Nailing Gulliver

The Delhi-based computer giant, PCL, had slashed prices, declaring war on assemblers like him. "There was no way to match PCL's prices. We were completely helpless. All we could do was wait and watch." He, and his cronies did just that. And saw PCL collapse spectacularly as it tried to carry out its grand assault on the unorganised market.

Another fortuitous development took place around the same time. In the beginning of 1996, Intel made its entry in India. The chip maker came in with a clear mandate: grow the PC market, and increase usage of computers in the country. And to do that, the $25 billion corporation was prepared to pour in hundreds of millions of rupees.

A thousand firms bloomed. Today, Dalal's company, Dynacons Systems and Solutions, part of the Genuine Intel Dealer(GID) segment, is a Rs 7 crore business. His compatriot, Chetan Shah who runs Computech, has set his sights even higher. He is exploring options to tie up with GIDs in other cities to increase his market reach. Computech already has an on-line PC store of sorts where customers can click and configure machines to order. (Customers still have to fax across the order form, though).

The rebirth of the 1000-odd grey marketers, who now carry the more respectable GID segment tag, is a tale of fluctuating fortunes. It is about the charge of the unorganised segment, which has not only held on to its territory, but given the large, established companies a run for their money. And playing the anchor role is a multi-billion dollar global giant who has staked its reputation behind this army of dwarfs.

What's more, the GIDs have perfected a way of doing business which, although characteristically local, is just as potent as some of the most sophisticated business models being adopted by computer companies the world over.

Twice bitten

Many have dreamt of it, but creating a mass market for PCs is yet to become a reality. Many plans have come a cropper, and firms that went the distance, found themselves utterly helpless against this untamed beast.

It seemed like a home truth: computers would be lapped up by the masses only if they became more affordable. But so far, the area of focus, to a very large extent, has been the institutional segment large and medium corporates, government and financial institutions. Even today, this market accounts for nearly two-thirds of all desktops sold.

It is a stable segment with steady growth rates. And the institutional buyers are not particularly price conscious. Or so have believed most marketers, thus not unduly worrying themselves to bring down the entry-level price for PCs. Until the end of 1996, the cheapest branded machine, with the standard specifications would easily cost more than fifty thousand rupees.

But most recent developments in India and in other world markets seem to suggest that that the power of the right price point had been grossly underestimated. Late last year, after Compaq introduced the $799 PC in the US market, and others followed suit, the home PC market has virtually exploded there. Even corporates and other institutional buyers are promising large orders if desktops are priced within a comparable range.

To be sure, the opportunity always existed in the Indian market. The grey market assemblers who would import components, evade customs and excise duties sold nearly three-fourths of the total PCs in the country until a few years back. Buyers flocked to them because their machines were cheaper, at times, almost half the cost of a branded PC.

There have been two instances though where an organised player tried to break the stranglehold. In the late eighties, Siva Computers stunned the market offering PCs at throwaway prices. As it turned out, it wasn't a very profitable move, and the company downed its shutters soon after.

And then came the by now infamous onslaught by PCL in 1996. With some cleverly configured deals, PCL was able to price its products even below grey market prices. The response was overwhelming. In the first month, PCL had cornered almost the entire desktop market in the country.

But just as soon, the pressures of a high-volume operation became too much to handle. PCL could not make deliveries on time, despite taking advance payments from customers. Today, what was once India's No. 1 PC company is still trying to restart itself having haemorrhaged itself on that initiative badly.

So for the record, none of the big boys have managed to crack open the market so far. A successful mass customisation model has eluded these players. And of course, the small operators have limited resources to tap the opportunity.

But there are indications that all this could change now. The marketing and technical power of a mega corporation combining with nimble, quick-to-react operators may just do the trick this time.

The return of the assemblers

It is sweet revenge for Dalal and his ilk. Once relegated to the fringes of the market, the local assemblers are basking in their new found importance today. While every other segment of the market under-performed last year, the GIDs made impressive gains.

The GIDs, by most market estimates, account for nearly 50 per cent of the market. Confirms a recent International Data Corporation's (IDC) India report, "The home and small businesses have offset the weak buying of desktops by corporate and the government segments...The credit goes to Intel and its Genuine Intel Dealer partners."

The void created by PCL's exit which sold nearly 1,00,000 PCs in 1996 has help other branded players. Sharad Talwar, general manager-marketing, HCL Infosystems claims that they will sell 1.2 lakh PCs this year (which according to the company, translates into a 17.1 per cent market share).

While this may be true, it is obvious that the big brands have not been able to build on this opportunity. The wedge created by PCL when it went after the assemblers' business has snapped shut as soon as the local giant collapsed. Concedes Raj Saraf, chairman, Zenith Computers, "I don't think they[GIDs] have grown, but then, they certainly have held on to their market."

The GIDs find themselves smack in the middle of the only segment which is showing robust sales home and the small enterprise. In the 80,000 pieces home PC market, the GIDs have a whopping 76 per cent share. HCL, the only serious national level player in this market trails with a niggly 12 per cent.

Even more ominously (for the branded players), it looks like the GIDs are particularly well-suited to address this market segment.

Who are these GIDs anyway?

In a ramshackle industrial compound in Mumbai's western suburbs, on the second floor, Room No 204 is humming with activity. In one corner, two engineers are hunched over a PC, testing it for delivery the next day. If you clamber over half-a-dozen cartons, you can see printers and computer monitors being tossed up the attic. And in the middle of all this turmoil, you'd find a bunch of enthusiastic, fresh-out-of-college kids manning the phone lines for customer calls.

Welcome to the headquarters of Dynacons Systems and Solutions Ltd, which incidentally also doubles up as its warehouse-cum-sales-cum-service centre. The scene doesn't change much across the offices of the 300-odd GIDs who are active in Bombay. And according to Atul Vijaykar, director, Asia Pacific, Intel, there are roughly 1,000 GIDs operating in almost every nook and corner of the country today.

It makes one wonder if a GID is any different from your friendly, neighbourhood grey market operator. GIDs too operate locally within 10-15 kilometres radius (Though additionally, most GIDs have an excise unit where PCs are assembled). And again, price is their most potent weapon. "On an average, we are 15-20 per cent cheaper than the branded PCs," says Shah.

But GIDs are all this, and more. To begin with, they enjoy the support of one of the biggest IT corporations in the world. In early 1996, Intel launched the Genuine Intel Dealer programme in Asia-Pacific. Under this scheme, Intel provides marketing and technical support to smaller companies. In return, it ensures that these operators use authentic Intel microprocessors. "We try and develop the PC market in every possible way, and work with all the players in the market," says Intel's Vijaykar.

So an assembler who wants a GID certificate undergoes regular training sessions, marketing tips, technical information on new products and technology, and his products are advertised by Intel. Intel has organised nearly a dozen PC melas where it gets a group of GIDs to hawk their products. Through Intel's efforts, a GID brand has been created in the market today. "Now, even a Zenith is bringing out ads saying how their PCs compare favourably with those by GIDs!" says Dalal.

The continuous promotional activity by Intel has certainly helped. Depending on the volumes achieved, Intel has been bringing out print ads for a select set of GIDs for the last two years. The ads, coupled with the melas, have generated interest among the small businesses and the first-time buyers. "At the last mela in Nehru Centre, we bagged as many as 60 orders in just two days," confirms Dalal.

But what brings in the business? Says Computech's Shah, "The small firm buyer is looking for a good machine at a good price. Since our prices are the lowest, and the Intel brand is behind us, they are willing to try us. And the home buyer wants the latest specs be it the Pentium II, SRAM, or the EDIO. For him, we can customise each machine, and besides of course the fact that we are available in his neighbourhood, should he need any help with the machine."

For Intel, it has to ensure that the GIDs maintain quality. In 1996, Chetan Shah recalls that when he attended the first induction programme, he had to give many assurances attending at least three training sessions every year, hiring enough sales and technical staff, and, of course, buying genuine Intel products.

The strategy has worked wonders so far. And for a very good reason. The GID-Intel combo is actually a very potent business model. It brings together the low-cost, low overhead operations of hundreds of small assemblers with the marketing and technical might of Intel. "Every machine we sell is customised, and we can provide local support. And with our low overheads, we beat the big brands on price too. And Intel also analyses our cost structure thoroughly before the recommended price is advertised in the newspaper," adds Shah.

Perhaps, it must have been what the doctor ordered for the home/small enterprise market. "The world over, companies are adopting a build-to-order configuration for this market, and the GID-Intel combination achieves just that at very low costs," asserts Sameer Kochar who heads Skoch Consultancy. So, manufacturers like Compaq ship only the bare-bones machine to their dealers, who based on the specifications demanded by the customer, add on the rest of the components (hard disks, RAM, monitor type etc).

Now, look again how the GID-Intel model achieves the same result. Suppose, Intel announces a more powerful chip today. The customer who wants the most update specs would obviously demand the more powerful microprocessor. A GID's stock level is around 10-15 days, and each order takes about 10 days to be executed. So within two weeks, he can start offering the new chip to his customers. The same logic would hold for the rest of the components also. With a compressed buying cycle, the GIDs are therefore able to seek orders from the customer, and then buy and assemble according to the specifications demanded.

On the other hand, a bigger organisation like HCL with its quarterly buying cycles would have longer lead times. "This is why they are still selling Pentium 133 machines because they bought those stocks a long time back," says Dalal.

Now duplicate this process across the 1000-odd GIDs across the country. It conjures up visions of a fractal organisation, which has a common marketing front in Intel, with localised arms for manufacturing and service support (GIDs).

Keeping their heads above water

Not everything is hunky-dory for these upstarts though. Bruising price wars are a way of life in this market, and very few players have the ability to survive on the ultra-thin margins. Niftier outfits like the GIDs can only have a higher threshold. But the relentlessly downward spiralling PC prices are beginning to test those limits too.

"Business has grown by leaps and bounds but my margins are headed south. On a PC sale today, I don't make more than 3-4 per cent. And I don't know what to do about it," wonders Dalal. It is not inconceivable to suggest that these operators might be driven to compromise on quality by buying cheaper components.

In fact sometime in August last year, Intel had sent a letter to all its GIDs cautioning against operators who were repackaging old microprocessors into PCs. Many GIDs admit that there have been instances of dealers palming off substandard machines, but insist that these are few.

Ashok Zutshi, corporate manager, advertising and promotions, HCL Infosolutions does not pull his punches, "They compromise on quality, and sell machines with pirated software." But Dalal argues that his costs have gone up by 6-7 per cent now just to ensure that genuine components are used. "I would be extremely stupid to scrimp on quality when Intel has given me this opportunity to build my image in the market."

In another interesting development last month, a group of GIDs in Delhi launched a new brand, Horizon. When contacted by The Strategist, Girish Bhatia, managing director, CDM Technologies, initially suggested that the scheme was Intel's initiative to sell Pentium II machines. When The Strategist asked Intel for its version, it flatly denied any involvement in the initiative. Later, after Intel's denial, Bhatia clarified that the campaign was created out of the ad subsidy that these GIDs got from Intel, based on their sales volume. Says an industry observer, "Intel has certainly taken a risk by staking its reputation behind small-time operators."

So far, both the parties have benefited from the arrangement, though many believe that the advantages may have been short-lived. HCL contends that in the last quarter of 1997, the company gained two per cent market share at the cost of GIDs. But from a 17 per cent market share to anything even close to the GIDs' 50 per cent is a long haul. And with Compaq declaring war in the more lucrative corporate segment, the big boys HCL and Wipro have more important battles to fight.