Consolidating for good

IT channels are beefing up their margins through acquisitions and by going retail, says Atanu Kumar Das

The channel segment is consolidating. Last year saw one of the biggest acquisitions in the distribution business. Ingram Micro inked an agreement to acquire Sydney-based Tech Pacific for approximately $493 million in cash, in a move that’s expected to help Ingram expand its Asia-Pacific business. This deal means that there are now only two major distributors left in India, i.e. Ingram Micro and Redington. Following this deal, Taiwanese major Synnex acquired a 36.3 percent stake in Redington to address the Indian market. More recently, Rashi Peripherals acquired Zeta Technologies.

Rajesh Goenka, Divisional Head, Rashi Peripherals explains, “Zeta Technologies occupied a niche segment as the distributors of Altec Lansing and Maxtor. This acquisition strengthens our brand portfolio.” Through this acquisition,
Rashi hopes to grow by 10 percent in 2005.

The merger of two giants, Tech Pacific and Ingram Micro, has definitely created ripples in the channel community. Bharat Bhushan, CEO, RR Systems says that after the acquisition of Tech Pacific, Ingram Micro will now have the definitive advantage of a huge reach across the country. As he says, “Ingram Micro was always one of the biggest distributors. By acquiring Tech Pacific, they have now made sure that there will be no close competitors.”

Tapping into the PC boom

Last year saw the IT channel grow at a brisk pace of 25 to 30 percent and most partners say that they have increased their bottomline significantly, thanks to the massive PC growth in both the consumer and commercial spaces. Aseem Kumar, Senior Manager, Value Product Head, Samsung India, explains, “In 2004, we strengthened our IT channel base as we realised that it is the channel players who increase our visibility.” Kumar says that Samsung has focused on training channel players as they represent the brand image of the company.

Storage, security and networking are three booming sectors for channel partners. Manoj Chugh, President, India and SAARC, EMC India says, “We have seen enormous growth in the storage space in India in 2004. Today we have 30 specialised channel partners and this figure is expected to double by end 2005.”

The importance given to channels by vendors is increasing as majors line up to tap the SMB space.

As Avijit Basu, Country Manager, Network Storage Solutions, Customer Solutions Group, Hewlett Packard India, explains, “Our channel partners are trained to implement all our storage solutions. We make sure that once we partner with somebody we train them at least once a quarter, which makes these players well-versed with technology. Basu says that as the storage adoption market picks up in small and medium businesses (SMBs), the role of channel partners will be crucial for every vendor.

Networking is another area which channel players will play an increasingly important role. According to Lt Col H S Bedi, Managing Director, Tulip IT Services, “Networking is an area of significant growth in India. Last year, we secured major government projects as the government is looking to invest substantially in connectivity.”

Security is another thriving area. Remarks Ranjan Chopra, Chairman, Team Computers, “Security accounts for a major chunk of every organisation’s IT budget.” Chopra says that in every systems integration project today, the customer insists on total security. Channel players are also looking forward to good growth in the area of flat-panel monitors.

Box selling clearly is not the key any more as channel players look to increase their revenues from services. Most channel partners Express Computer spoke to were of the view that software was going to grow faster than hardware in 2005, and are trying to be technically equipped in order to increase their share in services. As Bhushan of RR Systems explains, “One cannot expect to earn more just by selling boxes, but once a partner starts offering services, the revenue potential doubles.”

Focusing on products that bring in higher margins is considered as important as volumes. Reveals Goenka of Rashi, “We have grown by 30 percent in terms of value in 2004 over 2003. In 2005, we plan to achieve a similar growth.” To increase its value business, Rashi is focusing on high value items such as notebooks.

IT meets entertainment

Channels partners are realising the importance of retail and I expect more channel partners to take this route in 2005 Rajendra Kumar Vice-President, HCL Infosystems	Regional distributors help us increase visibility in a particular area while national distributors provide the reach Rajiv Bapna, Director, Amkette India

With their traditional reach, channel players are now turning to entertainment products. The margins of entertainment products are better and there is less competition when compared to traditional IT products.

The convergence of IT and entertainment products began in 2004, when channel partners saw the prices of PCs and other hardware products fall. They realised that the only method to raise their profit margins was to look at other segments. Channel players have now started selling MP3 players, traditional speakers, imaging products and DVD players. “One has to realise that IT is not just a ‘geek’ product and people buy a PC not only for serious work but also for entertainment, be it gaming or watching movies,” justifies Bhushan of RR Systems.

As the prices of most IT products decline, the margins are depleting. Selling entertainment products helps channel players improve their bottomlines.

As Hari Pandey, Country Product Manager, Optical Media Solutions, Samsung India Electronics, explains, “The growth of lifestyle and entertainment applications for PCs is influencing the growth of DVD rewriters. In the SOHO and retail PC space, DVD media has become the preferred format for storing, sharing and viewing digital content be it movies, photographs, music or games.” Pandey says that by 2007, the company expects DVD rewriters to replace CD writers.

Going retail

Last year saw an increasing number of channel players going retail. Companies such as Samsung, Canon and LG Electronics encouraged their channel partners to open retail outlets. In 2005, most IT channels are expected to expand their retail base as vendors believe that customers are more likely to open their wallets if they get to experience the product hands-on.

Shyam Modi, CEO, Modi Peripherals relates, “Six months ago we opened a retail outlet in Delhi and the response has been amazing. ” Modi says that a retail strategy helps boost sales as decision-making is faster. Buoyed by the experience, Modi Peripherals is looking to open a few more retail outlets .

Numerous resellers have started opening retail outlets. Says Bhushan of RR Systems, “IT products today are not perceived as technical products. Customers see them as entertainment devices and vendors are also doing their best to promote them as entertainment and fun products. Retail is the only place where a family can walk in, and a well-trained sales force can close a deal faster.”

Industry analysts believe that 2005 is going to be the year of retail. As IT spreads vendors are either opening their own retail chains or relying upon their channel partners to do the needful .

As Rajendra Kumar, Vice-President, HCL Infosystems, says, “Channel partners are realising the importance of retail and I expect more channel partners to take the retail route this year. We have more than 1,000 partners and I see many them setting up a retail presence as it gives them greater visibility .”

The digicam channel

At its present rate of growth, the digital camera market is expected to double in 2005. According to Alok Bharadwaj, Vice-President, Volume Group, Canon India, “Our digital camera business grew by over 400 per cent in 2004 . In the next fiscal, we plan to increase our market share from the current 10 percent.”

Bharadwaj says that 1 lakh digital cameras are sold in the country and in 2005, he expects the market to double. Canon plans to sell 35,000 units in 2005 up from 10,000 units last year. As the bulk of its sales are through the channel, the company is planning to increase its dealer network in the digital camera business. Says Bharadwaj, “Today we have around 550 dealers and we aim to increase this to 1,500 by end 2005.”

Samsung also launched new models in the digital camera space in 2004. The company saw its business surge by 100 per cent. Most digital camera vendors are appointing specific channel partners to promote their products. Retail is another option that is being aggressively promoted. As digicam prices plummet , customers are upgrading their cameras from analogue to digital.

National versus Regional Distribution

National and regional distribution are two business models both of which are doing well . Companies such as LG, Amkette, and Canon follow the regional model. Korean giant LG Electronics is among the first to adopt a regional model on a large scale. “Our regional model has been a success, as within a span of five years, we have been able to reach almost all Indian cities.” LG currently has more than 1,000 distributors for its IT products.

Some players are experimenting with a mix of both business models. Rajiv Bapna, Director, Amkette India reveals, “We have two national distributors and three

regional distributors. Regional distributors help increase visibility in a particular area while national distributors provide the reach. It is ultimately the visibility which matters and this can be obtained from a combination of regional and national distribution models.”

National distribution gives vendors the ability to leverage the reach of national channel players. As Rajendra Kumar of HCL Infosystems says, “Signing up with a national distributor gives us the confidence that our products will reach every nook and cranny of the country. National distributors have the edge because they have been in this business for many years and they know exactly how to push sales.” Kumar says that in the hardware business, the timing and speed of launching a product is crucial. Without a wide reach, shipments get delayed and there is a chance of losing out to the competition.

Most vendors are coming up with schemes to encourage their channel partners. According to Bhushan of RR Systems, “Innovative programmes are being launched to enhance partner participation.” As the economy booms, channel players are looking to 2005 with prospects of increased business.

atanu@expresscomputeronline.com