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Resurrection

Vipin Kumar

If your favourite aunt tells you that her neighbour's son Raju has joined the infotech industry, and you ask her if it is a hardware company, you are likely to have made an enemy for life (or you start getting treated like the village idiot). But not for long. The Indian hardware industry, which has long been playing a poor second fiddle to the software industry, is on the road to riches.

The mid- and late nineties were probably the worst of times, with hardware purchases in India slipping below estimates.

In 1997, it would have taken more than just business acumen to believe Ajai Chowdhry, then managing director of HCL-Hewlett Packard, now Chairman of HCL Infosystems, when he said: ``The Indian hardware industry is at a point of inflection. F rom this point on, the industry could well go down to dust. On the other hand, if takes the right steps, the growth curve will rise again. I am convinced that it will rise again since the industry is doing all the right things.''

What kind of right things? As soon as corporate purchases started falling, the industry pulled up its socks and went to work with the small and medium enterprises (SME) and the small office home office (SOHO) segments. The Internet, and increasing awareness and usage have also managed to help boost sales in the SOHO segment. Far more important to the survivors, the bad years made companies manage their resources very well in a wafer-thin margin industry. Witness: Compare the price differen ce between branded and grey market PCs in the mid-90s and now.

For those who are still sceptical about the resurrection of the industry, here are a few figures: According to a report by industry observer IDC India, over one million PCs were sold in India in 1999 at a value of Rs. 5,200 crores. S imilarly, peripheral sales recorded strong growth during 1999; printer shipments in the year crossed 6.7 lakh units, growing by 31 per cent over the previous year.

The hardware industry's turnover today stands at $3.5-4 billions, growing at about 20 per cent in value terms and about 40 per cent in unit terms, says the Manufacturing Association of Information Technology (MAIT). The Cassandras of yesterday are turning positive. According to Skoch Consultancy Services, an industry observer that had predicted trouble for the industry in the late-90s, the Indian PC market is expected to post a 70 per cent growth in 2000, taking the PC penetration up to 5.7 per 1000 from the present 4 per 1000.

``Since last year, the hardware sector in India has been doing very well. Demand from different sectors like Government, home and corporate is quite high and we expect a sales growth of 40-50 per cent from these segments in the current year ,'' says Chowdhry, Chairman of HCL Infosystems, India's largest PC manufacturer.

What are the major factors for this turnaround? As mentioned earlier, many believe that the Internet is catalysing the spurt in PC sales. ``There is no doubt that the Internet is the single major factor in recent times pushing up sales, especiall y in the home segment,'' says Manish Agrawal, Marketing Director of Vintron Informatics Ltd, an emerging ``desi'' PC manufacturer.

However, the prominent role of the Net in fuelling PC sales is likely to diminish in the near future as other devices such as palm pilots, WAP-enabled mobile phones and set top-boxes will emerge as effective means to access the Net. ``But we b uy a PC not only for the purpose of surfing the Net; there are a multitude of other uses such as computing, processing and storage for a PC. So I don't think the emergence of other technologies is going to affect PC sales,'' counters Agrawal.

The other factors fuelling the PC growth in the country are the increasing awareness about the advantages of having a PC at home, kids' exposure to computers in schools, and the increase in the income levels of the middle and upper middle classes.

``Children are being exposed to the computer at the school levels and its possibilities; they are now pestering their parents to buy them a PC,'' says Agrawal, who rates this factor second only to the influence of the Net.

According to Ravi Aggarwal, Vice-President, Computer Products, Hewlett-Packard, people have become much more comfortable with technology. ``A computer is no longer a monster to many people as they are increasingly becoming aware of the benefits of owning a PC,'' he says.

This user-friendly image of today's PC has certainly led to a sort of retail revolution across the country. Walk through any up-market shopping area, and you will come across many stationery shops selling PCs. Hewlett-Packard alone has 120 retail outlets in more than 40 cities to sell its PCs.

Presently, major domestic and MNC players in the PC market, and the huge unorganised sector, are all bullish on the future.

So where is the industry heading? Will we ever have a solid manufacturing base to compete with the likes of Taiwan and China? Or need we focus on manufacturing at all with the arrival of the WTO regime from year 2003 onwards, when all component imports will be freed?

``A strong manufacturing base is absolutely necessary in a large country like India. The costs of shipments are quite high and it does not make economic sense to depend on imports alone to meet the country's demands,'' says Chowdhry, who believes tha t India's biggest strengths in this sector is its engineering capabilities and abilities in designing and manufacturing.

Echoing similar views, HP's Aggarwal also feels that if a company wants to be a serious player in the Indian market, local manufacturing is inevitable in order to have better supply chain management and also to provide better services to the cu stomers.

But that is not easy, feel many. Component makers in the country are still not happy with the existing duty structures, which they say, encourage imports and make local manufacturing unviable.

Says Varun Talwar, Executive Director of XO Infotech, a Gurgaon-based manufacturer of motherboards, who has invested Rs. 40 crores in the facility: ``Competition in our segment is global and the only competitive advantage we have is the availab ility of cheap labour. But that is enough to survive. The 15 per cent import duty on raw material and the cost of capital here really make things difficult for us.''

Many in the industry feel that we might even retrieve this lost chance as globally big players are likely to go in for contract manufacturing in the years to come. With the WTO regime allowing free imports, India could emerge as a preferred loca tion for multinationals to get their machines assembled here. This one possibility itself offers a tremendous opportunity for the Indian hardware industry. But grey areas still remain which could stymie India's prospects of achieving global competit iveness.

``Although the Union Budget 2000-01 and the Exim Policy amendments have, by and large, addressed most of the problems of the hardware industry, the Government must take steps to simplify procedures for transacting business because the turnaro und time is a very critical factor in deciding global competitiveness,'' says Vinnie Mehta, Director of MAIT.

One instance where the Government can make a positive difference is in the speedy clearance of cargo. The hardware industry is faced with the problem of turnaround time at the ports and airports. This turnaround time in India is said to be huge, compared to the rest of the world. The inordinate delays in getting the shipments (components) cleared is a big problem, say manufacturers.

Otherwise, things look bright for the industry. Import duties on hardware components will go from the year 2003 onwards with the arrival of WTO regime. Already about 70 per cent components have zero duties. Industry sources feel that there will be increasingly less players willing to import the finished PC and then trade it here. The problems that logistics will pose are mountainous, in addition to after-sales service and supply chain management issues. So mere trading will not be a viable attraction anymore. Manufacturing looks set to rule.

With a lot to look forward to in the WTO regime, this is certainly the second chance for our hardware sector to emerge as a major player in the global arena. Two years is not a long period in today's Internet world and it's high time we l ooked at the pending issues. For, there may not be a third chance.

Grey market rules the roost

The unorganised sector, dominated by the grey market operators who evade taxes, continues to have a lion's share in the Indian PC market. As per IDC India, the local assemblers had 57 per cent share of the one million PCs sold in 1999.

A MAIT-IMRB survey says that in the first half of the last fiscal, the unorganised sector's share grew from 48 per cent in the same period last year, whereas multinational and domestic brands saw their market share diminishing from 23 per ce nt to 21 per cent and from 29 per cent to 22 per cent, respectively.

#According to MAIT, although the Union Budget 2000-01 has brought down the basic duty on finished goods from 20 per cent to 15 per cent, this has not resulted in a substantial price reduction of PCs due to the imposition of 20 per cent surcharge on the b asic duty and the introduction of four per cent special additional duty (SAD).

``A low-end, entry level PC is today available in the grey market for about Rs. 28,000 and a reasonably configured home PC for Rs. 35,000-38,000. As against this, our low-end model is priced at Rs. 49,000,'' says Ravi Aggarwal of HP.

``The revenue loss to the exchequer is estimated at around Rs. 250 crores annually due to duty evasions by these operators,'' says Vinnie Mehta, MAIT Director.

Although the Union budget 2000-01 brought down import duties on a number of critical components, this has not resulted in lower PC prices, for the excise duty was hiked to 16 per cent.

Moreover, most of the states also increased the sales tax rates in line with the implementation of the uniform sales tax across the country. In effect, the prices remained the same, much to the cheer of the grey market operators.