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It's easier to be at war than to work for peace. However, if peace has to be brokered there has to be a value proposition that those fighting for would perceive as befitting for them. And if it's a booming domestic IT industry, as in this case, and a low entry barrier, as in the channel business, the war has to be pretty severe and so has to be the outcome.

Over the years, the IT distribution business in India, which overcame the global slowdown through better planning, restructuring, improvement in processes and, last but not the least, cost cutting, has emerged as a very competitive business-cutthroat to a certain extent.

The result: the weak ones withered off, others moved out of the IT business, and some got acquired or merged with the strategically stronger ones. Interestingly, while FY 2004-05 saw some major upheaval at the top tier distribution level, it also saw big names like Almasa, Innovative and Quantus enter the distribution ring in India.

Besides consolidation, the increased pressure on margins also saw distribution players shift gear to don the value addition game. What has also changed the rule of the game is the focused approach to business and the convergence of consumer electronics (CE) channel with their IT counterparts. The fiscal also saw continued interest of distributors and channel partners in the handset business, with HCL Infosystems showing the way as the biggest handset distributor in the country.

The Year of Consolidation
With fewer options left for the resellers to pit one distributor against another for a better deal, the channel players had no options but to streamline their finances and manage credit better. Besides, the segment showed signs of maturity with better credit policies. This ensured cleansing of the market with many fly-by-night operators falling by the way side as MNC distributors got down to business without any credit at all. The Indian distributors continued to pass credit, but at much stricter terms with regular partners getting seven days credit and a maximum of 14 days credit for very special partners.

The mother of all acquisitions in the Indian IT distribution business that triggered of this consolidation was Ingram Micro's decision to buy TechPacific. And while the industry was still talking about how mergers and acquisitions (M&As) will be changing the distribution scenario, with companies selling off "less margin" business to financially stronger companies so that they can focus on high margin operations, IBM sent the shock wave. The company decided to sell off its PC business to Chinese major Lenovo in order to concentrate on its more profitable services business.

Margin was certainly the reason behind Ingram's decision as its profits had been much lower than Tech Pac and Redington across South East Asia. Experts indicate that, unlike its rivals, Ingram was losing grounds because it did not have adequate strong practices and processes to tide over the growing trend of "high volume, low margin game," where Tech Pac was the strongest.

Next in line was Neoteric Informatique, which decided to sell off 50% of its stakes in the Singapore-based Neoteric Asia Pte Ltd (NAPL). The buyer was none other than the erstwhile iron man of Indian distribution business, Prasad Mamidana who had recently quit Ingram to set up his own venture. Redington India came in next and decided to sell 36% of its stake to Taiwanese major Synnex. This was followed by the Frontline's decision to merger with Accel ICIM, and Zeta Technologies' decision to sell off its agency operation to Rashi Peripherals.

And this trend is certain to gain momentum. Interestingly, the three biggies-Ingram, Tech Pac and Redington-completely dominated the market with an estimated Rs 8,000 crore business being transacted in the 2004-05 fiscal. This leaves those in the second rung with very little to chew on.

The message was clear. One, distribution in the future would lie in the hands of those who can scale up fast to reach out more regions, either through their own network or through strategic alliances or mergers. Two, there is more money in services than in pushing vanilla boxes. Three, lesser number of tier 1 players meant tighter credit policies and hence the need to manage finances better.

The Name of the Game
While increased competition saw unhealthy price war that led to a race for volume to survive through the periodic turnover incentive, the pressure on margins was making distribution unviable for many, particularly for tier 1 players. Instead of succumbing to the pressure, the year saw many of the top and mid rung players adopt the "value addition" game that Tech Pac had kicked off nearly four years back. While the company's decision to set up a Value Division within its organization-the first of its kind for any national distributor-was taken with a pinch of salt by many, the trend that picked up in 2004-05 clearly indicated the foresight.

The trend surely caught on, and today majority of the national distributors-including Ingram Micro, SES Tech, Neoteric, Iris and Rashi Peripherals-have their value divisions. The trend is picking up at the lower level of the pyramid as well. While, many of these companies have been adding products that required high amount of value additions in their portfolio, others are focusing on pre and post sales support and technical know-how on integration of the products. According to estimates, most national distributors today generate about 15-30% of their revenue from such value added businesses, many of them through their separate value-division.

Specialize to Grow
The year also saw companies working towards skill enhancement with many of them working towards specializing in specific product categories. Few others decided to focus on gaining vertical specific domain expertise, and moved towards setting up proof-of-concept centers and engaging certified personnel within the organization.

The networking market boomed and more players decided to get into the business. Storage and security solution also registered good growth with end users focusing on data protection and storage growing high.

There were, however, others who decided to focus on providing complete solutions and tied up with industry partners, rather than specializing themselves to hawk their service. These companies decided to specialize more on the marketing front, thereby emerging as lead consortium bidders in verticals such as BFSI, government, education and BPO.

While the bigger players were busy streamlining operations through M&As, smaller solution providers and system integrators (SIs) were joining hands to not only reach out to newer geographies, but also to work as a consortium to win bigger deals. With more clients' looking for an end-to-end solution, it had become imperative for them to leverage on each other's strengths-both in terms of sharing technology and supporting each other in their respective geographies. This also meant more work for SIs through sub contracts from solution providers and bigger players.

Beginning of the End Game?
Not satisfied only by joining hands with other SIs and solution providers, the year also saw some of the SIs shift gear and jump on to the 'value-addition' bandwagon by scaling up their operation to become end-to-end solution providers. While this is not a new trend, the year saw many of the strong SIs, which had embarked on the new path, completely turn a new leaf and emerge as bigger and better entities, complete with ICT expertise. These companies-the likes of Allied Digital Services, Ontrack Solutions, Orient Technologies, Omnitech Infosolutions, SK International, Wysetek Technologies, Sai Info Solutions, Accutech, SK International, KayBee Infotech, Team Computers, Nirmal Datacomm and Lauren Technologies-clearly demonstrated the capabilities as end-to-end solution providers.

Looking forward, it's likely that the thin line that differentiates SIs from solution providers would disappear with most of the existing players being forced to invest in the skill-up process, thanks to the growing competition triggered by improving economy. Experts suggest that while M&As have become a way of life elsewhere, the same may not happen in India as not many of these channel players have any real value to offer. They neither have R&D capabilities nor unique asset base for acquirers.

What this means is that while in the short-term some of the weaker players might be weeded out, in the long run distributors might see it as a prudent move to merge with a competitor and tap each other's strengths in a more effective manner.

At the next level, sub-distributors would certainly be under tremendous pressure considering the fact that none of them bring in any significant value-add on the table except acting as stocking partners. With many of the large stockists today looking forward to the direct marketing model, there would be little space for such players. Resellers, on the other hand, will act as conduits to reach the user and would continue to flourish. However, they too would be forced to specialize in select goods and segments to command better margins for their sustenance.

No wonder then that hardcore resellers like Mumbai-based Creative Computers and Pacific Infotech have scaled-up to become SIs, while few others like Radiant, SP Technologies and JayDee Electronics have graduated to become master resellers. Many of the master resellers aspiring to become national distributors have also been upgrading their infrastructure and logistics.

The market also saw LG Electronics kick-start the concept of regional distributors (RDs). While the trend did not really pick up during the fiscal, it saw emergence of some new players, thanks to the company's policy of continuous performance evaluation. While some vendors successfully played the RD model, there were few vendors who chose to revert to the national distributor model for want of wider reach and lesser effort to manage them. The trend might, however, pick up during the FY 2005-06 fiscal if other MNC brands also decide to tread the same path.

The Era of Convergence
If the booming telecom market saw many a big distributor follow in HCL Infosystems' footsteps to sign up with handset manufacturers in FY 2003-04, fiscal FY 2004-05 clearly emerged as the era of convergence. The trigger: the shift in mindset from computing to communication and now to entertainment. The result: Consumer electronics (CE) channels have started taking up convergence products like digital cameras, MP3 players, LCD TVs, mobile phones, PDAs and other digital entertainment devices. Interestingly, there still remains a lot of gap because while CE channels have moved towards selling convergence products, the IT channel is still shying away from consumer electronics.

No wonder then, while digital cameras are moving through both IT and photography channel routes, MP3 players, cell phones and PDAs are being sold by IT and electronics goods players. The step in the right direction has been taken by LG and Sony. While the former is pushing its MyPC also through its CE outlets, Sony launched its Viao brand of laptop exclusively through its CE outlet Sony World. The convergence also strengthened IT retailing, a trend which started in 2002 but did not really pick up till 2004. The year saw CE channel players investing money in this segment, with higher margins on retailed products acting as the biggest motivator.

Mobile business, however, proved to be "de growth" for most of the players due to changes in the market dynamics and duty structure. The only exception was HCLI, which went on riding the Nokia wave cornering 62.3% of the overall GSM market share. In revenue term it was 99.9% growth for HCL-from Rs 2,301 crore to Rs 4,600 crore.

'Brand' Gains Ground
The year saw the fight between assembled and branded products intensify. This was primarily triggered by reduction in excise duty on PCs, from 16% to 8% in January 2004, and subsequent reduction to 0% in July 2004. This made sure that there was a substantial drop in branded PC prices. Besides, in order to get foothold in the white box segment, Xentis triggered off a new war of price by announcing its sub-10K PC. Celetronix followed suit with its Rs 8000 version. Amongst the big vendors, HCLI came up with the Rs 12,990 version.

The impact was massive. While MNC and Indian brands were gaining market share, some of the big distributors were firming up their plans for branded PCs. While Singapore-based eSys decided to set up its assembling facility in Delhi soon, Raipur-based Merlin Multitech decided to soft launch its own brand of PCs, laptops and UPS, with the full rollout expected in December 2005.

Unfortunately, many of the disti brands-from Ingram's Vesta to Rashi Peripheral's RPTech and Aditya Infotech's foray into the peripherals market with the launch of its Crusader brand-failed to impress. While Ingram decided to revamp its Vesta brand by expanding its product line, Rashi RPTech PC continued to remain as the niche brand of sorts with the company focusing only at the government sector.

An exception to the rule was the eSys initiative. The company, which is primarily a component distributor, is aiming at the entry level PC as just a packaged bundle of these components, with the objective of commoditizing the entry-level white box. The company has invested in two captive assembly plants, one each in India and Dubai and also working with two contract manufacturers.

Then, there were players like Kolkata-based Syntech Informatics, which decided to introduce its own brand of MP3 players, USB flash drives, UPS, plasma TVs and air conditioners besides PCs and laptops. The company also decided to stop selling IBM's products to take it a step further, and is mulling over getting out of the reselling business, if sales of its own products moves up substantially.

The fiscal also saw another Kolkata-based distributor of PC components and peripherals, Supertron India, enter the USB and accessory segment with the brand name 'Supercomp'. The company also has plans to launch its own brand of notebooks but is waiting for viable pricing structure to maintain a price differential of 25% over the MNC brands available in India. Supertron plans to import knocked-down components of the notebooks and assemble them at its units in New Delhi and Kolkata.

Overall, while the balance between the assembled and the branded PC seems to be leveling off at a 50:50 ratio, it would need, beside financial robustness, the ability to scale in size and R&D efforts to meet the aspiration of low-cost, no-compromise PCs.

New Frontiers
Another trend that has been talked about over the last two years was the emergence of smaller towns and cities as potential markets. The fiscal saw real penetration happening in the 'B' & 'C' class cities with vendors focusing on these cities for the first time by designing special schemes.

The year saw both Distis and vendors starting to create hubs to tap these markets. While the 'B' & 'C' class cities showed year-on-year growth between 60% to 70%, the metros were limited to 25% to 30%, albeit at a much larger base. On the profitability front, however, both fared equally.

While majority of the national distributors have created their presence across the country, the top 12 players together cover only 30-40% of these growing cities. Entering the new markets also helped many mid-tier distributors to improve on margins and retain customers to a large extent.

Shubhendu Parth

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