Computers Today, July 1-15, 1999, Master File; pg 1

Call it a year of mixed fortunes. Hardware firms struggled to keep their momentum going in 1998-99, as revenue growth sank and profits faded. For software export houses, the boom carried on with an extraordinary business cycle and a surging stock market. It was also reorganisation time-for IT firms, jumping from the hardware boat to the software bandwagon; for others, staying nimble and connected, with a quick embrace of ERP or collaborative computing packages; for multinational vendors, firming up direct presence with fully owned subsidiaries; for the government, divesting monopolies and facing privatisation; and for the end-user, entering the Net age on his/her home PC.

A DECADE OF GROWTH

Total Industry

Software

Hardware

Even five years ago, the term infotech used to predominantly mean the hardware industry, and its ups and downs influenced the whole industry's growth. The baton changed hands in 1997-98, when the software industry (Rs 6,690 crore) raced past the hardware counterpart (Rs 5,388 crore) in revenue terms. The difference became more than pronounced in 1998-99. The hardware industry clocked revenues less than half of the software sector (Rs 5,072 crore and Rs 10,858 crore respectively). What's more, the plight of the hardware industry (a negative growth of about minus 6 percent over 1997-98) is not even reflected in the total Indian IT industry growth, as software exports has not only compensated it well, but also has led the industry into an upsurge from the downturn that it had been facing over the past few years. From the 59 percent zenith in 1995-96, the total industry revenues dipped to mark a 24 percent growth in 1996-97 and 21 percent growth in 1997-98. In 1998-99, the industry came back again with a more than 28 percent growth, as total industry revenue surged to Rs 18,120 crore. For reaching the Rs 20,000 mark in revenue and 1 million mark in PC sales, we have to wait for the new millennium. The targets and promises of the hardware industry forum, MAIT and the Department of Electronics have fallen face-down. Once again.

Despite a regular business cycle and surge in demand from corporate houses, hardware companies struggled to keep their momentum going in 1998-99, as revenue growth sank and profits dipped. The plight has become sadder for exports of computer hardware. After many a seminar about 'world-class hardware' to be produced in India, exchange of delegations from Taiwan, Malaysia and Singapore, MAIT has decided to take the software route-design-development. Meanwhile, the assembly lines of Altos, DCM, and TVS are either gathering cobwebs or are running at minimal production. "Don't invest a single paise into manufacturing anymore," warns Gopal Srinivasan, managing director, TVS Electronics Ltd and past-president of MAIT. His dream of reaping benefits through contract manufacturing has turned sour. The nail in the coffin was the closure of JTS Technologies, the Tandon Group hardware exports company, that accounted for almost half the hardware exports in 1997-98. Statistically, the drop is minus 73 percent, but it's more about a dream getting buried.

Quips Satish Gupta, executive director, J.K Technosoft, "To call India's own, there would be soon the software industry only. Hardware companies that can would jump into the software bandwagon, the rest will perish." With the stock market surging, software export firms are enjoying a never-before run. The demand from the global market for professionals to fix Y2K and Euro problems is increasing. Not only have revenues of majors like Infosys, Satyam, NIIT or Pentafour nearly doubled, also impressive are their profit growth rates. Count it, more than 80 percent of the companies in CT 101 list deals in software and services.

Hence, "reorganisation" is in vogue. This is not the 'business process re-engineering' or 'resource planning' of yesteryear, where the companies, in a drive to stay nimble, fine-tuned their capabilities and marketing channels, but a thorough kickstart with a new garb. The HCL Group has funnelled all its software exports activities into an entity called HCL Technologies, the target is to hit NASDAQ. A constant bleed has led the once networking giant Microland Ltd to concentrate only on 'software and services'; Wipro Infotech's software and services division is healthier than its hardware sales wing; PCS Industries, Tata Infotech or CMC Ltd are no longer interested in hardware sales.

The message is simple: do software exports or turn to a huge supermarket-like distributor, without bothering much about conflicting brands. If you want to be Godrej Pacific Technology, sell Compaq, Hewlett-Packard and IBM PCs under one roof. Meanwhile, joint ventures are crumbling, exclusivity in distribution is becoming scarce, and the multinationals operating in India are stepping into what can be called the "third state". In the beginning, there were exclusive distributors or joint venture partners like PCL for Dell, HCL for HP, Wipro Acer for Acer machines or Microland for Compaq. Soon, MNCs dissolved the exclusive tag and systems and software sales was thrown open to multiple distributors. To oversee sales and offer support to major customers, they opened liaison offices. The third step is these companies firming up subsidiaries in India and taking up the marketing reins. While Compaq, HP, Microsoft, etc. already have their own set-ups, Cisco, Dell, Acer and others are opening their own subsidiaries; joint ventures like Tata IBM, Modi Xerox, Modi Alcatel, and Wipro Acer have been dissolved.

At about 40 percent unit growth, PC sales were not low, but competition brought down the revenues, and made margins wafer thin. With Internet access being offered by the private sector too, Net became a reason for people buying PCs, as well as Net surfing turned to be one of the major usages of PCs at home. Naturally, with price-sensitive customers choosing PCs for home, the share of PC assemblers in the pie has gone up. They account for about 40 percent of the PC sales now.

Corporate bodies have finally understood, that being IT-savvy is an intelligent way of beating blues, especially when the economy is not so pink and industrial climate far from stable. The rush for implementing ERP packages is at an all-time high, as the vendors have also reoriented their platter with low-cost, quick-implementation packages. Baan, SAP are all available "in a box".

Overall, the Net bound them all. Beyond the primary use of the Internet to find information and stay connected, companies, IT or any, took heed of E-commerce to surge sales. Growing Net usage helped PCs go home. It also brought over a new generation of infotech companies dabbling in Web services. Will they become the future challengers with 500 megahertz revenue growth and stock-option rich employees to unseat the software exports czars? Reason lies only in chaos, it seems.

When Prime Minister Atal Behari Vajpayee gushed that "IT means India's tomorrow" at IT.com '98 in Bangalore last year, he was perhaps momentarily overwhelmed with the aura of the event. If the hardware industry was taken in by this rather misleading statement as a promise of a better tomorrow, the government was quick to dispel any illusions this year. The Union Budget 1999 did not do much to kick up the industry.

While the hardware segment witnessed a modest growth of 11.3 percent in 1998-99, recording a revenue of Rs 4,772 crore, the hardware exports ran to the reverse, plummeting by 72.7 percent, notching just about Rs 300 crore. The negative exports brought down the industry's overall growth to minus 5.9 percent over that of last year.

The industry which had been crowing about exports worth $10 billion by 2008 has a battered look about it. "Given the current set of circumstances, $10 billion is a pipe dream," moans an official of the Manufacturers Association for Information Technology (MAIT). He explains: "With this Budget, the duty differential for the domestic manufacturer has come down, thus eroding his competitiveness." The biggest gainer as always, is the grey market which has got a big boost as parts are sometimes smuggled in and excise not paid. Now, wouldn't the branded PCs find it tougher than ever to breach the grey market bastion?

Most established players learnt it the hard way. Leading the pack is JTS Technology Ltd which was a major player in Computers Today's Big 9 Hardware Exporters 1997-98. This year it shut shop.

But the Exim Policy 1999-2000 gave some respite. It addressed key issues faced by the hardware industry by incorporating some of MAIT's recommendations as put forth in the IT Action Plan II. The Free Trade Zones (FTZ) initiative is a major step towards realisation of the S-BIT scheme, supported by all the members of the IT Task Force. It aims for manufacturing hardware in the zero duty regime expected under WTO agreement by 2003.

Compared to last year's growth rate of 57 percent, the Indian software segment grew by a remarkable 62 percent by rupee terms and 52 percent in dollar terms in fiscal 1998-99. In a year marred by a general recession, international sanctions and political uncertainty, the software segment managed to notch up a total revenue of Rs 10,858 crore. An upbeat industry lobby now pegs the domestic software market alone at Rs 8,200 crore in 1999-2000, while software exports are slated to bring in Rs 17,500 crore.

In the stock markets back home, it was wisdom time. Through with the blind bullish run that lasted for three years, there is no more a broad sectoral approach towards software stocks. The mood is to check out the individual stocks and evaluate how they would be performing for the next two-three quarters. Blame it on the slowdown in outsourcing, in turn caused by the postponement of new application development by IT spendors in the run up to the millennium.

But again, let there be no room for panic. This is not a long-term trend and outsourcing is expected to revive once the millennium is crossed. As a survey by BNP Prime Peregrine indicates, even Y2K related works would come back in the non-mission critical areas that were not addressed in the first round of conversions. With outsourcing demands slated to pick up in the first quarter of 2000, happy days are sure to stay.

Lull at home is not dampening the smooth glide of INFY wings in Silicon Valley. INFY, the symbol allotted in NASDAQ for Infosys, started off at $34 per ADR (American Depository Receipt), and began settling down at $41. As this write up was being prepared, INFY had closed for the day (June 10) at $53 per ADR.

Fiscal 1998-99 was also the year of the venture capital. The Union Government announced an exclusive Rs 100 crore venture capital fund for software and IT industry. This fund will be nucleated by Small Industries Development Bank of India (SIDBI). The government decision came close on the heels of a survey by NASSCOM showing that IT industry requires $500 million of Venture Capital fund in the next five years. Says Dewang Mehta, president, NASSCOM: "Now, we expect more venture funds in near future plus an atmosphere of angel investment, seed capital funding and venture funding taking off in the country."

As of now, it seems NASSCOM proposes and Government disposes. The domestic software lobby got a favourable Budget this time-service tax exemption to software, venture capital incentives, continuation of zero duty on software, and that special emphasis on Employment Stock Option Scheme (ESOP). With firms like Microland Ltd catching on to the ESOP wave, the Indian software industry might see an upsurge in the coming days.