After a dismal 2001, technology channels, which operate on low margins and high volumes, are now looking for a brighter FY 2002. Not only is the composition of the industry in flux, but business models are also in the process of change, says Srikanth R P

Channels: Top Trends

• Halving of credit limit will ensure stability in prices; non-serious players will exit
• USP of distributors will change from ‘credit and price’ to ‘value and support’
• Consumer devices like PDAs could be the next big opportunity
• Focus will move from box pushing to solutions
• Tiers of distribution will be cut down
• Focus on B & C class cities will intensify

If 2001 was the year every player in the industry termed as the worst year in the history of information technology, then 2002 certainly looks to be one of hope for India’s technology channels. 2001 brought along with it several changes that changed the dynamics of the channel industry. One, as distributors struggled to push wares across and kept searching for that ever elusive profit margin, they started cutting down their tiers of distribution. The traditional three layers of distribution a national distributor (Tier I), regional distributor (Tier II) and small distributors and resellers are in danger of being replaced by one or only two tiers of distribution. And in what could sound the death knell for large parts of the channel industry, many top MNC companies have started bypassing the channel altogether by selling directly to large corporates.

While a lot of experts said in 2001 that regional distributors were in danger of getting wiped out by the larger national players, what finally happened was rather different. Regional distributors, with their comprehensive knowledge of the local industry, are now being wooed by larger vendors, bypassing the national distributors. Vendors have now started looking at a mix of both national as well as regional distributors. Vendors have also started realising that by tapping regional players directly and offering them better margins, they could succeed in generating demand in a sluggish market.

Going to smaller markets

2001 was also said to be the year of the SMEs. With established markets reaching saturation points, it was a logical choice for channel players to tap smaller, virgin markets. Every player worth his salt was talking of increasing focus on B & C class cities. But contrary to expectations, the growth in the PC market has largely occurred in the four major metros. The high growth witnessed on a small base in smaller towns was nowhere close to the mighty expectations generated initially. Distributors who went into B & C class cities with short-term goals badly burnt their fingers. The key issues where distributors got stumped were issues like pricing, credit facilities, margins and availability of spare parts. Distributors realised that with the market being currently small in B & C class cities, disposing off surplus stock was a major issue. And when prices fell rapidly, regional players were left with no option but to sell their products at much lower prices. But if regional players were hit, then national players were hit even harder. A regional player scores over a national player simply because it has lower overheads.

National players who want to open the B & C class city pie could find the answer in third party warehousing. Channel players today are burdened with the problem of dealing with complex and different tax structures in different states. Hence, the need for multiple warehouses in different states. But setting up own warehouses would mean investments in markets where the distributor is not sure of growth. Hence, it makes eminent sense for distributors to go in for third party outsourcing and then go for setting up own warehouses if volumes justify it. In this way, the distributor’s investments are protected.

Going by volume/brand

But one distinct trend is emerging clearly large brands, which are looking for volumes, appoint a national distributor. Smaller brands, which are looking to build the brand and are focusing on smaller markets, go in for a regional distributor. An example of this is D-Link, which has successfully leveraged the regional distributor model to grow itself into a powerful brand. A key pointer to D-Link’s success lies in the fact that each distributor has its own well defined territory and does not sell beyond it. All of the distributors get the same price, irrespective of quantity bought. For the record, Mumbai-based Sejutronics, a distributor of D-Link, is now pretty similar in size as D-Link was three years ago. It is such loyalty that both vendors and channel players are looking at. For the regional distributor, it assures him of steady margins. For the vendor, it is a win-win situation as regional players put much more effort into the brand and try to grow the market. If more and more vendors realise this, it could solve the serious problem of undercutting of prices faced by most channel players today.

Another visible trend which could become more pronounced in the coming years is the possibility of vendors going direct and reaching resellers directly at the end of the chain. But all blame cannot lie at the doorstep of the vendor as most distributors carry multiple products with the prime focus being on increasing margins. And when this happens, the distributor could be reduced to being a logistics company. Does that signal the end of the national distributor? No, simply because many of the regional players are still unorganised and much of the focus is still on margins. Also, many MNC vendors have a policy that they will trade only in US dollars outside North America and Europe, and Tier II players who are usually not importers face problems on this front. Large, multinational distributors who have been very successful abroad find that India has been a very difficult and different market to tap because of the geographical spread. Hence, national distributors with a large and excellent network of offices will always have an advantage due to their ability to meet large requirements and also a wider range and portfolio of products. Plus, local billing and warranty support for corporates who have a presence in more than one location gives national players an advantage over regional ones.

Adding greater value

Like all segments in the IT industry, channel players are also playing the value addition game to surge ahead of similar competing players. Channel players, who were only thought of as pure traders have now started looking at providing value added services. Adds Sujit Singh, “If you look at the after-effects of the slowdown, you will realise that there is a shift from distributing on the strength of prices to a complete proposition in selling the product on the basis of its merits and after sales support.” Major channel players are today regularly organising educational roadshows in a bid to empower channel partners. For example, Ingram Micro recently organised a Veritas training programme where channel partners were trained in installing, configuring and customising the software.

The VAT problem

But one serious issue is still left unresolved. The issue of VAT (value added tax), which was supposed to be resolved this year during the Budget was ignored. India has created a unique problem for channel players due to its complex tax structure. For example, a dealer in a place like Ahmedabad has to pay much more VAT than a dealer in Mumbai. The result is that resellers in Ahmedabad prefer to purchase goods from Mumbai rather than Ahmedabad. With the lack of a uniform rate structure across the country, there is huge diversion of trade from one state to another.

New initiatives

Reeling under the effects of the slowdown and burdened with bloated inventories, channel players are also trying newer ways to sell products. With margins rapidly decreasing and almost no difference between the top distributors in terms of product profile, support and price channel players are advising their resellers on the essence of combining offerings of products of different

vendors so that the mix is attractive. For example, a HP storage device would be a perfect match for back-up software like Veritas. Another noticeable trend which could become more pronounced this year could be more and channel players pushing consumer devices like digital cameras and PDAs. And if channel players are looking at pushing consumer devices through their network, there is also the huge possibility of alternative channel players like distributors of television sets making their foray into IT distribution.

Good from the bad

And although 2001 was a horrible year for business, some of those negatives have actually turned out to be blessings in disguise for India’s channel industry. Explains Sujit Singh, “This slowdown has forced in tight business practices among the channel community. Needless to add it has also separated the men from the boys.” Credit issues are also increasingly becoming a problem in the channels segment as default rates grow and margins further thin out. But one crucial decision was taken by India’s top distributors recently when they decided to reduce the credit period from 30 days to 15 days. In a rare move, distributors are also looking at checking irregularities and issues of price undercutting by sharing information. As K Jaishankar, CEO, TechPacific India, explains, “In the beginning, there were certain apprehensions about the reaction from channel partners. But the market has actually reacted in a positive way and you will see more realistic prices in the market.”

P G Kamath of Ingram Micro terms this as a very positive move that will keep speculators out of the market. Adds Suresh Pansari, managing director, Rashi Peripherals, “Non-serious players who were doing business with someone else’s money will now have to do it on their own. This will also result in the increase of margins at the channels level. This will ultimately put the IT market in order and put a stop to gambling on financial leverage from the industry.” Not surprisingly, even vendors are backing this move in a big way.

Outlook

The last year was an aberration for a market used to high growth rates, but also brought in much-needed maturity among players. And almost all channel players we spoke to were extremely optimistic and expect the market to pick up around July 2002. Focusing on B & C class cities, expanding product ranges, marketing innovations , aggressively moving into the consumer segment and of course, the much touted moving up the value chain mantra is the new tune the channel players are singing today. Kamath sums up the mood of channel players when he says, “It is time for us to look with an optimistic outlook on the prospects in 2002. The positive approach is merely based on the premise that when things are at their lowest ebb, it can only go one way up. Also, as opposed to several other countries, the poor PC penetration in India can be looked at as a great opportunity by IT hardware and software vendors. Focussed roadshows and hard nosed retail initiatives can bring about a consumer buying revolution which is definitely the way to go if one has to look at a dramatic growth in 2002.” Based on strong foundations this time around, this year could see Indian channel players finally shrug off the unorganised tag and hopefully move up the value chain.