Hard truths from the hardware market

While the government has introduced various concessions and benefits to the IT industry in India in general, it appears that the hardware sector will remain the slog horse while software will continue to dominate. Thinning margins and hazards of easy imports confront hardware manufacturers in India today. Even with rising demands, pure hardware companies with small to medium operations find it difficult and are buffering themselves by moving to software services operations.

The basic prices of hardware have been falling owing to availability of cheaper components and easier import procedures. Added to this is the large number of players in the market, who have very little difference among them in terms of product differentiation. Besides, the branded big names have always had competition from the assembled or unbranded segment. The unbranded players, being localised and closer to the customer and operating with thin margins, had always had the advantage of offering their products at prices as close to the manufacturing costs as possible. Of course, these "assemblers" now have an approved identity as 'Genuine Intel Dealers or GIDs' and the chip giant has brought them together under a common umbrella. For Intel, this has meant an increased reach into the assembled segment that hitherto opted for cheaper components. The umbrella Intel branding has also removed the stigma attached to the unbranded segment.

Delivery costs like freight and handling and channel costs have been typically high in India. In a market that is yet to mature, increased penetration will come from lower price points. With the volumes growing at a fast pace, vendors find it possible to slash prices to achieve volume sales. Besides, the import duty structure and excise duty rates have not been favourable to indigenous manufacturers.

The hardware industry can do with a lot of support and understanding from the government. A recent case has been the classification of the Intel Pentium II chip as an electronic component rather than as a chip (which led to it being charged a higher import duty) simply because it had a different physical appearance from the chips introduced so far.

What would help the hardware sector is:

• Lower or zero import duty structure

• Lower excise duty as suggested by the IT task force report and abolition of additional duty of four percent on components

• 100 percent depreciation for hardware (which is now 60 percent)

It is estimated that the PC penetration in India will grow from 3 per 1000 to 10 per 1000 by 2005. The larger players who can deliver volumes at lower costs will survive and grow in the market. The vendors will have to be localised and closer to the market with efficient supply chains upstream and downstream of the product. For any MNC looking for a greater share, this means local manufacturing bases, local operations and a greater understanding of the market conditions.