Over the last decade or so, the PC industry in India has undergone a sea change. The entry of MNC brands in the 1990s changed the rules of the game, as the industry at that time was predominantly the domain of assemblers and some local manufacturers. Given these dynamics, the going, at least initially, was not easy for the Compaqs, HPs and the IBMs, as they had to struggle to build brands as well as to give their offerings as much of a local flavor as would make them attractive to the Indian buying segments. Moreover the MNCs also had to combat the goodwill, the trust and the loyalty that the friendly neighborhood assembler had built over the years with clients cutting across the big through small-enterprise markets. But as the years rolled on, the branded-PC industry secured what today constitutes a major slice of the Indian PC market pie.

FY 2003-04 was the year of the branded PC. Most of the vendors in the fray saw double-digit growth rates. In the previous year, the assembled-PC segment constituted around 65% of the market, but a year later, things were distinctively less rosy for the assemblers as they saw their market share dip by a sharp 7 percentage points. Industry analysts expect this slide to continue, and at this rate, by the end of FY 2004-05, the assembler segment may even move below 50%. There is a major new trend in the making here, as well as the erosion of a segment. Making this happen is the end user, who is willing to pay a small premium in return for the benefits that a branded PC brings to the table. Also the PCs shipped today have to conform to various regulatory and quality norms like UL, FCC, DMI and MPR II-these markings are indicative of greater stability and guarantee reliability. Assembled PCs have a very small chance of getting these certifications.

The Dynamics of the Market
Four key verticals that drove the demand during FY 2003-04 were BFSI, education, retail, and government. Meanwhile radical gains and significant shifts occurred in technology adoption and upgradation, as well as customization, across different user categories. For instance, large enterprises with revenues in excess of Rs 500 crore, went in for Pentiums with HyperThreading (HT) technology. The emphasis on HT was also a driver for growth in terms of volume and value, and vendors pitched their campaigns on the lower obsolescence rates of HT-based machines. Another business segment that brought in significant gains was the SMB. This time round most vendors took a highly customized approach towards the SMB segment. As a result one saw many SMB-focused programs which extended beyond PCs and peripherals bundling; rather, custom software, aimed at the vertical's business demands, were also bundled, leading to good volumes. For instance, an accounting package or an SME ERP solution package would be offered, and many SMBs found these propositions as attractive and high on value. A further instance of customization during this fiscal was the launch of the HP Compaq D 220, specifically designed for the SMB segment, and which, HP says, has been one of the company's most successful models in recent times. The configuration that gained the most at the popularity stakes was the Intel Pentium 4 with 2.3 GHz.

However, Q4 of the fiscal saw the price war reaching its summit, with all the vendors passing on the benefits of the excise duty cuts to the consumer. The decline in PC price points assumes significance when we factor in the fall in prices in real terms: a 366 MHz Celeron PC, from an MNC vendor, used to cost Rs 58,000 in 1999; now a much more powerful PC sporting a 2.6 GHz Celeron sells for Rs 23,990-less than half the price for four times more power. In just over four years, entry-level PC prices have come down by almost 59% and when we compare it to the previous year, the prices have declined by 12% to 10%, depending on which processors one is looking at, for instance, AMD or Intel. So, for the price of a 15" TFT monitor, one almost gets a PC with a better-than-decent configuration. This is a development that is sure to increase PC penetration levels in the country, dismal so far since prices have been a major deterrent. For instance, the cost of a PC in the Indian context, in real terms, represents 24 months' per capita income, as compared to 4 months' in China and 12 days' in the US! Given that India is in dire need of a low-cost computing product, the steady decline in the price of entry level PCs in the recent past can only be interpreted as a chance to break new ground toward that end.

Impact on Margins
While the mini-budget has brought down the prices of PCs, it does not, however, create a level playing field in terms of margins.

The branded players by virtue of OEM tie-ups manage better margins. Industry estimates the current average of branded PC vendor margins close to around Rs 2,000 for a basic configuration and about Rs 3,500 and upwards for higher configurations.

Therefore small vendors will increasingly find the going difficult in the current fiscal unless they are able to arrive at a revenue model that brings good value by enlisting new consumer and commercial business from the B and C class cities.

This margin pressure is playing on the assemblers.

For instance, a medium-sized assembler today averages a margin of just around Rs 800 for an assembled PC. Given that, most of the assemblers are taking the bundling route more aggressively in an attempt to improve the overall profitability. One can see web cams and photo inkjet printers being bundled with assembled PCs.

HCL is the clear leader in the PC segment; the company's PC volume registered a growth of 78% during the fiscal. Further, in the customer satisfaction survey Dataquest conducted, HCL topped with a score of 78.8%. Zenith, meanwhile, posted a volume growth of 57% in 2003-04, and secured good shipments for its P4 2.4 GHz machines. The company attributes good growth and better margins to its business strategy of attacking all buying segments through an aggressive sales force that secured repeated dealer business. PCS Industries, for the same period, saw machine shipments grow by 25%, with proactive buying from the BFSI and the retail segments. PCS also made concerted attempts to move the company to a more solutions- and services-based model. Though services contributed only a small amount to its overall revenues, it grew by a stupendous 100% during the fiscal. The company made good gains from the retail sector by focused value-based selling. Wipro, meanwhile, sold 64,098 units of its SuperGenius desktops cutting across various configurations and grew 4% in unit terms. For other small and medium players in the fray, it was business as usual with revenues coming from repeat orders and upgrades.

Meanwhile, vendors like BPL and LG, which forayed into the branded PC market last fiscal, are yet to make an impact. While these vendors rightly read rising PC-sales as a commodity trend, due to their overpowering presence in the consumer electronics side, these vendors suffered from a lack of brand recall. These vendors have a lot of catching-up to do in order to build a strong equity for their PCs.

The Videshi Rise
 HP, IBM, Acer, and Dell-these four multinational musketeers have a large mandate in the desktop space in the country. HP made concerted efforts to emphasize its flexibility when it comes to offering products, and this was reflected in the fact that its PCs were powered by a combination of technologies like Intel and AMD for processors, and topped with Microsoft or Linux for operating systems. These flexible configurations enabled HP to better position its offerings across four broad categories: Home, SMB, and large corporates and global MNCs.

Of the MNC lot, Acer needs special mention for its aggressive push over the last year. According to the company, the growth in the desktop business during JFM 2004 has been in excess of 155% and about 76% on a year-on-year basis. The Acer Power series was the biggest contributor, with machines of the P4 2.4 to 2.8 GHz variety accounting for a major chunk of the revenues.

Notebooks: On the Growth Trajectory
What was once a high-flying executive's exclusive accessory saw great price slides during 2003-04, bringing in a volume growth of 75%. This volume growth was largely engineered by the fall in notebook prices to levels that tallied with those of high-end desktops, in the sub Rs 50,000 range. Acer kick-started the price war by announcing a notebook priced at just over Rs 46,000. Not just that, the recently launched Travel Mate TM 244FX Acer notebook pre-loaded with Linux has also breached the sub Rs 40,000 threshold. Price cuts seem to have done wonders for Acer, with the result that it is the only vendor to register triple-digit growth during the fiscal. A whopping 508% is a clear indicator that Acer is fast becoming a volume player in the notebook space. The market leader, however, is obviously HP, with a 34% market share. In addition to high-end Centrino powered notebooks, HP aggressively attacked the low-end notebook segment with various configurations, with an HP Intel Celeron 2.8 GHz notebook selling today for just over Rs 40,000. IBM had a market share of 31%.

Indian vendors like Zenith also had a good year. Zenith sold 2,519 units and attributes good notebook sales to the overall industry attitude in pushing more notebooks.

Also, second-time PC buyers mostly went in for a laptop.  Another vendor who gained prominence during the fiscal was Dell. It made its presence felt by announcing various sub Rs 50 offerings and topped these with wireless capabilities. Wipro ended the fiscal with sales of 917 units of its LittleGenius notebooks fetching a value of Rs 7 crore.  Indian vendors were able to do only slim volumes as compared to MNC brands, mainly due to the consumer perception that MNC notebooks offer higher quality and perhaps even more value for money.

This perception can be countered only through Indian vendors putting in place-dedicated strategies for promoting their notebooks.

The Retail Approach
In the West, PC is being seen as a consumer commodity and as a result PCs are sold through retail outlets. But in India, that trend is yet to take off in a big way, as the majority of the population does not think it as a necessary consumer appliance.

However, last year a new trend was witnessed with some companies launching dedicated stores to leverage the offerings. For instance, IBM launched its ThinkWorld range of stores in the non-metro cities, which helped improve its brand visibility.

Overall, FY 2003-04 was a fiscal that provided clear pointers about the future of the PC industry in India. Going by the current dynamics, the outlook for the future looks very positive in terms of volumes. Some industry analysts suggest that the total number of desktops will figure at close to four million during FY 2004-05. But the real issue will be about growth in terms of value. Value might stabilize, rather than grow dramatically, and this value stabilization will happen in the ongoing year as vendors push high-volume low-value boxes in the entry level space, and high-value desktops, costing upwards of Rs 40,000, with cutting edge 3D graphics and CD-RW/DVD ROMs SMB segments. The strategic positioning of various configurations is expected to be key to overall higher yield in the ongoing fiscal. However much also depends on the government's initiatives towards further liberalizing the tax regime. One hopes the sops will continue, as do most of the PC vendors, who expect a lot from the soon-to-be-announced Union budget.