Party time for branded PC players

The PC market is rocking with branded PC vendors grabbing marketshare from the assembled players, says Kusum Makhija

The overall market for desktop personal computers registered a 28.2 percent growth during calendar year 2004 as compared to the previous year. What is significant is that branded PCs continue to make impressive gains against the grey market. According to IDC, the share of branded PCs grew from 36.2 percent in 2003 to 49.2 percent in 2004, registering an impressive growth rate of 74.3 percent. Interestingly, the grey market remained flat, registering a growth of 2.2 percent, while the total desktop PC market registered a growth of 28.2 percent.

According to IDC, the recent re-surfacing of finance-based purchase options had an accelerating effect on the consumer desktop market, which is already witnessing a consistent drop in end-user prices for both the branded and unbranded PC segments. Among the vendors, HCL Infosystems emerged as the market leader with a share of 13.7 percent. The company registered a 91.4 percent growth during 2004 as compared to the previous year. HP followed HCL with a marketshare of 11.9 percent. HP too grew at a blistering pace registering a growth rate of 73.03 percent. IBM is in the third place with a market share of 6.2 percent.

IDC is not the only research firm confirming the signs of robust growth. Gartner, in a recent report, states that the Indian desktop market grew by 31.5 percent in 2004. Says Vinod Nair, Analyst, Computing Systems, Gartner India, “Peaking business confidence based on strong economic growth catalysed PC purchases in both consumer and corporate segments throughout 2004.”

While every research firm has given different figures, one thing is common—the PC market is booming at double-digit growth rates. MAIT (Manufacturers Association of Information Technology) estimates that the desktop PC market grossed 17.1 lakh units in the first half of fiscal 2004-05, registering a growth of 37 percent over the same period of the previous fiscal. With the Indian economy booming, MAIT estimates that PC sales will touch the 40 lakh mark in fiscal 2004-05.

The buoyancy in PC sales can be attributed to increased consumption by traditional industry verticals such as telecom, banking, financial services and insurance, BPO, manufacturing and govern-ment. Consumption also increased in non-traditional sectors such as education, retail outlets and self-employed professionals.

The highly price-sensitive segments of the market have responded positively to lower prices, especially at the entry-level. This led to significant consumption in the small and medium business (SMB) segment and in the home market. MAIT predicts that the trend of increased PC consumption in smaller towns and cities, as witnessed last year, will continue to be the trend this year too. Another trend was the emergence of a strong replacement market in the OND quarter.

We want to position home PCs as digital imaging and gaming products P Krishnakumar Country Manager Home PCs HP India	In the post-WTO regime, value addition will become the key to success as prices will no longer remain a differential for sales R Manikandan GM Sales and Marketing LG India	A significant portion of the market activity reserved for 2005 was advanced to 2004 Sanjit Sinha Senior Research Manager Hardware Group IDC India	The development of technology customised to the needs of emerging markets is key to business growth George Paul Vice President Marketing HCL Infosystems	The new Lenovo will change the personal computing game for enterprises and consumers Neeraj Sharma Vice-President Personal Computing Division IBM India

Growth Drivers

Several factors have contributed to the growth of the market. Firstly, the Indian PC hardware market witnessed two rounds of duty revisions in 2004. In January, the government reduced the basic custom duty from 15 percent to 10 percent on a range of IT products, and halved the excise duty on PCs to 8 percent. The special additional duty of 4 percent was also abolished, which gave a fillip to the branded players. Subsequently, the July 2004 union budget abolished the excise duty on fully-built PCs. A later correction on the announcement imposed a 7 percent additional duty on the import of fully-built PCs and 6 percent on standalone CPUs, thereby providing a level-playing field to both domestic and multinational vendors.

“Though the announcement of the revisions did cause some temporary confusion in the market on both occasions, overall it had an accelerating effect on PC shipments during the year. As a positive result of these changes in the tariff structure, a significant portion of the market activity reserved for 2005 was advanced to 2004,” says Sanjit Sinha, Senior Research Manager, Hardware Group, IDC India.

Speculation over elections and the centre’s stand on economic policies, uneven rainfall and fluctuation in the supply of components did little to inhibit the growth of a market that was positively driven by a strong demand from the consumer desktop market and the banking and finance segments. The software and distribution segments, and the government segment, played a critical role in the increase in numbers seen last year.

Signs of exploding growth in the PC market could be seen when HCL Infosystems reported consolidated revenues of Rs 1,994.8 crore during the quarter ended December 2004 as against Rs 1,042.9 crore in the corresponding quarter of the previous year, registering a growth of 91 percent. During the quarter, HCL bagged orders for its enterprise business from the State Bank of Saurashtra, State Bank of Hyderabad, Department of Posts, Ministry of Defence, Indian Overseas Bank, Sun Pharmaceuticals and CRISIL. HCL also won an order from the Punjab state government’s education department to install and maintain IT infrastructure in 1,287 government schools in rural and urban centres.

Vendors have also laid greater emphasis on providing usage guidelines and positioning the PC as a productivity tool rather than the traditional configuration or technology pitch. Says Yash Bharadwaj, Senior VP-Marketing, PCS Technology, “The concept of value-for-money pricing is becoming popular among customers rather than the concept of low pricing.”

Agrees R Manikandan, GM, Sales and Marketing, Product Group Head, IT Products, LG Electronics, “The reduction in the prices and the increased consumer awareness backed with aggressive marketing are driving the growth of PCs.”

Impact of WTO

According to IDC India, the overall commercial desktop market remained rather soft in the fourth quarter of 2004, favouring only a few vendors with large orders. As such, barring a few, most vendors had to contend with sluggish uptake as enterprise buyers deferred their purchase decisions in anticipation of the post-WTO ITA duty reduction price drops expected in the first quarter of 2005. As branded PC players have been able to match the prices of the assemblers, they have been able to make gains at the expense of the latter.

According to Bharadwaj of PCS, “Due to the price cuts, we see the market opening up in a big way. Assemblers will be washed out and branded players will have a great opportunity.” With the price factor diminishing, value-added services and sales support will emerge as the key factors for vendor differentiation. Comments Manikandan, “In the post-WTO regime, value addition will become the key to success as prices will no longer remain a differential to pitch sales.”

Linux on desktop

While Linux has spread in recent years, the desktop market has remained a tough market to crack. Factors such as lack of applications and hardware support have confined the penguin to servers. Unlike in the past, Linux vendors are not touting a Linux desktop as a complete replacement to Windows. The strategy now is clearly to attack specific verticals which promise volumes provided the vendor can deliver on the features required by a basic user. As most users in offices use their PCs primarily for creating documents or accessing e-mail, Linux vendors are hoping that the requirements of a basic user can be fulfilled by a Linux desktop.

PC vendors are excited because it gives them a chance to lower the cost of the PC when bundled with Linux. HP, which was one of the first brands to introduce a multiple choice of operating systems, sees the Linux desktop market picking up. “We are seeing a lot of demand for Linux desktops from segments such as education and e-governance,” says P Krishnakumar, Country Category Manager for Home PCs, HP India.

Comments Neeraj Sharma, Vice-president, Personal Computing Division, IBM India, “While development work on the kernel, server programmes and embedded devices is important, the most crucial piece of the puzzle is now beginning to take form in the shape of consumer applications. The desktop is the road to success for Linux.” A shift to Linux, particularly by governments (which account for over 10 percent of IT spending) can increase growth in the PC business.

Similarly, LG, which was one of the first vendors to launch Linux-based PCs, is seeing good growth in the Linux desktop market. Says Manikandan of LG, “Linux is steadily picking up in India in the enterprise segment, and also in the government sector. By the end of this year, the Linux OS will surely make inroads in other segments such as educational institutes and homes.”

Agrees Pranav Kumar, Research Director, APAC, Gartner, “The government and the education sector is ahead of the enterprise segment in terms of experimenting with Linux on desktops. Organisations that run limited applications on the desktop—such as an industry-specific application—are also candidates for shifting to Linux.”

However, not all vendors believe that Linux is still ready for the desktop market. “Linux is recording growth in the government and corporate segments, but not in the home segment,” says Bharadwaj of PCS.

Branded vs Assembled

According to IDC, in the third quarter of 2004, the sum total of branded PCs has exceeded that of assembled PCs in the overall PC market, with the former accounting for 50.5 percent and the latter 49.5 percent. However, in the consumer PC market, the assembled PC is still ahead of branded PCs, although the percentage has dropped from 70 percent to less than 55 percent towards the end of 2004.

Similarly, MAIT estimates that the aggressive pricing of the branded PC players has led to a drop in the marketshare of assembled PCs from 55 percent in the third quarter of 2003-04 to the current 43 percent. Says Bharadwaj, “There is a definite shift to branded products with a reduction in the gap. We are educating customers and sharing with them the pitfalls of assembled machines through a widespread communication campaign.” With the price difference coming down, vendors are pushing to promote their low-cost entry-level offerings. They are also increasing their access points and focus on retail.

Consolidation time

As for growth verticals, education and e-governance were the hot segments for PC penetration and volumes. In an effort to drive volumes, vendors adopted low-cost pricing policies. HCL Infosystems, for instance, pushed the price barrier down with the launch of the HCL Ezeebee Pride at Rs 12,990. Comments George Paul, the company’s Vice-president of Marketing, “The development of technology customised to the needs of emerging markets is key to business growth.” More recently, Xenitis Infotech launched a PC at only Rs 9,990. The computer’s configuration is 128 MB RAM, 30 GB HDD, 15-inch colour monitor, keyboard, mouse and Linux operating system.

HP focussed more on the digital home segment, launching the Pavilion PC++ range of consumer desktops. “We want to position home PCs as digital imaging and gaming products,” says Krishnakumar of HP.

Vendors such as PCS also launched various customised offerings. For the home segment, PCS introduced segment-specific PCs such as the Oriion Net PC targeted at enterprise customers, and the Oriion Student PC. The company plans a big push in B&C-class cities using this range. It has also decided to open one service centre every 100 km across 200 target cities and towns to enable efficient customer service.

Similarly, Zenith Computers announced the launch of Infotainer 2. This offering has advanced gaming features and is aimed at users who want to play high-end graphic games. Zenith has developed this product in consultation with NVIDIA, one of the leading graphic card vendors. Another unique feature of the Infotainer 2 is the picture-in-picture TV mode that allows a user to watch cable television and record programmes.

During the last year, HCL unveiled a technological innovation to solve power-related problems that hinder PC usage. The RP2 System, conceived by HCL Labs, frees the user from erratic power supply and other electricity-related disruptions at work. It runs on the widely and easily available car battery using the company’s proprietary RP2 technology. Says Ajai Chowdhry, Chairman and CEO, HCL Infosystems, “RP2 is another example of HCL’s efforts to make products specifically for Indian conditions. We believe that this technology will help in enhancing PC penetration in the country.” To drive volumes, IBM is focussing strongly on Tier-II cities and the SOHO segment as part of its marketing strategy.

2004 also witnessed a consolidation in the PC industry with the acquisition of IBM’s PC division by the Chinese giant, Lenovo, formerly known as Legend. Comments Neeraj Sharma of IBM, “The new Lenovo with IBM’s PC business and strategic alliances in sales, service and financing will change the personal computing game for enterprises and consumers.”

kusum@expresscomputeronline.com