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Hardware Sector: Focus PC markets

Feb 10, 2001

India has the infamy of having one of the worst IT infrastructure in the world but at the same time has the distinction of having one of the most computer and Internet literate populations in the world. The PC penetration in India is about 4 in 1000 compared to about 64 in 1000 in advanced countries. These two factors put together have created an ever-burgeoning demand for computer hardware. The hardware market does not only constitute of PCs it constitutes of high end machines more popularly known as servers, peripherals like printers and networking equipments like network interface cards. However, the term hardware in Indian is synonymous with PCs.

PC demand is primarily from two segments: the business segment and the home segment (including small office home office). The demand characteristics of both the segments are quite different. In the business segment the demand is for branded PCs (or desktops) that typically have better processing power, memory and other features. This market also constitutes of servers, notebooks (laptops), network interface cards, uninterrupted power supplies (UPS), hubs and routers. On the other hand the demand in the home segment is mainly for desktops (PCs and modems) and is largely price sensitive.

Product Units Value (Rs. bn)
1HFY00 1HFY01 Change 1HFY00 1HFY01 Change
Computers
Desktops 662,885 834,650 26.0% 23 29 24.0%
Notebooks 16,099 24,150 50.0% 2 2 36.0%
Servers 23,380 28,620 22.0% 5 6 22.0%
Printers
Dot-matrix 123,550 162,485 31.0% 1 1 24.0%
Laserjet 29,860 33,385 12.0% 1 1 12.0%
Inkjet 116,590 157,745 35.0% 1 1 36.0%
Line 1,290 1,760 36.0% 0 0 35.0%
Others
Keyboards 752,677 845,285 12.0% - - -
Monitors 713,520 842,730 18.0% 5 5 18.0%
UPS 103,490 195,885 89.0% - - -
Networking
NIC - 444,690 -
Hub 58,625 80,025 36.0% - - -
Modem 214,323 323,230 51.0% - - -
Internet 873,365* 1,238,725** 42.0%
* March 2000 ** September 2000
Source: MAIT

The home segment is dominated by the unorganized sector (assembled machines) that manages to produce at far lower cost compared to the branded industry (as it avoids a host of taxes). Another reason why the assembled machines are so popular with the home segment is that there is a flexibility of configuration that is not available with branded machines. But that is going to change very soon with the entry of Dell into the Indian markets. Dell is famous for its online ordering system through which retail customers can select the configuration of their PCs through the Dell website. Dell will no doubt introduce this kind of a system in India too. This offers two advantages. Firstly, the production begins after an order is received and therefore, the inventory costs are reduced. Secondly, bulk ordering helps companies purchase parts at lower rates.

In the first half of fiscal 2001 (1HFY01), the business sector accounted for 76% of the PC market. However, due to low PC penetration the home segment grew faster at 53% as compared 19% for business segment during the period.

However, hidden beneath these growth numbers lurked ominous trends. PC sales were hit due to economic slow down and the projections for sales had to be revised. PC market had grown by 37% in fiscal year 2000 year on year. Considering this, the growth projection for fiscal year 2001 was 40%. However, after 1HFY01 the projection has been revised to 24%.

Letís look at the competing players in the market. The PC market is divided into three players viz. the unorganized sector, Indian brands (Wipro, HCL infosystems and Zenith) and the MNCs (IBM, Compaq and Dell).

In 1HFY01 59% of the PC market was controlled by the unorganized sector. MNCs controlled 24% of the market. But it was the Indian brands that were badly hit as their market share declined to 17% from 21% in the first half of fiscal 2000. The reason why Indian brands are loosing to the unorganized sector is cost competitiveness. Again the MNCs are offering far superior quality at almost the same price as Indian brands.

Infact, so intense is the competition in the industry that operating margins have been going down for PC manufactures. Common sense is that when the margins are low the smartest thing is to concentrate on volumes. Therefore, the hardware industry in India is going to be a game of volumes especially in the PC segment. In the near future, possibility of consolidation in the industry seems imminent.

Apart from size, another feature that could become key for success in this industry would be services. Though unorganized players dominate currently, they fail to provide after sales services. As the consumers mature, after sales services will become the cutting edge for the players involved. This gives hope to the organised sector, as ultimately consumer is King.


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