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PC: Price Vs Differentiation - Views on News from Equitymaster
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  • Mar 14, 2001

    PC: Price Vs Differentiation

    The hardware sector, which is dominated by the unorganized sector, has little space left for the branded players. The unorganized sector presently has a 59% market share. The remaining 41% is shared between the MNC (24%) and the Indian brands (17%). Due to lower prices the unorganized sector has managed to dominate. The unorganized sector consists mostly of very small outfits, which assemble readily available parts. They manage to buy the components at lower prices (possibly without paying taxes). Once the assembled computer is sold they also manage to avoid the excise duty (that is 16% for computers). This gives the unorganized sector about 20% to 25% leverage as compared to the branded industry.

    For the budget the hardware industry had demanded that the excise duty sale of computers be reduced to 8%. This would have reduced to the differential and given the branded sector a level playing field to compete with the unorganized sector. However, the finance minister did not cut the excise duty. Instead he gave other incentives to the branded segment. These included an announcement that all key institutions and offices within the government would be computerized. This means that there was big business waiting to be grabbed. Now again the onus has shifted back to the branded industry to find innovative ways to compete. But more than competing with the unorganized sector the brands have been competing amongst themselves.

    The PC market in India can be broadly divided into four groups:

  • The home and SOHO (Small Office Home Office) segment
  • The SME (Small and Medium sized Enterprises)
  • The Large corporate
  • The Government

    The home and SOHO is the most price sensitive segment and therefore the captive market for the unorganized sector. The government has traditionally been the market for Indian brands. Itís the SMEs and large corporates that have been won over by the MNC brands. Of these, the SME, SOHO and home segments have seen the fastest growth in recent times. The government and corporate segment of the markets have grown at a much slower pace.

    1998 1999 2000
    Home and SOHO 29% 40% 44%
    SME 22% 30% 30%
    Corporate 23% 16% 14%
    Government 26% 14% 13%

    With the projection in sales for hardware scaled down the competition is likely to intensify, especially in the branded segment where the size is even smaller.

    SME, corporate and the government segments of the market will not be looking just for hardware but for complete solutions. It has typically been the mindset of the Indian customers to expect total solutions, which includes both hardware and software from the IT vendor. Therefore, the Indian companies like Wipro and HCL Infosystems would have an upper hand as they have the expertise and the capability to provide that kind of services. The MNCs are would be leverage on better supply chain management. But service is going to be the key differentiator.

    Dell recently announced that is targets to have a 10% share of the Indian markets by end of 2001. The company already has a 5% market share. Dell in December set up a technical support call centre in Bangalore. Itís with these services the companies can hope differentiate to capture the market share.

    Another very critical factor for survival in this intense competition will be size as all kinds of extra services will cost and take time to payback. The hardest hit will be smaller Indian companies like Zenith at one end in the Home and SME segment as they will have to compete with the unorganised sector and in the corporate and government segments they have to compete with the major brands. For the first half of FY01 Zenithís topline grew by just 5%. This was way below the industry figure of 26%.

    In the long run it is the service that will provide the competitive edge in the low cost segment too. This is due to the fact that technological obsolescence is very fast in the PC market. Usually PCs become outdated in every five years. The unorganized sector is notorious for its quality of service and therefore, the repeat business may go to the brands, which are closing in on the price differentiation with technological innovation. As for now HCL, Compaq and HP enjoy being the top brands in the PC market. But soon we will see the names in the top spot changing rapidly.



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