The Year of Survival  

It began as the year of the slowdown, and ended with signs of a turnaround
just setting in. Through the 12 months, it taught IT India Inc a lesson of
tighter belts and lighter wallets, and saw moods change from bullish and upbeat
to careful and cautious. It was a year when the IT industry–used to riding the
revenue clouds and notching up heady growth year after year–was sent crashing
to earth, and forced to relook at business, revenue models and geographies. The
final tally–overall growth of a meager 14%, against the previous year’s
near-65% score; software exports growth of 19%, just above one-fourth of the
previous year’s 64%; negative hardware sector growth of 3%, compared to a
heady 53% last year; a measly 9.3% growth for services, against the previous
year’s heady 39%; and a steep 37% fall in IT training and education revenues,
against a growth of 48% last year.

It was also a year of tumultuous developments, both in corporates and
government. At corporates, mergers and acquisitions ruled strong and mighty;
brand-building worked wonders for the few who had the foresight, stomach and
finances to indulge in it; and accounting scandals saw some of the biggest names
go down on their knees–while Enron and Arthur Andersen all but died, the gavel
is yet to come down on the final verdict in the case of Worldcom and Xerox Corp
(India). In government, it was another year of shaky progress and policy-making,
with different coalition members pulling in opposite directions, seeing Budget
promises being broken and policy hopes belied–the result was slow takeoff for
corporate India. At the end of the day, the sops that IT industry segments were
looking forward to, and hinging their very survival on, did not materialize,
sending blotches of red ink running across balance sheets. And things don’t
seem to be getting any better–as this piece was being written, Jaswant Singh
and Yashwant Sinha traded ministries, with the former kicking off a clean-up
exercise to ensure that the ruling coalition’s vote-banks remained intact. In
the final essay, there was only one way to describe Indian IT in financial year
2001-02–the ‘Year of the Slowdown, Consolidation and ITeS’. Meshed
together, it was the ‘Year of Survival’.

Twelve months gone asunder

The year started on a gloomy note, with GDP growth recorded at 4% (2000-01),
far below expectations. Many segments were instantaneous in catching the
slowdown fever. The first three quarters were bad, as an industry reeling under
the impact of the slowdown suffered repeated blows in the shape of 9.11, 12.13,
the ‘War Against Terror’ unleashed by the United States, and the threat of
an Indo-Pak military confrontation. It was only the fourth quarter that brought
some relief to the industry–when outsourcing began to grow again, in favor of
India. Business graphs started moving northward, but the pace was slow.
Organizations across industry verticals, perforce, explored new business models.
It was no surprise to those who were following Indian corporate progress,
therefore, when business models turned IT-centric, depending heavily on core
vertical technologies.

Snapshot 2001-02
	Global tech-led slowdown, 9.11, 12.13 and war threats are too much for the IT sector to ward off. Growth rates slip drastically
	Network-based storage option SAN picks up to 16%, while NAS drops to 10%, but DAS remains the mainstay–74% in India, despite a fall from 80% last year
	Server sales growth, after witnessing a staggering high growth rate of 76% last year, goes down to a negative 20% as the slowdown continues and Indian enterprises scale back IT spending
	Banking and finance remain the hottest growth drivers, though manufacturing leads in volumes
	The Net matures and ISPs hike focus on value-adds, not plain Net access. Growth driver—corporates
	Private international gateways set up—bandwidth availability rises
	US not only remains the largest export destination, its share rises
	Large IT companies move into acquisition/consolidation mode
	ITeS outperforms every other market segment, total revenues jumping by a huge 73%
	Training industry is the worst affected, with sales slipping 37%
	Packaged software segment remains near-flat, but it is now the customer who calls the shots
	The days of cash-up channel buying go, credit lines lengthen
	Slim margins and tough market conditions see desktops grow 7% in numbers, but slip 5% in values
	Stock market continues to be clueless, moving on sentiment and sudden market developments

In a recent essay titled ‘Vertical Industry Comparative Report’, IDC
revealed that the manufacturing sector was the highest IT spender in 2001-02,
accounting for over 30% of the overall IT spend, followed by the services and
financial services (BFSI) sectors. In terms of growth in IT spend, insurance,
finance and telecom grew fastest, while software exporters, pharmaceuticals and
biotech, government and manufacturing had a moderate spending pattern. The
slowcoaches in terms of growth in IT spend–the automobile and services
segments.

But how did manufacturing continue to rule as the largest IT spender,
especially in a year that banking, insurance and telecoms pulled out all the
stops? Simple, sheer girth. While the FSI and telecom segments were big spenders
in 2001-02, they were ahead of manufacturing only on a per-organization IT spend
yardstick. The number of players in the FSI and telecom segments, however, were
limited in number, whereas in manufacturing, sheer numbers were huge, more than
100,000 of them. Also, the manufacturing segment has been implementing IT under
the guidance of the management of the respective companies, unlike in the
banking, where the Reserve Bank was the key driver (70% of bank business had to
be automated–and this 70% of business emerged from a maximum of 30% of their
branches).

DISMAL ‘FIRST’ FOR DOMESTIC INDUSTRY: Overall IT industry growth slipped from 65% last year to a meager 14%, and even this number was achieved only due to strong growth in the ITeS (up 73%) and software exports (up 19%) segments. Year 2001-02 was particularly bad for the domectic industry, which showed negative growth for the first time

Also, there was the alo lecho, pecho factor–what couldn’t be cured had to
be endured. IT became so pervasive and important that while companies and
economies across the world turned cautious, investment in enabling technologies
simply continued, regardless of sentiment and intermittent events like 9.11 or
any other. IDC agreed with this analogy–"There’s no fundamental reason
for IT spend to slow down. Continuing political and economic crises may have
made companies cautious, but IT has become so important that investment in
enabling technologies should continue," it said.

US STILL ON TOP: Top IT exporters increased their geographical spread, targeting EU and Asia, but the US share in total Indian exports increased to 64%

Today, Web-enabled solutions and e-commerce are high on the list of IT
initiatives. Consequently, despite a slowing economic outlook, IT spending
trends should be healthy in 2002-03. The growth drivers in the ongoing year–read
that as the segments that will ensure continuous prospects in tech investment
across various vertical markets–are likely to be:

1.An accelerated rate of productivity growth won’t be possible unless
companies across the country, large and small, use information technology to cut
costs, increase output, and generally rebuild the way they are doing business;

2.The need to boost competition, provide better value to customers, and slice
costs from the supply chain remains a driving force for IT spend; and

3.Depending on where the technology is positioned in any organization,
corporate investment in IS will lead to increased sales of services and
software.

Thus, there are clear indications of abundance of opportunity for IT vendors
across various verticals. However, given the fact that the business process of
every vertical industry segment is different from others, and hence their IT
infrastructure and investment pattern, it becomes important to understand the IT
requirement of the industry segment for marketers to customize their
requirements. In general, IT vendors need to have wide-ranging expertise in
hardware, software, integration, maintenance, support and understanding of user
environment to be successful in this market.

ITeS: The ten-headed crusader

For a bit, let’s talk ITeS, the segment that stood out like a beacon of
light in an otherwise dark fiscal 2001-02. In a year of layoffs and benchings,
the IT-enabled services segment generated employment at a rate faster than ever
before; in times of slowing growth rates and slackening revenues, it registered
its strongest growth ever; and in terms of share of GDP and revenue size, it
grew and held out an even stronger future promise. At the time of going to
press, it was evident that many of the Top 20 players were concertedly moving
into the ITeS space.

YEAR OF REVERSALS: Falling sales revenues in hardware and packaged software told the domestic IT industry story. Only services showed growth

A KPMG study on competitiveness gave India a high rating on the ‘People
Factor’ parameter, as also on ‘Supportive Policy Framework’. However,
there were some drawbacks, like the absence of a clear marketing and positioning
platform for the industry at large. Another survey by Merrill Lynch revealed
that cost-cutting was a key criterion for outsourcing services to India, with
cost savings being viewed as India’s topmost competitive advantage.
Considering that labor costs represent as much as 20-30% of a typical client’s
business, India’s low-cost skills were attractive. The salary of a database
manager in India could be as low as a fifth of an equivalent post in the US.
Even for a primary school teacher in India, salaries are one-tenth of that in
Ireland or the UK, and 60% that in China. Add the value-adds that India offers
in terms of abundant skilled manpower, established expertise and strong telecom
and bandwidth growth–ITeS happened at just the right time.

But there are some caveats as well. Nasscom warned that India would run far
short of its manpower requirement and this would severely cramp growth, both in
the ITeS and IT services space. Then there was the problem of size–at present,
India caters to only 0.5% of the total ITeS opportunity by value and a little
less than 1% by volume. The leading players in the market have started ramping
up their scale of operations to meet the rising demand. GE’s original target
for India was 10,000 people by 2005–this number has now been revised to
20,000.

Another problem is that few seem to understand what ITeS is, other than call
centers. For instance, the CEO of a leading ITeS company said this when asked a
straight question–What is BPO? "Jab hamein samajh aa jaayega tho aapko
bhi bata denge" (when we understand what it means and implies, then we will
let you know too) was the prompt reply.

PRIVATE SECTOR REMAINS KING: The government’s oft-quoted announcements of major IT implementation plans at the state and central levels, as also at PSUs, didn’t translate into actual orders—it was the private sector that remained the biggest growth driver. It should be noted, however, that SOHO sales are counted in the ‘private sector’ category

So what is ITeS? Nasscom commissioned McKinsey to try and understand, and
explain to the Indian industry. A joint report went into the various
constituents of ITeS, establishing that there was far more to ITeS than call
centers. The report lists ten processes as ‘Attractive Opportunities’–telesales/telemarketing,
Web sales and marketing, database marketing and customer analysis, benefits
administration, payroll services, engineering and design, inbound call center,
claims processing, billing services, and credit/debit card services.

AFTER 9.11: The WTC attacks had a telling impact on IT sales, with the OND quarter being the worst. AMJ saw a rebound, but didn’t match up to the numbers of 2000-01

Globally, there are four types of ITeS vendors who differ by origin and focus–in-house/captive
centers, spin-offs, focused BPO providers and broad-based service providers, who
offer consulting or IT services in addition to BPO. ITeS companies will need to
broaden their service offering to expand their businesses beyond a point. That
the, is ITeS.

Software exports: Still going strong

Software exports continued to stand tall amid the ruins, though the slowdown
and flexing of US military muscle in Afghanistan exacted a toll. From a high of
64% last year, software exports slowed down to 19%–even in exports, it was the
brave new warrior called ITeS that puffed up final takings. Geographically, it
was the US and Canada that hogged over 64% of exports of software and related
services from India in fiscal 2001-02. Of the total exports (including ITeS) of
$7.6 billion, the US and Canada accounted for just under $5 billion.

BRAVING THE SLOWDOWN: The domestic market weathered the September 11 storm far better than did exports, with sales dipping only marginally. It was JFM of 2002 that saved the day

EU countries continued to be the second-largest destination for Indian
software exports, with a marketshare of 23 per cent. In absolute terms, exports
to this region grew to $1.8 billion from $1.3 billion in the previous year, a
growth of 40%, indicative of the efforts made by the Indian exporters to develop
alternative markets. Exports to Japan, South Korea and other Far East countries
also looked up–with the marketshare of Indian exports to these destinations
rising from well under 3% in 2000-01 to over 4% in fiscal 20001-02. In absolute
terms, IT exports to these markets went up to $318 million from $190 million. In
the ongoing year, exports to Japan are set to register a quantum jump in view of
the large-scale digitalization planned in that country in the manufacturing
sector, ESC said. ESC is now planning a major push in this region, and is
working with JETRO to promote tieups between small and medium enterprises
engaged in software development in India and Japan.

Significantly, India’s exports to Singapore, Hong Kong and other South-East
Asian countries registered a marginal slide. In absolute terms, exports to this
region came down from $324 million in 2000-01 to $307 million. In value terms,
the fall was less than 2%. A similar trend was witnessed in exports to Australia
and Oceanic countries. The marketshare of exports to this region dropped from 3%
to 1.23%.

Hardware: Shaky and bruised

Hardware: Shaky and bruised

This was the space that propelled Indian IT to record growth in 2000-01,
with servers leading from the front, notching up 72% growth. But fiscal 2001-02
was slow–the scales tipped against PCs in general and hardware in particular.
Even as Intel celebrated the shipping of the 5 billionth PC in the world on
April 12, hardware companies announced a disastrous year.

FLAT ALL THROUGH: No guesses here–banking and manuacturing remained the hot growth drivers in the domestic market, while exports did the trick in the global space. Government spend not taking off was a big blow for Indian IT

There were profit warnings and downsizing across the board and globe, through
the year...the only consolation was that Indian PC shipments crossed the
2-million mark in a financial year for the first time, with the total number
resting at 2,008,083. (MAIT announced a far lower PC sales figure of 16.7 lakh
units–implying a negative growth of 11%). Now, a word on servers, easily the
biggest disappointment of all–sales were down 20%, after leading industry
growth charts in the previous year, with a 72% jump.

Buyouts, mergers, demergers...

LET’S HEAD SOUTH-WEST... For that is where the revenues came from for IT India Inc. The northern region wasn’t too much of a straggler, but the east continued to remain way behind

Finally, a brief on the hottest movements by IT companies in fiscal 2001-02–as
the going got hot, the tough cooled off by buying out smaller fish or by
launching consolidation drives. Samsung peppered every media segment with
promotional campaigns and the new year saw it ranked #1 in BusinessWeek’s ‘Infotech
100’ list. NIIT bought out Osprey and Click2Learn’s custom development
business. HCL Tech picked up 51% in Deutsche Software, apart from launching HCL
Jones Technologies to target the retail segment. Oracle, Red Hat and Dell teamed
up for a major Linux push. IBM signed a five-year, $194-million agreement with
TSYS. Infosys acquired IQ Financial Systems’ treasury software and launched
subsidiary Progeon, while Aptech demerged. HFCL gobbled up 74% of HTL, while
Covansys bought out PDA Software Solutions. Polaris merged with Orbitech and
STAR Group digested indya.com. The list was endless, and headed by the mother
mergers–HP bought out Compaq to create an IT mammoth second only to IBM and
the Tatas bought out CMC and a slice of VSNL. IT India Inc sure had some
mega-corporate get-togethers in fiscal 2001-02 and just after.

To end the piece, some down-to-earth news–VIA Technologies announced plans
to launch multimedia branded PCs at Rs 15,000! The PCs, targeted at the home and
small offices segment, will have 733 MHz processors, 128-256 MB RAM and 20 GB
hard disks. That should stir up things in H2 of 2002-03–more on how that does
next year!

TEAM DQ