'Domestic tariffs must be reduced'

Q&A/Ajai Chowdhry

The country's largest hardware company HCL Infosystems is back with a bang after almost two years of uncertainty.

It reported a 98 per cent growth in revenues (Rs 2,700 crore) and a six-fold growth in net profits (Rs 96.65 crore) in 2002-03.

Chairman and Chief Executive Ajai Chowdhry attributes this to the improvement in the economy and the innovative products that the company introduced in the market. He believes that India's hardware sector holds a better prospect than the software sector in terms of providing employment.

Chowdhry outlines his vision for the company as well as the country's hardware sector.

After about two years of uncertainty, HCL Infosystems has shown promising topline as well as bottomline growth. How was this made possible?

We have been able to achieve this landmark, despite challenging circumstances, due to our focus, domain expertise and the ability to adapt to market dynamics. We undertook a business reorganisation process wherein the software services business was divested to HCL Technologies. This helped us to be more focused on the hardware market.

The turnaround started with our mobile phone business doing better and now the same performance has been repeated by the hardware business.

There are certain factors that have helped us achieve this. First, the overall improvement in the economy has resulted in increased demand from the corporate sector. Besides, economic growth also had an impact on consumer buying. In addition, the e-governance projects by the government also helped us improve our performance.

What about the performance of the hardware sector? Has it come out of the slump?

The hardware industry seems to be in a good health now. Various studies have indicated that the actual growth would be much more than the projections made at the beginning of the year.

Don't you think the growth has come a bit too late? Many point out that the country's hardware sector has missed the initial momentum.

The sector was ignored and as a result hardware manufacturing went to other countries. We had a very vibrant hardware sector, which undertook manufacturing for the global market. But the unsupportive policies have actually killed the prospects of the sector. Today, the industry has got into a vicious cycle of volumes, prices and grey market. In a price-sensitive market like India, volumes will not pick up unless prices are down. The high price is the main reason for the growth of the grey market in India. Besides a vibrant domestic market, India also has the potential to become a global hub for hardware design.

Why are companies not lowering the prices if high prices is the main reason hampering the growth of the sector?

Companies have reduced prices as much as they can. The only way the prices can now drop is if the government reduces the excise duty and other local tariffs on personal computers (PCs). Various taxes and tariffs contribute to about 35 to 40 per cent of the price of a PC. This is probably the highest in the region. In China, for example, the tax on PCs is only about 14 per cent. Some studies have shown that a 10 per cent drop in prices can increase demand by 30 per cent.

With the country moving in to the World Trade Organisation (WTO) regime of zero duty on imports by 2005, it makes more sense to reduce the domestic tariffs. We hope that the government would tackle this issue in the Budget.

Many companies, including HCL Infosystems, have introduced low-cost computers in the market. What is the performance of these products?

Our Rs 20,000 PCs are doing very well. This may be a model for the sector to follow because it shows that with the reduction in prices, volumes will pick up automatically. The high price is one main reason for the slow growth of the sector. In the past eight quarters, we have seen that the increase in demand was in constant sync with the reduction in prices.

What are the main steps that you want the government to take up in the Budget to ensure the growth in the sector?

Besides reduction in the various domestic tariffs, the hardware sector also wants a 100 per cent depreciation for PCs in the first year against the current 60 per cent. Steps should also be taken to ensure that the procedural bottlenecks are removed and India becomes viable for hardware manufacturing. Look at a market like Taiwan or China where policies were drafted to encourage IT manufacturing.

In India, a task force was set up by the government to make recommendations for helping the hardware sector grow. The task force had made its recommendations, but nobody knows what has happened to the recommendations.

The government supported the software and IT-enabled services sector as it is a great export earner as well as an employment generator. What are the prospects of the hardware sector in these areas?

The hardware sector also holds a great prospect for exports. We had a vibrant hardware export sector. It did not survive because of the unfriendly policies.

In the case of employment, the hardware sector also holds great potential. Besides, while the software and IT-enabled services sector provide employment to the urban middle or upper class, the hardware sector has the potential to employ people from the entire spectrum of the society.

Just look at the potential the sector has. HCL Infosystems, with a production base of about 200,000, directly employs 2,000 people and indirectly about 5,000 people at the dealer level. For example, when the production level moves up to about 2 million, the employment that we generate can go up about 10,000. Similar will be the jobs that other companies can also generate. If the top 10 companies can do the same, that would create at least one lakh jobs.

There has also been a lot of talk about local language software actually driving the growth of PCs in India. What is your view on this?

The scene here is exactly like the television broadcasting sector. It all started with cable operators wiring up the whole country. After this, broadcasters saw the business potential and started local language programmes for the viewers.

Similarly, there has to be a reason for companies to make local language software programs.

I agree that the local language software has a great role to play in the domestic hardware sector, but none of the companies find it economically viable to make investments in a market of about 2 million PCs a year.

The market has to be much larger, say, at the levels of China, to expect companies to make investments in local language software.

You talked about lower prices driving the market. What according to you should be the ideal price for a PC?

I guess, when the price hits the Rs 15,000-mark, demand will actually grow. This can be done even now if the various duties and tariffs are dropped.