Swinging into fifth gear

Over the past three to four years, the major agenda for all IT vendors has
been to reach out to the large set of consumers in C, D and E class cities. It
is a no-brainer that all of them have heavily relied on distributors and channel
partners to realize this vision. Distributors across the country have accepted
the challenge realizing that they play the role of a catalyst in a brand's
success.

With class A cities becoming saturated with IT products, the vendors and
distributors have been planning ways to tap into the upcountry markets. They
have not only expanded presence by opening new branch offices, but have
proactively tapped new locations by organizing road shows and increasing
marketing activities to woo sub-distributors much the same way vendors do. This
proactive market creation approach has been a fundamental shift during the last
two years, with activities intensifying in FY 2008-09.

With this, the distribution game has also changed, as all the key
distributors have been building the right mix of existing and emerging markets
and products. At the same time, the regional and tier-2 distributors are giving
the larger distributors some healthy competition. During such trying economic
times, the importance of these emerging locations is being increasingly felt as
this is where the demand lies.

Emerging Markets

Over the last one year, most large distributors have identified more than
700 towns as potentially vibrant IT markets. “It all began with low cost mobile
telephony which in majority of the regions proved to be the first acquaintance
with any form of technology. This created the breakthrough and the slow
acceptance of IT in these locations,” says Dushyant Mehta, MD, Mediaman Infotech.

According to Suresh Pansari, MD, Rashi Peripherals, C,D and E class cities
have been growing at 60-80 percent YoY and constitute over 40 percent of the
market for most vendors. “Class A cities have become saturated markets with not
much growth but only replacement demand. Smaller towns are growing much faster
than metros and semi metros,” he said.

And this growth is because today the customers of C and D class cities are as
informed as any other customers from a metro.

Growth Drivers

Internet penetration, m-commerce, automation of government processes and
high awareness levels at the school level are driving the demand for IT products
in these locations. Government-led initiatives through CSCs and SWANs have
helped deeper penetration and adoption of technology in these emerging towns,
helping them evolve into vibrant IT markets. Moreover, vendors have also found a
solution to appease the price conscious customer in small towns. “With vendors
breaking the Rs 10-20k cost barrier with every new generation of products, the
acceptance and purchase ability of consumers in these emerging locations has
grown,” said K Jaishankar, MD, Ingram Micro. All major brands such as HP, Acer,
Lenovo, Asus, HCL, etc, have introduced low-cost laptops and netbooks. Some
players have also come up with low-cost desktops and are now scrambling to
realize the vision of building the ultimate $10 PCs that will revolutionize the
market the same way low-cost mobile handsets did for the telecom industry.

Commercial business from enterprises and SMBs was the major growth segment
for most distributors for the past couple of years. What's more, most of the key
vendors such as HP, Intel, IBM, and Lenovo were focusing on the commercial
segment until last year, that is now slowly shifting toward the consumer side
due to the major slump in demand in wake of the present slowdown. The government
and institutional demand is also at an all-time low. However, most national
distributors opine that the consumer business, mainly from the home and SOHO
segment, has not been affected much, and is in fact leading the game with the
commercial piece slowly following.

Seconding his views, Pansari added, “Mass demand will come from education
sector. There is a demand for basic entry level PCs right from the class B to E
cities. Institutions and colleges are increasingly adopting netbooks and low
cost laptops, performance is not a big concern with them.” He also adds an
interesting figure quoting that the state of Gujarat purchases almost 0.5 mn PCs
for the education sector alone.

While hardware and component vendors have been focusing on the C, D, E and
even F class (virgin IT markets) of cities, software vendors are now focusing on
B and C class cities as new markets. The demand for applications ranging from
the basic operating system and Microsoft Office to anti-virus/security and to
some extent ERP software encouraged software vendors to expand their partner
base and provide training to them.

Expansion Spree

Rashi has been conducting road shows and training programs for channel
partners for the past three years. Last year, it conducted road shows in
forty-nine cities and out of these twenty-six cities such as Karnal, Meerut,
Muradabad, Haldwani, Vellore, Behrampur, Salem, Agartala, Silchur were virgin IT
markets. To improve post-sales support, Rashi has also explored alternate
consumer touch points through a mini-call center in corporate offices, mass SMS
service and mass email service which has helped the company reach out to
partners and customers in the fastest possible time.

Supertron too has been expanding the channel network for its brand Supercomp
through service camps, product demo and the like. Top distributors such as
Ingram continue to focus on training and value added services but did not expand
its physical branch network, instead choosing to focus more on its tele-sales
engine that spread to 15-20 smaller towns. Redington on the other hand continues
to increase its footprint in smaller cities and towns

Going Regional

Most vendors have realized that regional distribution helps in ensuring
proper justice to each potential market by virtue of local sales network, local
logistics and local promotional programs. As each market has different dynamics
and different psychographic and demographic preferences, a typical nation-wide
campaign no longer works for any vendor. Also, the lack of major competition
unlike in class A cities and metros makes them a popular choice for major
vendors.

Many tier-2 channel players are gradually expanding their business operations
from city to district to state, and finally having a national footprint. Taking
the national players head-on, these successful regional players have proved that
the Indian distribution market can now look beyond Nehru Place (Delhi) and
Lamington Road (Mumbai).

Future Course

The future agenda for most channel players is to continue to focus on C, D
and E class cities, expanding product ranges, marketing innovations and
aggressively moving into the consumer segment. There is a strong bonhomie
between distributors and solutions providers to utilize each others'
capabilities. But there are certain pros and cons too-while the cost of doing
business is higher in terms of freight, service, etc, in these locations, the
competition is not as cut-throat as in the metros, ensuring healthy margin for
everyone in the value chain. Once the CST is phased out by 2011 and the VAT
structure is more rationalized, national distributors will be able to reduce
logistics costs and cut down on operational costs. In the meanwhile, the
regional distributors who are spreading their wings beyond the traditionally
delimited boundaries tell a good story of how the established hegemonies can be
challenged if not completely shaken.

Source: dataquest