February 29, 2020
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Systems Failure

Unlike software, the Indian hardware sector has little government support and a tough haul ahead

Systems Failure

IN 1997, during his India visit, Bill Gates announced that the Indian computer market would leave China behind in the next few years. Famous last words? Two years later, the Indian computer hardware sector is a shambles.

While software continues to scale new heights, the hardware sector has found it difficult to make ends meet. The reasons: low demand, lack of government support, competition from transnationals and a thriving grey market. Many Indian hardware makers have downed shutters, and many others are diversifying for survival. The market is dominated by global giants like Compaq, IBM and Hewlett-Packard (HP). Recently, another—Dell Computers—announced plans to set up a fully-owned subsidiary.

Even five years ago, there were several Indian companies in the ring. Not anymore. The myth of India being the biggest infotech (IT) market of the '90s has been proved wrong. The IT manufacturing industry grew by only 25 per cent this year, down from the heady 40 to 45 per cent rates two years ago.

The survivors include Zenith, with its strategy to market low-priced computers; HCL, which is, however, gradually shifting from hardware manufacture to other allied areas; and Wipro. Says a top computer industry manager: "Manufacturing is a volumes game. So most smaller players have vacated the field. Wipro—and to some extent HCL—have been able to stand up against the transnational onslaught because they could manage volumes."

Says Ravi Aggarwal, vice-president, computer products, HP: "It's extremely difficult for a manufacturer to survive in India with just the Indian market in mind. The volumes here are too low to sustain the kind of investment a good computer company requires. On the other hand, infrastructural limitations impede performance and government rules and regulations make life even more difficult." Indian hardware companies feel that the government, which has been magnanimous towards the software sector, has totally ignored their cause. Says Vinnie Mehta, director, MAIT: "Today, it is easier—and perhaps cheaper—to import than to manufacture locally. This is of deep concern as manufacturing defines the competitiveness of a nation." Rajiv Popli, director, Microsoft India, agrees: "Look at the software sector; it shows what government support can do. There is huge scope for growth in hardware, but it's not being exploited. What has the government done to increase computer penetration?"

 Despite talk of an IT explosion, computer penetration remains abysmal: about two PCs per 1,000 people, while in China, it's 10 per 1,000. And China is growing faster too—at about 5 million PCs a year while India is yet to cross the one million mark. In the US, there is one PC for every two people and the home penetration is over 50 per cent, while in Japan, it's one PC for every five.

On paper though, growth is robust—from 2 lakh to 8 lakh PCs every year in less than a decade. But, says Som Mittal, managing director, Compaq: "In real terms, there was no growth as the level of PC penetration remains low due to high prices. In the US, a PC costs as much as a week's average wages." Besides, most Indians do not consider it as important as the refrigerator or the TV. Says Bipin Ahuja, senior vice-president, Zenith: "The Indian user is yet to reach a stage where he can define his PC need. Most of the purchase is driven by publicity and advertisements of companies." Plus, where large-scale computerisation is required, manual techniques still survive.Says Mittal: "For IT usage to grow, government spending on IT should be higher."

The toughest competition comes from the huge grey market, offering products 20 to 25 per cent cheaper. Says Mehta: "Over half the market is grey and the government is losing as much revenue as it earns from the organised sector. We need to create a means of converting the grey market into an organised sector." The situation has been compounded by Intel Corporation's policy of granting "Genuine Intel Dealer" (GID) certification to small-time traders. Intel has a virtual monopoly in manufacturing microprocessors for computers. Says an analyst: "Intel's policy has given the grey market players an authenticity which they are playing up before the customers."

INTEL, however, disagrees that it has contributed to the rout of branded computers and the rise of the grey market. Says Atul Vijaykar, director, South Asia: "We have not endorsed grey market players. We have just offered the unorganised sector an opportunity to buy genuine, legally imported CPUs so that quality is maintained. We have helped the unorgan-ised sector through training and certifica-tion to provide better products to consumers. If anything, the GID programme has helped curb the real grey market."

High obsolescence rate is another bane. In an industry where products change every time you blink, manufacturers have found it difficult to keep pace with technological advances yet manage inventory. This is where they are beaten by grey market operators, with their low-scale operations and low inventory, or transnationals with a huge financial corpus.

The situation is expected to worsen in the near future as India moves to a zero import duty regime by 2005 as per WTO specifications. This will open the floodgates for dirt-cheap hardware imports. Says Mehta: "instead of offering to support the industry to create a conducive environment, the government wants to move to a the zero-duty regime by 2003 instead of 2005. If nothing is done now, India's IT manufacturing base will cease to exist.

. That would probably be unfair. Last year, prime minister Vajpayee set up a task force on IT. Key recommendations include a stable policy framework till 2003; simplification of procedures and transactions; new incentives to promote manufacturing and introduction of a soft-bonded IT units scheme to unify manufacturing facilities for both domestic and exports market. The plan is particularly serious about the export potential of the IT sector, where again, India has achieved little. In Malaysia, IT contributes $44 billion to exports; in India, it amounted to a ridiculous $2.6 million in 1998!

So what kind of a future are we looking at? Says Aggarwal: "Industry surveyor IDC projects a 30 to 40 per cent growth for the sector in India but I don't see the hardware industry growing by more than 15 per cent in the next five years." Others are less pessimistic. Says Ahuja, whose company focuses on low-cost PCs: "With Internet cover increasing, PC demand will rise manifold and those able to give the latest at the best price will survive."

Says Suresh Vaswani, CEO, Wipro Acer: "Manufacturing will see a huge paradigm shift in the next two to three years. Global brands will be manufactured in low-cost locations where third-party manufacturers will put out products which will be branded and marketed by individual brand owners."

What then should be the strategy for a turnaround? Aggarwal feels that companies should identify their strengths and exploit their competitive advantage. Vaswani believes that ideally, India should position itself as a manufacturing base rather than have individual companies go through the branding exercise. Also, he says, "manufacturing should move to a second level to produce motherboards, monitors or PC housings for the world."

One thing is clear. Soon, the differentiation between Indian brands and TNC brands on the basis of price will go, leaving two clear segments—the branded and the unbranded. And instead of fighting over the price platform, Indian companies will leverage distribution and service advantages to survive and stand out.

But for a new business model to emerge in India, a considerable change in government policies, duty structure and support will be necessary. If we have a robust manufacturing base, it will provide healthy competition to transnationals when India hits the zero duty regime. If not, another promising industry will go down the tube.

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