The PC Slump and Beyond

With a shrinking market and price-sensitive customer base, even promotional
schemes have become passé in the PC segment. Is it time to focus on retailers
and smaller towns?

A series of unforeseen contingencies like the slowdown and escalating
India-Pakistan cross border tension badly hit consumer sentiment in the country
last year. In January 2002, MAIT revised its earlier projection of PC shipments
touching the 2.5 million-mark by March 2002 to 1.65 million units.

MAIT also announced that the PC market in second half of 2001 (April to
September 2001) had shrunk by 4% as compared to the same period last year. But
alarmingly, compared to the previous half-year (October 2000 to March 2001), the
market shrank by 23%. If MAIT projections were to come true, by the end of March
2002, the market would have shrunk by 12% over the previous year.

The mood however is not too upbeat for the soft quarter AMJ (April, May,
June) even though the JFM (January, Frbruary, March) 2002 quarter was fairly
good. But the JFM quarter is traditionally when a major portion of government
and large corporate buying happens. The silver lining for this quarter is
expected to come from the home customers. Says Sai Chandrasekhar, head product
marketing, HP India, "Home PC volumes are expected to pick up."

Why the slowdown?

With the low consumer confidence and consequently lowered spending, the mass
PC market did not grow. In fact, business declined by 1.5% during April—September
2001 as compared to the same period in 2000 and 24% as compared to October—
March 2001, the preceding half year. The fall in the household sector was even
steeper at 11% and 20% respectively for the corresponding periods.

Says Ajay Mittal, brand manager, Personal Computing Division, IBM India,
"Customer buying cycles have become longer and more customers prefer to
wait and watch." Echoing Mittal’s sentiment is S Rajendran, general
manager, marketing, Acer India. Rajendran admits that major decisions have
slowed down.

Even corporate customers are now becoming price-sensitive and this is
reflected in a sharp decline in revenue as opposed to decline in volumes. While
volumes in the first half of 2001 over 2000 declined at 4%, the value decline
was a disturbing 23%. Says Vinod Marwah of Compunics Information Systems, a
Mumbai based reseller, "Even the corporate sector is moving towards lower
prices." The average size of corporate deals has gone down over the past
few quarters. While customers negotiate for larger quantities, they typically
end up buying fewer PCs. Says Sai Chandrasekhar, "Thousand plus PCs deals
have become a rarity in the market."

Mittal of IBM offers another explanation for the slower than usual market,
"Customers had in the recent past, bought systems with configurations
higher than what their applications demanded and therefore the need to upgrade
is not urgent now. "Besides, low memory prices apparently made upgrades
cheaper.

Lackluster schemes

The picture in the home segment was not too different. Buying was slow and
vendors were trying everything to woo customers. The focus on price points
became even more intense. Says Subir Bhagwati of SD Computeronix, "This
quarter, we are planning to explore the lower-end Celeron based PCs which are
affordable."

There was a deluge of schemes and promotions, but customers were not to be
wooed easily. Says Manish Agrawal, director, marketing, Vintron Informatics,
"We offered bundles at aggressive price points for the home market.
However, they have not really boosted sales." As a result, Zenith Computers
MD Raj Saraf says that he may not be going strong on schemes in this quarter.

However, Sai believes that schemes act as a mechanism to drive the market
when it is down. "They generate interest and drive walk-ins that may not
happen otherwise."

Another reason is the lack of creativity and innovation in designing schemes.
Customers have come to accept bundling offers as a mainstay in the PC buying
process. Says Satinder Juneja, senior manager, HCL Infosystems, "Everybody
in the business runs schemes today." And since schemes can be easily
copied, it is becoming increasingly difficult for marketers to get customers to
notice their offerings. Adds Juneja, "Innovation in designing schemes will
provide a pull in the days ahead. " HCL incidentally ran a scratch card
scheme for an extremely short duration handing out durable gifts to customers.

Mittal points out that customer must be given value in bundling through
multiple means. IBM offers its customers free insurance on its ThinkPad range of
notebooks. "This guarantees the customer almost free replacement of the
notebook in case of a loss or a theft", says Mittal. IBM also offers
migration software to ease the transition from an old PC to a new one. While
some industry pundits are expecting an upward trend though not steep, some even
predict a flat market. But the cause for concern is the falling revenues despite
rising volumes.

Multi-pronged approach

Most vendors are looking at broad-based strategies to survive and grow in
these tough times. Says Rajendran of Acer, "We will retain strengths in
domains like gvernment, education, etc and consolidate our position in the SME
segment." Saraf and Mittal speak about expanding the dealer network and
increasing physical reach.

IBM will bulwark an expansion strategy with 16-20 city roadshows in the first
six months that would be critical for them to establish local presence.

However, according to Manish Agrawal, "Customized offers with aggressive
bundles may be a good option for growth but price points will have to remain
aggressive. Adds Sai, "It is clearly becoming a price game, though price is
not the only determinant."

Just to address this price sensitive market, Compaq had announced the launch
of a sub-Rs 40,000 machine powered by AMD processors. Addressing customer
preferences at all price points is now gaining prominence as opposed to the
older approach of targeting niche markets.

Thrust on retail

Most vendors are aggressively looking at retail as an option to penetrate
the home market. The home segment accounts for close to a third of the PC market
today. Saraf, who had made news inaugurating multiple retail outlets in Mumbai
in a single day, stresses on the importance of retail in Zenith’s overall
strategy, Vintron too in the recent past, undertook an aggressive exercise to
rapidly create a retail presence for itself.

Though dominance in the retail segment is not part of IBM’s global
strategy, it is establishing ‘demo centers’ to showcase both desktops and
mobile computing devices.

As brand-customer interaction is facilitated in this manner, more and more
vendors are increasing their product portfolio on display at retail outlets. HP
is looking at retail for a ready-made platform in showcasing new products. With
Agrani’s entry in the retail scene, PC retailing is expected to come ofs age
faster than was predicted. It offers PC manufacturers a ready platform to
experiment and evolve strategies for different market segments. Innovation is
expected to be on the forefront.

The ‘B’ and ‘C’ growth

Another key component of the companies’ strategies is a greater thrust on
upcountry markets. This is because the top twelve B and C class town make up
close to 50% of the market today. The growth in this region is attributed to
increase in Internet and VoIP usage. As the volume generated per outlet is lower
in smaller tows, vendors and partners are evolving strategies to address them.
Says Daljeet Singh of Compro, "ROI on branches is not sufficient for
expansion and partners operating out of metros then tend to spread their
resources too thin." Because local resellers have a better idea about the
market, vendors incur high training costs in partnering with them.

Secondly, more and more vendors are addressing the cost-sensitive customers.
Says Juneja, "We can attribute our growth to our ability to offer the
latest technology at the best price."

The customer relies on the reseller’s advice and consultation, thus
controlling their buying decision. Says Mittal, "The bonding between the
customer and the reseller, and the principal and the reseller is much stronger
in B and C class towns."

Also retail gains are more prominent in smaller towns because of high one-off
buying by self-employed professionals. All these pose opportunities for vendors
with the towns fast becoming critical points-of-presence.

The PC market looks turbulent with rapidly evolving products, change in
distribution strategies and more conscious customers. Although the market is
slow, it is too early to write it off, as India is still under-penetrated as far
as PC density is concerned.

Mohit Chhabra in New Delhi (Inputs from
Sunila Paul/Bangalore and Goldie/Mumbai)