The MAIT-IMRB review of the hardware sector was released recently, and while it proved that PC and peripheral sales sank as never before, the good news is that smaller towns are increasingly becoming consumers of IT. Gaurav Patra & Shipra Arora have more details on the report

2001 was the most forgettable year till date for the Indian hardware industry. Although the second half of the year—with 8 percent growth—was marginally better as compared to the disastrous first half, annual sales still dipped by a whopping 11 percent over 2000-01.

According to the Manufacturers Association of Information Technology (MAIT), the apex body representing the hardware, training and services segments of the Indian IT industry, the desktop PC market only managed to gross 16.7 lakh units last year. Significantly, 30 percent of total PC sales came from B and C class cities—representing a huge growth of 106 percent over the previous year.

“The performance of the industry is a reflection of the performance of the domestic economy,” says Vinnie Mehta, executive director of MAIT. Adds Sai Chandrashekhar, head, Product Marketing, Hewlett-Packard, “2001 was the first year where the hardware industry faced a situation of negative growth after years of high growth points.

However, it was also an eye-opening year to remember because it held forth lessons to be learnt for the future.”
“If it was not for the comeback in the second half, the figure of 11 percent negative growth in PC sales would have been worse,” says Yash Bhardwaj, vice president-Marketing, PCS Industries. As for the reasons for the massive decline, there are many. Deepak Sharma, managing director, Invensys, explains, “A succession of eco-political setbacks in India have had a direct effect on the growth of the economy, with the stock market scam, UTI scam, Gujarat riots, September 11 attacks, etc, leading to a push back in purchases and hence projections.”

PC sales had clocked a growth of 34 percent in FY 2000-01 over that in 1999-2000. 1n 2001-02 the market witnessed a significant slowdown in IT consumption in general manufacturing, banking and finance as well as the media and professional services sectors. However, with imminent recovery in the Indian market, the IT market is expected to grow at 12 percent in FY 2002-03, with projected PC sales of 19 lakh units. The vertical segments that showed buoyancy in the desktop market space during 2001 included telecom, banking and finance, call centres, education and government. The Small and Medium enterprises (SME) segment has been the primary driver of the desktop market in the country. This segment has been the most buoyant on a relative basis.

According to the MAIT-IMRB Review, in the assembled PC segment, smaller and lesser-known regional brands and unbranded systems accounted for 46 percent of PC sales in 2001-02. The proportion of assembled PC sales shrunk from 53 percent in the previous year, a negative growth of 22 percent. “The poor performance reflects the fact that price sensitive market segments deferred IT purchase plans in 2001-02,” says Mehta. However MNC brands increased their share of the pie, with a market share of 35 percent, up from 27 percent in 2000-01, despite having registering a negative growth of 17 percent. Indian brands accounted for 19 percent of the market. The share of Indian brands in 2000-01 was 17 percent.

However, Chandrashekhar does not agree with MAIT’s report that the share of assembled PCs has come down. “In fact, as per our estimates the share of the assembled market increased from 60 percent to 65 percent in 2001. The share of the assembled market is not likely to come down during 2002 as the price gap between assembled and branded PCs has widened further. The gap between the two is around Rs 15,000 to Rs 18,000. And since market sentiment is down, the trend is definitely towards cheaper products,” he feels. He also feels that there has been a very marginal change in the share of the MNC brands.

Overall, PC purchases in the Top 4 metros accounted for 56 percent of total PCs purchased. This is down from 68 percent in 2000-01, representing a decline in purchases by 26 percent. Similarly, PC purchases in the next four metros accounted for 14 percent of total PC purchases, indicating a decline of 35 percent over last year. In the business segment, although the Top 4 metros accounted for maximum PC sales, their share declined from 67 percent in 2000-01 to 60 percent. The proportion of sales to smaller towns increased significantly from 18 percent in 2000-01 to 29 percent in 2001-02.

In terms of value the industry witnessed a southward movement with desktop sales declining in value terms by about 21 percent compared to last year. “I think MAIT’s estimates of a 21 percent fall in value terms is a bit too aggressive. I believe it is between 10-15 percent,” says Chandrashekhar. “It is not just spiralling prices but also ‘lower margin, higher volumes,’ which the new gambit adopted by players,” adds Bhardwaj. Another reason for the fall in value terms have been the falling prices. 2001 witnessed a sharp fall in prices in the desktop space. Between January and December 2001 prices fell by 15-20 percent. The price fall in 2000 was much lesser than this figure. The main reasons for falling prices have been sluggish demand conditions, increasing competition (too many vendors going after the same business). A drop in memory prices also helped to some extent.

One of the most notable findings of the study has been the increased consumption of IT products in smaller towns and cities. 30 percent of total PC sales was accounted for by Class B and C class cities—a phenomenal growth of 106 percent. In the last fiscal smaller towns had accounted for only 13 percent of overall PC sales. Likewise, notebook sales grew by 200 percent in small towns whereas sales to Top 4 cities declined by 28 percent. Smaller towns accounted for 9 percent of total server sales, growing 4 percent. Server sales recorded a negative growth of 21 percent in fiscal 2001-02, with sales in the Top 4 cities declining 23 percent, with a decline of 21 percent in the next four biggest cities.

Inkjet printers too saw the same trend. Sales to smaller towns accounted for 41 percent of total sales, growing 91 percent, while sales to Top 4 cities dropped by 33 percent, and in the next four cities by 23 percent. Sales of UPS to smaller towns also witnessed a significant growth of 23 percent although total UPS sales in FY 2001-02 declined by 6 percent. Mehta says, “The slowdown in the IT market is of immense concern to the industry but increased sales in smaller towns and cities brings a ray of hope. There is an increased need to support this market and grow it further. However, it can only happen if applications, tools and content are made available in local languages to create a pull effect.”

Vinnie Mehta of MAIT says smaller markets can grow significantly if local language computerisation is pushed

MAIT’s Consortium on Innovation and Language Technology (COILTech) is doing a credible job of establishing computing standards in local languages. The long-term agenda in this space would be to support and incubate virtual R&D centres for development of language computing tools. “More and more experimentation is going to take place in this market, as it has tremendous potential,” says Mehta.

Mehta explains that IT usage is confined to just 5 percent of India’s population because almost all apps are in English. He says that vendors are now focusing on the hinterland because even if they get a small chunk of the remaining 95 percent of India’s population, the numbers will still be significant.

Chandrashekhar thinks otherwise though. “The good performance of desktop sales in small towns is in no way an indication of saturation in the big towns and metros because PC penetration in India is still far too low to reach a saturation point even in the metros”. He further adds, “This is just an indication towards the fact that spending levels have come down in big towns.” Mehta also warns that the reason for the phenomenal growth in smaller towns can also be attributed to the fact that the base there is so low that growth seems very huge.

Another significant reason for sales in smaller towns growing has been the education sector. A lot of investments in terms of PCs are being made in the education segment, and many educational institutions are based in smaller towns.

How others moved
Printer sales grew marginally by 1 percent compared to 2000-01. Sales of dot-matrix printers grew by 6 percent; sales of laser printers declined by 15 percent, while that of inkjet printers remained flat. Large establishments, which accounted for 36 percent of dot-matrix sales registered a positive growth of 57 percent. SMEs accounted for 33 percent consumption and grew 6 percent, while the small scale sector witnessed negative growth of 17 percent.

Sales of line printers declined by 30 percent. Summing up, dot-matrix printers accounted for 41 percent of market share, inkjet printers for 52 percent and laser printers for 7 percent.

Sales to the household segment also came under severe pressure. Sales to SEC A declined by 20 percent over 2000-01, although SEC A continued to dominate the market with 59 percent market share in 2001-02. For the first time the SEC C category emerged as a consumer for IT products, accounting for 7 percent of market share in 2001-02.

This lends further credibility to the argument that smaller towns are becoming an important market for IT.

Notebook sales declined by 15 percent over last year. The enterprise segment accounted for a major proportion of notebook sales, although the proportion of sales to this segment has been progressively decreasing every six months, from 56 percent in H2/2000-01 to 47 percent in H1/2001-02 to 41 percent in 2001-02. Notebook sales remained concentrated in the Top 4 metros, which accounted for 68 percent of total notebook sales, although sales to this segment fell by 41 percent. As mentioned before, sales in smaller towns saw an increase of 200 percent.

HP’s Sai chandrashekhar says 2001 was an eye-opener for the Indian hardware industry

The server market also experienced negative growth, declining 21 percent in 2001-02. The Top 4 metros accounted for 75 percent of total server sales, though consumption declined by 23 percent.

Sales of servers to the enterprises declined by 1 percent, even as they accounted for 54 percent of sales. “The server market was hit by the SME segment which postponed purchases,” says Bhardwaj.

The networking segment, always considered to be a steady hardware segment, also reflected poor consumption in the domestic market. NIC sales declined by 18 percent while that of hubs declined by 3 percent. The modem market declined by 34 percent.

“With signs of an economic recovery this year, the IT market is expected to perform better. However, to ensure IT reaches the grassroots level in India, we need to seriously contemplate developing products for the smaller markets,” says Mehta. The growing market in smaller Indian towns will help validate and prove such products. While there have been some admirable efforts in this direction, the government needs to facilitate and encourage this process by creating simple mechanisms for quick access to low-cost finance for product development and pilot production, with only the technology, materials and components as security, regardless of whether the product development is in the public or private sector. The government could also award R&D grants for proactively developing new products. Innovation in this space must be encouraged and nurtured.

What 2002-03 holds
“Our initial hopes for 2002 were high and we were expecting market sentiment to start showing improvement by July 2002. However, there are not many signs of recovery,” says Chandrashekhar. 2002 is expected to remain a stable year, showing neither as dismal a performance as 2001, nor any spectacular growth in sales. “While we expect desktop sales to remain more or less flat, sales in terms of value in my estimates is likely to see a 5-10 percent fall,” Chandrashekhar adds. “Although there are signs of recovery, it is not happening in full swing. The second half of this fiscal is going to be very good and hopefully we will reach our target of 2million units,” says Mehta.

The general expectation is the situation is likely to stabilise in the next few months. In terms of price falls, 3-4 percent cuts could be expected in 2002 as opposed to very steep falls of 15-20 percent last year. 2003 is likely to be the year of positive growth. In terms of market segments it is the SME segment, which will continue to drive desktop sales in the country. On the other hand, the home segment is likely to improve marginally.