Defying all grays

Lower margins are hitting the unorganized PC market hard, but its not logout
time yet

The color gray is fast fading into inconsequence on the PC screen as the
down-and-out branded machine is switching back in.

Says who? The manufacturers.

The optimism of domestic PC makers and the MNC computing leviathans is not
totally misplaced. This giant nameable matrix of component assemblers, resellers
and warranty servicing shops, stretching its feet into India’s remotest taluks,
had for too many years, too many shades of gray to it. The gray market has local
acceptability, an informality and service promptness, which would put the most
professional international banks to shame, an ability to provide replacement
components at very cheap prices and above all, a swift ‘friendly neighborhood
techie’ customizability and embarrassingly personal configurational
efficiency. As a private PC assembler told Dataquest, "The three golden
rules the gray market follows are ‘customize, customize, customize’."

Nice punch line, but it did knock the stuffing out of the
branded PC Goliath even as a gray market David fattened up at 5-8 percent CAGRs
down the ’80s, usurping over 70 percent of customer real estate.

Shades of Black in Your Gray

January’s mini-budget had PC vendors scurrying to get rid of old stock and
get in their new hardware at the subsidized rates. That, understandably, gave
rise to a few instabilities in prices and availability of components where
replacements were needed. With things settling down back on track now, the
premium on certain components has been worn down, coupled with the advantage of
prices dropping between 8 to 10 percent.

The threat from branded PCs is grossly overrated, and the
assembled PC market will always co-exist with the manufacturer’s PC, says
Shreyas of Bangalore-based Shreyas & Co. "Lower margins are a temporary
factor, because at the end of the day, the duty cuts apply to both sides of the
fence. We will always score on prices and over 80 percent of first-time
individual buyers will continue coming to us," says Zaheer, a Coimbatore-based
PC assembler.

While corporates and call centers prefer manufactured PCs, a
huge unaccounted base of educational institutions-private schools and
colleges-rely on the assembler’s guy-next-door presence, says another
assembler.

Past, Tense, Present Imperfect

The consumer’s allure to match the logo on the PC monitor with its
innards, was picking steam well before the duty cuts and SAD slash from 16
percent to 8percent were announced. The manufacturing sector started finding its
feet after a long time in the April-June quarter of fiscal 2003-03, on the back
of some aggressive pricing. This was in the face of the vast gray unorganized
majority undercutting each other with the same dexterity as it swamped the big
MNCs and domestic brands. "We are going to the assemblers, hugely
undercutting each other like never before. It’s the piranhas eating the
piranha," says a spokesman for assembler firm Shreyas & Co. It was
silicon music to the price-sensitive Indian customer’s ears, when branded PC
prices dipped to below Rs 20,000 well before the price cuts. In November last
year, a Rs 18,000 Athlon-powered PC from distribution giant Ingram Micro had the
unorganized market probing its own gray areas. Spoiled on a 70 percent chunk of
the PC market, the move made them sit up and take notice of their inventories,
optimum configurations, peripherals like printers and UPS and the rest of the
customer package where attraction levels had to be increased.

Stock Answers

With the lowering of import duties on components and finished products to
zero from 16 percent, the sub-Rs 15,000 PC will be the next pricing playground,
feel PC assemblers. This is where the ‘Rest of PC India’ team plans to offer
stronger deals and turn the tables on the manufacturers by keeping inventories
very low and assuring customer retention through strong after-sales onsite
support and three year warranties. Besides that, assemblers will continue to
bank on their arsenal of value additions like bundled-in scanner, printer, and
web camera in and a host of software titles, which customers find hard to
resist.

"The flexibility of configuring a computer to meet
specific client need can be done only by the assembler," says PC assembler
Rakesh Shetty of Bangalore.

Customer’s can pick and choose from a host of options in
memory, hard disk, monitor and other peripherals such as key board and mouse.

Even as MAIT announced, in the second week of February, that
PC sales for the fiscal 2003-04 could touch three million units, an upward
revision from the previous estimate of 2.7 million units, branded PC
manufacturers were bullish on their stronger warranty periods, and in-house
customer services "at the drop of a telephone receiver".

Precisely where the problem lies, retorts an assembled PC
customer who swears by his machine and the assembler. "I get immediate
service from my assembler who is on the job within 30 minutes of receiving my
call. Most PC makers can’t better that," he says.

Bang-for-the-Buck Customization

Bothersome vagaries of the economy were not of much concern to the
assembler. But as the longer sales cycles, rejuvenated competition, and thinner
margins are taking the fun out of the white-box business, assemblers reiterate
that zero stocks and customization will continue to be key gray market USPs.
"We are able to dispose off stocks quicker, as we often undertake on order.
On the other hand, soon after the mini-budget, branded PC makers with excess
stocks were caught napping and had to sell them at pre-budget prices," a
Bangalore-based assembler notes.

The WYSIWYG (What You See Is What You Get) pitch really
attracted the individual customer, and knowing his needs continues to be the
thrill behind the game, says Coimbatore-based assembler Abdul Pasha.

"The market for personalized configurations will only
continue to grow at over 50 percent annually," he claims.

Hardcore gamers and professional graphic artists and studios
handling high-end multimedia applications still form around 50 percent of gray
market individual buyers, estimate industry sources, with the other 50 percent
comprising price-conscious buyers. Now, with hardware warranty and reseller
support becoming part of the gray mix, people like Venkatesh Kamat of Taurus
Technologies are seeking new ways out of the impasse of low margins.

"The duties on motherboards, microprocessors and
printers, which are key in our bundling services for customers, remain more or
less unchanged and we can capitalize further here by offering proactive advice
on configurations and going to the customer first," says Kamath.

Return of the Brand

Off-the-shelf commodification could be something the 2.5-million strong
branded PC industry is looking to remedy through stronger hardware services
support, says an industry observer.

"Right now, we would strongly recommend further
reduction in duties and increase in depreciation to 100 percent. This will
increase the sale of computers to companies as well as SOHOs and
individuals," notes a PCS spokesman.

On the assembled PC mart, localization and customer
familiarity have been keen bargaining chips. Undercutting on prices was hitherto
not too fierce, but will boil over in the coming months even on entry level PCs,
where the assembled PC continues to enjoy a minimum price difference of Rs 5,000
over competing MNC brands.

The narrowed price difference is encouraging customers to buy
branded computers on the back of stronger after-sales support, add PC makers.

Brand of Brothers

Never before has it been more viable to manufacture/assemble PCs out of
India, say PC makers. Due to the substantial penetration growth expected from
the current dismal 9 units per thousand, the road ahead appears to them
undeniably rose-paved. PCs are currently 42 percent more expensive in India than
in China and 32 percent more than the global average. Even as price-points
continue to drop by at least two percentage points every week, the PC industry
sees its scale of operations increasing, resulting in further cost-effectiveness
and greater PC usage in different spheres, leading to a true service industry.

The Loner

The loner is the logical extension of the TVÿmechanic who worked with one
of the larger multinationals, then branched out to perfect his assembly skills
in splendid isolation. A one-stop computer shop, his personal touch and very
high networking skills could give the smartest of call center reps a complex.
And specialized consultancy skills are never in short supply. Where branded PC
makers ran into cul-de-sacs in the face of throughput demands under varying
power and user requirements, the loner has his feet in the social and
infrastructure mosaic of every location he is placed in. Source global, think
local.

The Family Man

The family man? Well, he is the archetypal assembler who branches out into
areas as varied as customer consultancy, reselling and after-sales support,
maintains a troubleshooting database, and has a 4-member sales team to make cold
calls to prospective buyers, and these days, well before the loner makes his
move. All this, with an average team of 10-30 engineer employees to fan out into
the exurbs and neighboring towns, ministering to a "dedicated" PC
user-base. Ask him if he is a ‘gray market’ component and he will blanch,
self-esteem to the fore, "Actually, we are very much a product
company." Annual `family’ incomes range upward of Rs 20 lakh.

DQ Report From Bangalore