The Year Of Hope

Dismal beginnings



Strange but true. Back in April 1998, nobody, including the most incurable of optimists,
believed that things were going to get better. First it was an 18-party coalition, headed

by the Bharatiya Janata Party (who the BBC constantly referred to as 'right wing Hindu

fundamentalists'), with a ragtag coalition of partners, which ranged from a

constantly-on-the-offensive Minister of Defense to a highly tantrum-prone Chief Minister

who kept threatening to pull the rug from under the government. Then it was the nuclear

tests, which after the initial chest thumping, resulted in a global backlash against our

economy. The FDI froze, as did the multilateral aid. Big questions were left unanswered,

like as to whether the global IT companies will sell the high-end systems to India or not,

the questions whose answer even those very companies did not know for a long time.

The Prime Minister broke the 'right wing mold' and included

IT as a key element in his five-point program in his inaugural address. Unfortunately, his

Finance Minister obviously didn't think so. A lackluster budget left the IT industry

without any major sops.

When sops didn't come, hope kicked in. The PM's Task Force

on IT under the chairmanship of Foreign Minister and Deputy Chairman Planning Commission,

Jaswant Singh, and AP Chief Minister Chandrababu (Cyber) Naidu, rekindled the hopes, when

the core team came back with recommendations to the PMO in record time and got the

approval within a fortnight through a presidential gazette.

Despite the govt. falling, hope stayed on course. So high

was the hope that even in the face of a lame duck government and a specter of political

instability, Infosys became the first Indian company to be listed on the NASDAQ stock

exchange.

It was hope, buttressed by a momentum that finally saw the

industry through. It made possible a 33% growth and saw homes taking to PCs in large

numbers. Hope that the Telecom Policy of 1999 will be a harbinger for growth, and hope

that ISP policy will spur another round of growth for IT. Both hopes were dashed even

before the ink dried on the policy. Y2K was to be the mantra for buying, but it happened

only in passing. Hope for the future paraphrased by the Prime Minister's first address to

the nation, "I am certain that information technology is the way of the future."

The Facts



A robust Rs 24,000 crore industry, which has grown by 33% from 1997-98. A domestic
industry which has come up trumps, considering the circumstances, and grown by around 22%

to close at Rs 13,204 crore. An export business which grew again by about 50% to finish at

Rs 10,752 crore. An industry that has not only withstood roughly 30 months of economic

slowdown, but also managed to grow consistently over this time. Consider this: as on

September 1996, the Indian IT industry was about Rs 6,000 crore, with PC sales touching

about 1.7 lakh.

Then the downslide started. However, while all other

sectors of the economy have been steadily going down, the Indian IT industry has managed

to double over the last two years. That it also generated export revenues of more than $2

billion along the way is quite another matter. In the last 30 months, the PC market has

ballooned from 3 lakh to over 8 lakh. The domestic industry has simply defied gravity and

has clocked a double-digit growth, thanks to homes who have taken to the PCs with a fancy

which must be the envy of many an FMCG player.

Where did all this growth come from? It has come from the

fact that IT is no longer considered a 'maybe' need. Across the enterprise, the pace of IT

absorption has been breathtaking. For instance, in the year under perspective, the small

and medium enterprise (SME) segment absorbed over half the spend of the entire country.

Contrast this with a point in time, not more than three years ago, when the attention of

the entire industry was concentrated amongst the Top 200 buyers in the country.

The year of the minnows



The large enterprises and the public sector organizations were out and just like last
year, homes and the SME segment ruled. "The SME is no longer a potential, it is

happening."

Along with this spurt in the SME segment was a parallel

growth in Intel powered machines. The non-Intel segment slid with Unix being the biggest

casualty, both workstations and servers slipped badly. Unix is no longer a platform of

choice. NT-with its tornado-like force-is leaving the competition gasping.

The PC server market again saw NT climbing. However while

the NT movement is continuing unabated in numbers, it's not so in value terms. The value

growth of Microsoft was incongruent with the numbers growth (Microsoft refused to confirm

or deny or comment on the estimates submitted by DQ). Unlike Intel, which publicly slashes

prices every quarter, Microsoft does no such thing, at least not in India. However, data

suggests that the company has been extremely aggressive on its pricing front with its

channel segment and, through them, the end-user. Despite the monopoly that the company's

products enjoy, price slashing to gain marketshare is de rigueur. Given the explosive

growth of the PC market and the emergence of homes as a market hungry for PCs there's gold

for Microsoft. Intel continues to release faster processors at the high-end and the

NT-Intel combination is a sure fire recipe for success.

Novell—a beleaguered giant



A company with a real fight on its hands is Novell. The proverbial third force in the OS
market, and the first in the PC networking environment Novell will sweat. If Microsoft

targets the 'small' enterprises of the SME segment and goes after this market with full

vigor, then it will have NetWare bang in its gunsight. In traditional file and print,

NetWare's dominance could be challenged by Windows 2000 when it comes out. The best bet

for Novell will be to aggressively evangelize the virtues of its directory service, which,

despite claims to the contrary by Microsoft, is the best in its class. Novell's strategy

could be to outflank Microsoft by leading with NDS as the structure for enterprise

networks and then plugging the tight coupling that NetWare provides to the same, instead

of leading with vanilla NetWare. Novell must move fast, for IT history is replete with

examples when Microsoft has come in from behind only to overtake the entrenched. Ask

Lotus.

Home: the floodgates open



However, it was Microsoft and Intel which once again opened the floodgates to the homes.
In fact, in the year that went by, roughly a quarter of PC shipments went to the home

segment, thanks largely to regular slashing of processor prices by Intel and the Internet.

More powerful PCs with the ubiquitous CD-ROM drive have become the de facto standard in

Indian homes. And yet the Indian market for home-grown (or imported) CD titles is yet

stillborn, despite valiant efforts by companies such as NIIT, Cyber Multimedia (a sister

division of Dataquest) et al. Maybe, this has to do with the pricing. Remember the

software package pricing mechanism in the early nineties which used to amortize the total

cost of the operation over a pre-determined number of packages that 'could' be sold. It is

a similar situation. The only difference is that very soon, the unit prices of home-grown

titles will crash to double figures and the market is actually ripe for a 'T Series'

equivalent player.

New calculations



That brings us to PCs. Another growth year, largely reminiscent of the previous
year. A market dictated more by Intel, both from Inside and Outside. A market which still

did not cross the one-million mark in terms of annual shipments. A market, where despite

all the hype and hoopla, two Indian brands dominated the center stage-HCL and Zenith.

While HCL's position is a matter of habit, Zenith has jumped places and positioning to

upset the calculations of many an MNC.

Interestingly, both Zenith and HCL are probably fighting

for the same positioning-the Value-For-Money slot-with the former being more aggressive

than the latter, but HCL moving far ahead simply out of momentum. Another interesting

aspect is that the premium segment of the market is shrinking, and fast. Last

year's most aggressive PC player was Hewlett-Packard, which went straight for the VFM

slot, with its Brio launch. Brio did well. Compaq, which initiated the non-premium

position of the MNC brand, ended up quite at the other end, with the highest ASV amongst

all the PCs sold in the country, beating names like IBM, HP and Acer.

The high point of the year was the expected dissolution of

the Wipro-Acer JV, which was a mutually agreed divorce. After having gone through a

traumatic phase in the PC business, given the tremendously high-brand equity of the Wipro

brand Acer has a second shot at cracking the Indian PC market. If there was ever a

contender for the No. 1 slot in the Indian PC business, with the requisite reach and

R&D, it was Wipro. Unfortunately, the company, and the brand, have misread the market

in the last few years with the shackles of a JV and pressures of plugging the Acer name

off, Wipro will probably get busy capturing lost markets. Chairman Premji has affirmed his

intentions of establishing the brand name across the home and the high-end markets.

Manufacturing continues to lose ground to services,

education continues to be a strong segment, while telecom, in spite of the GoI tomfoolery,

has managed to attract a healthy IT spend.

Government bonanza



The biggest surprise element last year was the government. With the Task Force
recommendation coming in the first quarter, the entire government sector, whose spend has

hovered around 19-21% earlier, and which slid dramatically to 8% in 1997-98, once again

jumped to almost 19% with the biggest buyers here being state governments led by Andhra

Pradesh, and followed by Maharashtra and Tamil Nadu. In fact the three states will witness

a spurt in the IT spend and are expected to outdistance all others. Perhaps due to the

demonstration effect of Andhra Pradesh and some of its celebrated projects, almost all the

states in the country today have an IT policy, which is an encouraging sign.

And this for us is the event of the year: That, as a

country, as individual states—given the level of poverty and corruption that we have,

we should be having most states not only creating an IT policy, but also following it up

with dream mega projects for the development of the state. As Victor Hugo said it is

"an idea whose time has come." Given that the momentum is gaining, the current

and the next years will be exciting times for the governments, both at the state and the

Center.

DATAQUEST