks. Prices of
XBox 360 still hovering high and relatively poor after sales service may be an
important factor for this uptake.

There was a good demand for enterprise solutions and products among
corporates, SMBs and government, with distributors streamlining their product
portfolio to cater to these segments. Failing to live up to distributors
expectations, the thin client solutions did not witness enough market uptakes,
causing many distributors to step backwards.

Another major trend was the inclination of some key distributors to
manufacture their own range of branded products including PCs and accessories
like headphones, speakers, etc. Many distributors explored accessories as a
viable business and added PC and mobile accessories like laptop bags to their
portfolio.

Expanding Presence

All distributors aggressively expanded their presence to reach out to C, D,
and E class cities, resulting in higher growth in the consumer PC business.
Redington increased its billing locations from thirty-three to fifty-nine, and
plans to increase its footprint gradually this year too. ESys set up around ten
new offices in Surat, Bhopal, Nashik, Amravati, Benaras, among others. Rashi
Peripherals expanded its presence in eight new cities across India such as
Jabalpur and Allahabad and tapped twenty virgin markets across the country. It
now has a focus to tap F class cities such as Kottayam.

On the other hand, Savex Computers expanded its regional presence by setting
up seven new branches in eastern India. SES Technologies focused more on
enhancing the number of support personnel, branches, and warehousing facilities
across the country. Supertron expanded its presence in B and C class cities,
whereas Mediaman began operations in Singapore. Iris Computers witnessed sudden
spurt in demand from the western region and increased its presence in seven new
B and C class cities such as Nagpur, Surat, Aldhwani, etc.

Ingram, SES and Rashi also focused on value addition to resellers and more on
pre-sales and post-sales support and services. In line with this move, SES is
exploring the launch of a toll-free call center that will provide online
technical support to resellers.

Top 10 Distributors

Ingram Micro retained its #1 position once again. In fact, it was the best
year in terms of growth and diversification post the merger with Tech Pacific.
The systems business once again dominated the revenue share, while the consumer
electronics business grew significantly contributing more than 12% of its
revenues. The consumer PC business saw maximum growth at about 30% despite
Ingram dropping the LG product line. It added ASUS to its portfolio and stopped
reselling Toshiba notebooks. Ingrams high-end enterprise business contributed
almost 20% to its revenues. Its enterprise software portfolio grew by almost 50%
having added the Autodesk and Adobe businesses.

Ingram managed to leverage on its excellent base of resellers to launch more
products in tier-2 and -3 cities. Its UNIX hardware and software as well as Red
Hat businesses performed better compared to FY 07 while the thin client
business did not take off as expected. Ingram also started an in-house training
cell and began vendor specific training sessions for Red Hat and Fortinet to
both resellers as well as customers.

In its first year of operations as a listed company, Redington entered into
many high value businesses. Its enterprise business received a good thrust, with
the increase in the number of large government funded projects. It also had a
major SME focus as part of its commercial business. Redingtons consumer
notebook business also witnessed high momentum while it further consolidated its
components business. The biggest highlight was its partnership with Viewsonic,
and its role in positioning the brand as one of the premier monitor brands in
India. It added many new principles such as Adobe, Sun Micro, Sonicwall,
Cyberoam, Fujitsu laptops, and PowerDesign, among others.

Interestingly, for a non-traditional distributor, about 70% of HCL
Infosystems revenues came from the distribution business taking it to the #3
position. This was largely due to HCLIs efforts to ramp up channel ties. In
fact, according to the IDC-DQ Channels survey, HCLI climbed up the rankings in
the overall channel satisfaction index. Apart from this focus, the company also
launched the MiLeap series of HCL Leaptops and unveiled its next-generation of
HCL-Data Center in a Box for the emerging businesses in India along with a new
line-up of HCL eSafe desktop PCs.

On the product distribution business front, Toshibas decision to get into
direct selling for its laptops was bit of a dampener for HCLI. However, there
was some respite in the form of new business as HCLI partnered with Kodak and
Princeton for nationwide distribution of their products. While Nokias
contribution to its revenues declined, there was a growth in revenues from Apple
and Kodak, and its DTH business.

DQTop20 had reported the meteoric rise of eSys for two consecutive years.
However, this year, eSys had a flat year in terms of growth over FY 07, thus
losing out to HCLI. This was largely due to eSys inability to attract new
vendors, and its high dependence on the low-growth components business. While
Samsung and Intel contributed almost 40% of its revenues, eSys also explored low
cost contract manufacturing for peripherals and accessories.

Nehru Place, New Delhi

Ranked fifth, SES Technologies was appointed by ASUS as its national
distributor for its range of motherboards, networking products, LCD monitors,
and notebooks last year. Philips Electronics partnered with SES to foray into
the IT accessories and computer peripherals market. The company also added the
HP storage range and is building pre-sales and post-sales support infrastructure
for this business.

Iris saw significant growth last year with HP and Lenovo contributing almost
70% of its overall revenues. It added Lenovos new consumer line of notebooks
and desktops to its portfolio and performed well in HPs run rate business.
Among the new principles added were APC for smart UPSs and HCL for its consumer
and commercial range of desktops and PCs. It discontinued distribution
activities for Xenitis and BenQ and signed up with IBM for Infoprint.

Savex saw significant boost in revenues from its HP (Compaq Presario) range
of notebooks. In addition to HPs consumer line of desktops and notebooks, Savex
also added the brands commercial line of products to its portfolio. Its Samsung
business saw exponential growth, especially since it began nationwide
distribution for the brand. LFR contributed almost 4% of its revenues and
expects this figure to grow. As a part of its expansion plans, Savex is also
planning to enter the enterprise networking segment this fiscal.

Rashi streamlined its products and brand line into separate divisions such as
components, peripherals, PCD, and networking and solutions to engage with
customers in a better way. It enhanced its product portfolio in the components
business by adding new principles such as XFX, Leadtek, Jetway, and AMD. It also
began distribution for the ASUS Eee PC. It added Procurve and Nexans under the
networking business and roped in Freecom under Peripherals. Rashi extended its
relationship with Sandisk for memory cards targeting the photography channel
market. About 40% of Rashis revenues came from new vendor acquisitions last
year.

Neoteric experienced high growth from new product additions. It signed up
with Lenovo for distribution in Gujarat and extended its partnership with HP for
their entire commercial range including PCs, servers, notebooks and backup
storage devices. After signing up with Wipro in FY 07, Neoteric once again
added new principles this fiscal such as Avocent for KVM switches, Imation for
removable storage media, UMAX for storage peripherals and consumer electronics,
and Moser Baer for optical disc drives, storage devices and TFT monitors. It
signed up nearly twenty-five large format stores, including Croma, Home
Solution, Reliance Digital, and Mobile Shop, and plans to tap the retail segment
further.

Ranked tenth, Supertron witnessed substantial growth in revenues from Acer,
Seagate, APC, Transcend and Supercomp. Its Acer business grew by almost 60% over
FY 07. Supercomp contributed significantly to the bottom line and is planning
to extend the brand offerings into PC components. It added Buffallo, a Japanese
storage company, for exclusive distribution of storage components and tied up
with IBM for the server business. It also launched its own brand called
Surveillance dealing in DVR cams.

Tier-2 distributors such as Mediaman, Pacific Infotech, Fortune Marketing,
Jalan Infotech, Priya, etc are trying to graduate to the tier-1 slab by adding
big ticket items such as processors, monitors, hard disks, printers, etc. to
their portfolio. Mediaman too is trying to get into tier-1 distributorship with
brands like Transcend driving its growth. It also entered the gaming market
aggressively with Palit gaming cards, and tied up with Swiss Travel Products and
a French company named MTech for accessories and home entertainment products.
Fortune, on the other hand, became the distributor for Seagate hard disk drives,
which contributed largely to its top line.

LFRs Pose No Challenge

Most distributors witnessed a growth in revenues from the retail segment.
Apart from the success of LFRs in large metros, the small format retail concept
has also taken off in smaller towns and cities. Hence, most distributors have
put in place a strong LFR strategy. As the IT retail market is still not very
structured, retailers have to still turn to distributors for procuring certain
brands. Though this is not a highly profiting part of the business compared to
the dealers, distributors are keen on doing business with LFRs because vendors
are not yet ready to cater to this segment directly (barring few brands like
Canon and LG). However, the distributors expect this to change over the next
three years and believe that LFRs and distributors will always co-exist.

Key Deterrents

The distribution industry continues to be a highly capital intensive
business with declining margins. The interest rates are at 8-9% and the cost of
distribution has also gone up. The other high cost factor was the increasing
logistics or freight cost which cannot be passed onto the customer. The rupee
appreciation also hit the industry to a great extent.

Though the VAT structure is more consistent, it requisites further
rationalization. Also, once CST is phased out by 2011, distributors will be
allowed to operate out of multiple regional warehouses and reduce their
logistics costs. Distributors will be able to cut down on operational costs by
almost 2-3% apart from saving on logistics, manpower, etc. They will also be
able to consolidate their third party vendors and improve operational
efficiency.

Priya Kekre

priyak@cybermedia.co.in