Indian IT industry poised to maintain a rising graph

Every year strategy and marketing consulting firm Skoch Consultancy Services releases its annual analysis of the Indian IT industry. The sixth annual edition, titled Browser 2002, was presented at Skoch Summit-Challengers 2003, held at New Delhi on March 26. The report covers all IT market segments from hardware and software to networking. Here are some important findings of Skoch’s analysis

The global tech slump notwithstanding, the Indian IT industry has shown a remarkable resilience to record an overall upsurge in almost every category. With an overall growth of 9 percent in 2002, the domestic market stood at Rs 23,774 crore as users in government, banking and finance, education and telecom sectors have emerged as major spenders. Over half the revenues have come from 1.8 million PCs and other hardware sold during the year.

Despite some stagnant demand for Indian software services in the traditional US market, software exports—the backbone of Indian IT industry—have been higher by 30 percent at $8 billion during the period. A significant one-fourth of the contribution coming from IT-enabled services (ITES) has added to the export performance. As all other segments like training, consultancy and systems integration continue to do better, the industry is poised to maintain a rising graph in the current year too.

Discrepancies
Skoch’s findings have explained some of the anomalies in market data that is floating around from different sources, confusing industry and the consumer alike. Skoch says that due to various discrepancies, the size of the Indian hardware industry is overstated by as much as $600 million because of the trickle down impact from a $40 billion global IT grey market. For example, as India and China get differentiated prices that are lower, systems bought for these countries get added in the figures, but in fact the shipments get diverted to some other markets to gain price advantage.

Similarly, norms to determine software market size need to be refined, as some unquantifiable data is getting reflected in most industry figures, including captive software development.

Hardware
The action is also clearly shifting from metros to non-metros with the latter expected to overtake their share with 52 percent by 2003 end as compared to a marginal 20 percent in 1997. That has opened up a lot of opportunities for vendors to explore new markets. This is largely due to a vast percentage of the SME and consumer PC market being non-metro, and further aided by an increased thrust to implement IT projects, including e-governance initiatives by almost all the state governments and Union territories. The user awareness levels are also higher now in non-metros as vendors are carrying out regular promotional events in these areas.

Among the growth drivers have been the increasing requirement in the telecom sector that aims to increase tele-density in the country with wireline and wireless networks. Applications such as billing, customer services through call centres and online payments have driven demand. Similarly, increasing automation in the banking and insurance sectors has provided the impetus as more private players want to attract consumers with better quality of services.

Private participation in the education business and the government’s thrust to spread computer literacy through projects like Vidya Vahini are among the factors that make education a high-potential market segment. Yet we are still way behind countries such as China and can possibly lose our competitive advantage to them in the long term if this is not corrected immediately.

PCs sold in the education segment have grown to 89,852 units in 2002 compared to 63,054 units in 2001. BFSI, telecom and education combined have contributed a good 18 percent in the total market size.

The overall volume-wise growth of PCs was 14 percent, selling 17,97,039 units in 2002. While almost all the user segments have bought more PCs during the year, cost still remains a critical issue. An entry-level basic PC configuration is still exorbitantly priced at around Rs 35,000, despite a fall in average unit price. That’s evident as volumes have increased by 14 percent, while the total value has shown a rise of 11 percent.

There are various cost reduction measures—ranging from lower excise duty to 100 percent depreciation benefits that can make PCs affordable by bringing down costs. This may not result in an immediate surge in buying patterns, but will be beneficial in the long run to attract more consumers, especially price-sensitive home PC buyers.

With a view to further develop the market and induce demand, there is a clear need to introduce some conducive policy changes. By allowing 100 percent depreciation, the government can offset its revenues by way of increased excise duty collection. In fact, by applying this, the annual profit to the government could be over Rs 30 crore.

While the PC market growth was slower than some of the earlier years (2000, for instance), the biggest disappointment has come from the ubiquitous network—the Internet—that has failed to spur demand for PCs as was expected. Indian consumers have less than a 1 percent share in a world Internet subscriber base of 600 million. High prices and choked phone lines for the poor man’s dial-up alternative persist to be the deterrents. Also the lack of relevant content for the local market has kept potential buyers at an arm’s length.

The general perception on the lacklustre performance by the retail channels is not true. In fact, over 8,00,000 PCs have gone through retail outlets giving them an attractive 48 percent share. The number of units sold through retail was 8,60,782 during 2002. Small businesses and first-time users are mostly buying from retailers, who are largely assemblers. It’s observed that even some big corporates have bought machines from assemblers. Those machines are generally bought as client PCs that are linked to a branded server. While the retail market is highly fragmented, HP’s performance as the single largest organised retailer stands out.

Big metros continue to increase their PC penetration. For example, Mumbai and Delhi have an equal PC penetration of 23.5, while Bangalore is a notch ahead at 23.6. The penetration level in some of the non-metros is also high at over 17 percent. This is attributed to enhanced awareness levels and expanded distribution channels of PC vendors.

From the ‘rightsizing’ years in the early nineties, India is still a PC country with a strong preference for Intel architecture-based PCs. That holds true for front-end as well as back-end systems. AMD has been making significant gains at the front-end market, accounting for nearly 10 percent of all PCs. This year Skoch also expects a lot of activity from other vendors like Via in the thin-client space. With some of the forthcoming launches, we might also find non-Intel architecture based CPUs getting into the server space as well.

While high-end non-PC servers have a negligibly small percentage share, the user preference for PC servers shows that India is a price-sensitive market. First time users and small businesses continue to be the leading buyers as they have been buying around 40 percent of PCs during the last four years. SME users too have been big spenders as usual, accounting for another 30 percent. Corporates and government organisations are the other major categories, with a combined share of 28 percent during last year.

Because enterprise buying is far lower as compared to SME and home categories, a clear preference is indicated for assembled PCs that are cheaper. They have enjoyed over 60 percent share as compared to Indian brands with only 17 percent and those produced by MNCs at 22 percent. In fact, the MNC brands have dropped their share from 28 percent last year, attributed largely to the hiccups faced by post-merger HP and Compaq. Skoch expects the new HP to bounce back over the next couple of years. Skoch also believes that Samsung will emerge as a strong branded PC player given the fact that they control the bulk of the component base.

The value-wise share of PCs has increased by over 11 percent, accruing revenues of Rs 7,664 crore. In fact, the value has surpassed the 2000 level, which was considered to be the boom period. This shows that the market turnaround is happening and growth will be more robust in the current year.

Despite slow corporate spending, the server market grew by 15 percent with 45,640 unit shipments. Though most companies are using networked systems for their computerisation needs, most PCs bought by the corporate and government sectors have either gone as standalone machines or as additional clients in existing networks.

Peripherals & Networking
Peripherals have also witnessed a matching demand. Printers, for example, have crossed the one-million unit mark for the first time during 2002. Network printers, all-in-one devices offering print, fax, scan and photocopy are among the new offerings that will spur SME buying. Technology innovations and lower cost of ownership for printers have been the major factors for increased buying.

Laser and inkjet machines have collected a combined share of 70 percent, which is considered to be a healthy growth as office and enterprise printing requirements have gone up. Users have many more options now with vendors introducing new products at regular intervals. Applications such as bills printing, passbook printing, etc., in the service sector industry (for instance, banking and telecom) have increased printing requirements. Skoch expects Canon and Samsung to make significant gains in the printer market over the next few years.

Likewise, the networking market value has increased by 9 percent to Rs. 1,850 crore. The slow growth in this segment is largely due to a ‘go-slow’ on Internet penetration.

Enterprise apps
A slow spending approach and disillusionment with standalone ERP implementation has affected the packaged enterprise application software market, which has been almost stagnant at less than Rs 300 crore. Total cost of ownership is also driving increase in Unix and Linux-based servers. The impact of Linux on desktops however so far is negligible and Skoch expects it to catch up, but more in the medium-term than short-term.

Software exports
As was expected, software export revenues have gone up by 30 percent in dollar terms to cross the $8 billion mark. This is a good achievement considering the persisting tech slowdown in the US, which has been a traditional buyer of Indian software services. However, a major contribution in software exports has come from the ITeS segment, including call centres in India working for global clients.

Given the fact that a major part of software export earnings have happened through the government facilities offered by STPI, it shows that SMEs have played an important role in the software exports area. More than half the export revenues have come through SMEs—covering IT services and the ITeS categories.

Despite their remarkable export performance, SMEs continue to face a step-motherly treatment in terms of policy support or rather lack of it. Skoch believes that various measures need to be immediately taken to follow an SME-friendly approach, including better access to capital and broadening the definition of ITeS to come at least in line with the WTO Information Technology Agreement.