The PC market is desperate to put the spectre of negative growth rates behind it, and move on to a healthier future. Ivor Soans finds out what growth enablers the beleaguered industry is pulling out of the hat to help business blossom once more

PC Market: Top Trends

• PC market revival may happen in second half of this year.
• Post-Budget PC prices will remain constant or rise marginally.
• Indian brands will survive, but they need to decide on an unambiguous competitive pitch.
• Thrust into the B & C class towns will be aggressive, by Indian and MNC players alike.
• The notebook market will show significant gains in 2002-03.

If you want to know what the future holds for the Indian PC industry, the one fact you cannot afford to ignore is the current slowdown not just falling growth, or a gentle trough, but the horrible spectre of negative growth.

The near panic the industry witnessed in the wake of this terrible time was reflected in the price slashes and bundling offers anything to kick start stagnating sales graphs was acceptable. And that took the PC to almost commodity status in India.

But then, that’s history. And in business, history is not what sells; promises of a rosier future do. According to industry association MAIT’s president Vinnie Mehta, sales have picked up in the JFM quarter, which is traditionally a high sales quarter, and as of now, they’re hoping that this will be a sustained phenomenon in spite of a lacklustre Budget that did almost nothing to push up demand for PCs.

Prices do an about-turn

Immediately after this year’s Budget, most PC vendors said PC prices would remain constant, and some even pointed out that prices would rise, thanks to increasing memory prices. That should be one of the key differentiators between last year and the financial year ahead PC prices are not likely to come down, and in all probability, will actually see marginal rises. Says Vasu Srinivas of IDC India, “While the initial response to the slowdown was to slash prices, when it began to hurt, PC vendors began to take a profitability approach. They are now seeking out the more profitable deals and aiming for better prices with lower volumes.”

Another factor that will contribute to stable prices is the move by the big distributors to cut credit periods down the line from 30 to 15 days. This move, coming in the wake of big defaults among IT channels, will discourage speculative and rash pricing and margin policies that result in price wars the industry can ill afford.

Don’t wanna go home

The home PC market is in the doldrums, and as a result quite a few PC vendors will actually increase their focus on the more lucrative and dependable corporate markets. Vendors like IBM, which focuses completely on the business PC segment, and Acer, which again has a strong business orientation, will lead the way on this front. Sameer Kochhar of Skoch Consultancy Services concurs with this viewpoint. Srinivas of IDC agrees, and explains that one of the key reasons behind this trend is the continued reasonably healthy buying in government markets, resulting in PC vendors wanting to stay right in the thick of the action there.

But of course, with the long-term opportunities that exist in the home market, vendors can’t afford to ignore this important segment. Far more attractive financing schemes for home PCs are likely in the coming fiscal.

Triumph of the MNC brigade?

In recent times, one of the most important trends in the Indian PC business is the sight of MNC vendors turning leaders. Yes, HCL Infosystems, the leader in the desktop segment, is as Indian as they come, and the company’s leadership position seems in no immediate danger, but it’s not insurmountable either.

All it will take is the HP-Compaq deal going through in the United States, and HCL will become No 2 to an MNC behemoth that will then control almost double of HCL’s market share, which currently stands at 8.6 percent, according to George Paul, head-marketing, HCL Infosystems. While everyone admits that the market share of MNC brands has gone up, and mostly at the expense of Indian brands, this issue generates a lot of heat and passionate arguments.

Take a look at the numbers: According to MAIT, for the half-year ended September 2001, MNCs maintained a robust market share of 36 percent, up from 24 percent in the first half of 2000-01, registering a growth of 44 percent. And this at a time when everyone else was staring a low to negative growth rates.

But Srinivas of IDC says, “The proposition that Indian PC brands will die out as MNC brands and the grey market grow at the expense of Indian brands is not true. Indian brands like HCL continue to do well. Reach advantage and equity in government markets continue to be of help to these vendors.” Agrees Mehta of MAIT, who explains, “Indian brands have started moving into the smaller towns and cities, and are working on the early mover strategy. With smaller towns being far more price sensitive, Indian brands are able to offer competitive prices.”

But others like Sameer Kochhar say the numbers speak for themselves. “It is a near certainty that Indian brands will die out to MNC brands and the grey market. For the last four years Indian brands are losing ground every year,” he points out.

Vinod Nair, research analyst-hardware platforms, Gartner India, throws more light on the issue: “Indian brands are sandwiched between MNC brands and the grey market, leaving them cornered with little or no room for differentiation. This tussle has witnessed a drop in market shares of Indian brands, and they need to find ways to counter competition before it is too late. Ideally they need to decide whom they want to compete with the cash rich MNCs or the assemblers with low price offerings. In any case, vendors will find it difficult to place their hardware independently of services, so expanding service capabilities will be of prime importance.”

And for those who think Indian brands can play on price, Nair bluntly says that aggressive price competition will return only suicidal victories, bruising revenues further. “For those incapable of sustaining such battles, exiting from the market may be a viable solution,” he explains.

The argument that MNC players are the only ones who’re really gaining is further buttressed by the fact that even the unorganised, grey market is seeing terrible times. True, in the home market, the branded players have suffered greater than the unorganised sector, but the fall in the home market has been so deep that the unorganised sector, which survives on razor thin margins (not that the branded players enjoy much greater margins) is in trouble too. Explains Vinnie Mehta of MAIT, “For the first six months of 2001-02, the proportion of assembled PC sales has shrunk to 44 percent from 59 percent in the same period the previous year a negative growth of 28 percent. With the MNC market share at 36 percent, the share of the Indian brands in H1/2000-01 was 17 percent. In a way, the organised sector has cannibalised the unorganised sector.”

Heading for the hinterland

Even as experts like Mehta feel that Indian brands will survive because of the move into smaller B & C class cities, the coming year will definitely see the intensity of the marketing push into these locations strengthen be it Indian or MNC brands.

Explains Subin Joseph, country sales manager, Business PCs, at Hewlett-Packard India, “The significant outcome of the slowdown was that branded players had to look hard at non-traditional markets for making up volumes. This will grow the business for the future.”

With IDC projections saying that the SME market size is close to half of total IT spending, and with a significant number of SMEs in the smaller cities, the B & C class bandwagon will definitely see even greater interest. And this is also perhaps where the Indian brands will give the toughest fight to the MNC vendors. Players like HCL have been spreading their tentacles into the smaller markets for a long time now. Zenith Computers too is extremely strong in the smaller cities.

The MNC brigade seems to have woken up only now to the opportunities in the hinterland, but the moot question that you come back to is: Does it really matter in the short run? Gaurav Dua, senior research analyst, Technology Practice, Frost & Sullivan India, feels the major chunk of business will continue to come from the metros. “Presently, the B & C category market is not large enough for the loss in revenues derived from metros.” For Indian PC brands, who’re seemingly wilting under the dual pressure from MNCs and the unorganised market, that’s hardly comforting news.

Big buyers matter

While the move to B & C class cities attracted attention, the biggest buyers of PCs pretty much remained constant, and they’re expected to continue to be the saviours of the beleaguered PC industry this year too. The honours go to the government, both at the Centre and the states, and the banking and financial sector mainly PSU banks. Another segment expected to contribute significantly to PC buying this year is the telecom sector.

Retail’s still in vogue

Another trend over the past few years that is expected to intensify in the current year is the retail push from PC vendors. Chandrashekar of Compaq says that the MNC giant will continue to invest heavily to expand its retail network. Explains Dua of Frost & Sullivan, “The PC is rapidly entering into the retail space. The day is not far off when the PC will vie for the same shelf space as TVs or refrigerators.” And for players like HCL with its Frontline chain of retail outlets, the ability to offer the complete technology experience under one roof is a very important factor behind the retail push.

Mobile computing, anyone?

Mobile computing is also expected to have some effect on the PC market in the coming year. And in many ways, this may just be the beginning of things to come in the Indian PC market.

While low-cost devices such as the much-touted, but almost invisible Simputer are expected to hit the market in the coming fiscal, Palm’s entry into India, as well as Compaq’s heavy push with its Evo portables and iPAQ Pocket PCs definitely mean that this segment of the IT market will have a slight impact on the overall PC market.

Another significant trend in the mobile space is the falling prices of notebook computers. With players like Zenith delivering competitive value in the notebook space, and the price falls from MNC vendors, the market for notebooks is expected to do much better than the market for PCs this year, albeit on a much smaller base.

Outlook

When will the good times start rolling again? The pundits have differing opinions. IDC India says the PC industry is expected to grow by 5.1 percent in 2002, and adds that PC buying is expected to revive in 2003, when a growth rate of 20 percent is forecasted. Kochhar of Skoch says this year will see some revival, though he warns that heady growth rates will not return without policy measures like 100 percent depreciation from the government. MAIT is hoping that the slight upturn in the JFM quarter is a portend of things to come, even though it revised industry sales projections for 2001-02 downwards from 2.45 million units to 1.65 million units. Besides, JFM is traditionally a quarter which sees higher sales, and therefore MAIT still doesn’t see this as a trend. Gartner India says that business is expected to look up towards the second half of this calendar year.

Whoever’s right, the Indian PC industry is desperately hoping that the good times will start rolling again. Just when that will happen is something the industry can only wait, watch and pray for.