HCL Infosystems: Uneasy lies the crown?

In protected economies, local players enjoy a significant advantage till reforms come along. But the MNCs don’t always win when markets open, and in the Indian market, the MNC brigade has had to play second fiddle to market leader HCL Infosystems for a while now. While the gap in units sold between HCL (10.8 percent share/2001 H1) and Compaq (8.2 percent/2001 1H) isn’t all that wide, the HP-Compaq merger, if that happens, will ensure that the gap becomes a chasm in favour of HP-Compaq, who will then command close to double the market share (HP’s share was 7.1 percent/2001 H1) that HCL now enjoys.

Surely, that must be one of the most important things on the minds of HCL Insys’s top brass now. But knowing that they can’t wish such global mergers away, HCL Insys is going full steam ahead with its plans for the coming year. According to George Paul, head-marketing, while last year was a bad year, HCL still outperformed the PC industry, and this year they’re looking for the growth spurt again.

One of the key strengths of this desi company is its focus on the smaller markets so, even as many other vendors plan to get into the B & C class cities today, for HCL, it’s a case of “been there, done that.” With a company-owned presence in 151 locations in India, HCL plans to expand its Frontline retail stores to other B & C class towns, and also keep beefing up its network of service centres. On the business front, the company is on a very strong wicket in the government, education and banking sectors, and wants to establish leadership in the corporate market too. George Paul says the company will focus on solutions and not just stick to plain box-pushing to achieve this objective. For instance, HCL has core domain knowledge on the banking industry functioning in India, thanks to its years of experience in supplying computers to banks, and it now wants to build on that domain knowledge to push solutions in which PCs form just a part. Obviously, the fact that the solutions business sees higher margins than the PC business has played a role in this strategic decision.

Since partnerships are key in the solutions business, HCL is all set to partner with other firms in areas where it does not have expertise. On the supply-chain side, HCL intends to cut costs and bring in the just in time inventory concept, reduce time-to-market, and also project rollout times. These measures will help increase HCL’s competitive advantage.

With over 25 years in the business, HCL feels that the slowdown isn’t something it can’t overcome. The company intends to continue its technology leadership Paul claims that HCL has been the first player in the market to introduce products based on the latest Intel microprocessors, and wants to continue things that way. “For instance, on the P4, the first MNC introduced a product 10 weeks after us, and in most products we have a 6-8 week lead,” claims Paul.

While HCL is a definite gainer from the government’s move in the Budget to delay the zero-duty commitment deadline under the ITA to 2005, it does face some problems in the government sector one of its biggest markets. Company officials say that with some government departments issuing tenders, which clearly state that MNC vendors are preferred, it’s not a level playing ground anymore. The company also wants the government to sort out excise issues, which hurt its competitiveness.

HCL is confident that it will maintain leadership position. Yet, thanks to the HP-Compaq merger, and the increasing dominance of MNC vendors, the crown is definitely not that secure. Whatever happens whether HCL stays at No 1, or drops to No 2, one thing is clear: HCL Insys will remain the most formidable competitor to the MNC brigade in the coming year.

Compaq: Looking beyond PCs

Compaq hates to be No 2. Globally, Dell now leads Compaq, but in India, with Dell just about beginning to establish a decent presence, Compaq is the No 2 in units, and No 1 in terms of revenues. Compaq claims that it is actually No 1 in the overall PC business if you consider notebooks and Pocket PCs. But rival HCL is quick to point out that if you include its system integration business through which it sells HP and Acer PCs, plus being a distributor for Toshiba notebooks, the numbers would tilt back in HCL’s favour.

If the HP-Compaq merger happens, then the new entity will automatically become No 1, but Compaq is going all out to wrestle the No 1 spot on its own anyway. Like any other MNC, Compaq would have loved seeing the government sticking to its earlier announced plan of moving to zero-customs duty for IT products in 2003, but has also hedged its bets by starting local integration of products. This will ensure that the government’s decision to shift the deadline to 2005 doesn’t hurt the company.

According to Sai Chandrashekar, product manager-desktops, Access Business Group, Compaq India, the year ahead will see Compaq increase its reach in the B & C class cities by investing heavily in expanding its retail network, and focusing on areas that provide growth. New products will also be rolled out specifically for the education and banking sector.

One of Compaq’s biggest initiatives, which will gather greater strength in the coming fiscal, is its focus on the mobile computing market, which is currently in a nascent stage in India. Says Chandrashekar, “Our strategy of gaining an early entry through educating consumers and offering easy reach to Compaq PCs through our exclusive retail outlets in the home PC market worked very well and we plan to replicate the same for our foray into the mobile computing space. We have already started investing in a new network of outlets called ‘Compaq Mobile’, which would be a dedicated store for all Compaq mobile products. Two such outlets are already functional in Delhi and Mumbai.”

Another area where Compaq will gain in the following year is the notebook market where the gap in prices between notebooks and desktops is falling. While there’s tough competition in this sector from IBM, Toshiba (through HCL) and others, Compaq will definitely gain as the market becomes bigger thanks to prices dropping. Compaq has also already started locally integrating most Compaq portables at its Bangalore facility.

HP: Aiming for No 2 spot

Hewlett-Packard India has a significant presence in the business PC segment, and unlike Compaq, hasn’t focused heavily on the home segment. Globally, Compaq generates around 50 percent of revenues from PCs, while HP does only around 25 percent from the PC segment. While the merger plan has been slammed globally, with one of the main reasons being that Compaq was losing money on the PC business, with HP not too far behind, in India the merged entity might just end up bulldozing the PC market.

But since the merger is still not a sure thing, HP is going ahead and making plans to get to the No 2 position in the Indian PC market, with the final aim to be No 1. According to Subin Joseph, country sales manager, Business PCs, HP India, the company has done excellent business in the financial and government sectors, and the coming year too will see the same focus continuing on these lucrative markets.

In end-2001, HP India consolidated all its PC brands like Brio, Pavilion, Vectra and Kayak into a single HP PC umbrella, further divided into two sub-categories the essential line, starting around Rs 30,000 or so; and the professional line, starting around the

Rs 50,000 level. HP feels brand consolidation will bring about an increase in volumes since the brands are now demarcated according to customer profile. And that’s what HP is hoping will catapult it to the No 2 position in the Indian PC market.

HP is also augmenting its manufacturing and channel strategy as part of the brand consolidation exercise. It currently has two manufacturing facilities at Pondicherry and Bangalore, which will be doubled in the coming year.

And on the mobile computing front, although HP will not spell things out, with a cryptic comment that, “HP will offer access devices using mobile communications technology in India at an appropriate time,” HP may enter the market in the coming year, especially with Compaq’s focus on this market.

But finally, for both Compaq and HP, what matters is whether HP CEO Carly Fiorina and Compaq CEO Michael Capellas will manage to get the merger through. If that happens, they’ll emerge as undisputed kings. If not, both will still play formidable challengers and one of them might even get to the No 1 spot.