Industry Analysis

Networking industry during 2000-01 was very high on emotions. The huge growth

seen in the ISP scene during the previous fiscal had a cascading effect on the

moods of each and every networking equipment vendor and network integrator. They

all invested heavily on teams that would focus on this high growth sector, which

included the ISPs and the nascent, but developing IDCs and private telecom

operators. But, when all looked good for the market, came the global technology

meltdown. And, it slowly began to have a crippling effect on the equipment

market and the allied services like network integration. By the end of 2000-01,

most of the networking vendors and integrators had already shifted their focus

and efforts on the more traditional sectors.

Also in FY 2000-01, India saw a series of visits of CEOs of multinational

networking companies. Cisco’s John Chambers, Nortel’s Clarence Chandran,

Sycamore’s Gururaj Desh Pande … They all said–India is a big market for

them, communications infrastructure is the highway and railroad of the new

economy, and that India can use its tech talent to catapult into the big league.

While all this on one hand, brought confidence among the industry, on the other,

things were not all right at Wall Street. Soon, companies started not living up

to the investor’s expectations. As a result, their share prices crashed to

record levels. Cisco, lost hundreds of billion dollars in terms of market value.

Coupled with this, the news of global layoffs brought genuine fear among

networking executives, no matter what words of assurance their Indian chiefs had

for them.

All said, the Indian networking industry did have things to rejoice about.

Banks and financial institutions acted as the perfect counterfoil to the

foot-dragging telecom sector, with all the prominent names like RBI, SBI, BSE,

NSE, UTI, aggressively pursuing their networking plan. And to top it all, the

fiscal came to an end with a very positive budget that directed all banks to get

their acts together, as far as connectivity of branches is concerned. If the

banking and finance sector contributed more than one-third of last year’s

networking revenue, many are of the view that it will get better this year.

Interestingly, the other sector that was really bullish during last fiscal

was the IT sector. The hot trend, here, was to setup Outsourced Development

Centers. Players like Cisco, Lucent, Nortel, etc, invested heavily on huge

centers employing large number of people in contrast to the worldwide trend of

retrenchments. Then there were startups that mushroomed both in Bangalore and in

NCT of Delhi.

Also, there was an air of freshness in the industry, with the entry of

players like Juniper, Extreme, Foundry, Unisphere, Sitara, Alteon (albeit in the

form of Nortel) and f5. Though, during the last fiscal, they only spent time

establishing relationship and doing the initial process of meeting the

customers, without doing much business, these companies could this year give the

established networking majors a run for their money.

Also seen were a lot of actions in the new SAN/NAS front. EMC2, Network

Appliance and Legato Systems, all were here besides Sun, HP, Compaq and IBM.

Even, companies like Apara focused on achieving good business from the data

center space. While quite a few IDCs like Enron, Global, Satyam and Cyquator

have set up their basic infrastructures, the big action on the storage space

came from banking and financial institutions. The IP contact center space is yet

another front where there were some good actions. Though basic in their nature,

many such call center companies had set up large LANs for their agents to

operate.

Size of the Networking Market

It was time for the networking industry to return to reality. Last fiscal,

the equipment industry grew 53.7 percent to touch a total turnover of Rs 2,751

crore as compared to Rs 1,790 crore. The product categories that contributed to

this figure were NICs, hubs, LAN switches, structured cabling, router, RAS,

dial-up modems, leased line modems, WAN switches, Access multiplexers, VSAT

equipment and Wireless LAN equipment.

Adding a new category of fiber-optic SDH equipment, which we started

analyzing this year, the total networking equipment market during fiscal 2000-01

stood at a total figure of Rs 3,217 crore.

Studying the networking equipment industry performance from a pure LAN

perspective, the LAN equipment supply industry last year, which included only

NICs, hubs, LAN switches and structured cabling, registered a total sales

revenue of Rs 931 crore. Thus showing a growth of 28 percent over Rs 729 crore,

during the previous fiscal.

This market is a fairly matured one, with a CAGR of over 32 percent over the

last five years, in which VOICE&DATA conducted the survey. While price drops

have meant that lakhs of units and ports of equipment have to be sold to sustain

the growth in value terms, also there is a lot of development in the LAN switch

and structured cabling categories. Layer 3 switching is already the in-thing

among large enterprises, while Layer 4-7 switches are beginning to get accepted

by the data centers. Fast Ethernet cabling is getting popular among the

structured cabling families, but Gigabit Ethernet is likely to be accepted, once

the final standards are ratified.

The Network Integration (NI) market, finally came into its own from being a

product margin earning industry to one which is now concentrating on value-adds,

in terms of consultancy and integration services. In fact, the top NIs did many

projects, which involved just consultancy and integration services, while a

totally different company supplied products. Already, companies are exploring

for overseas NI projects where they can do value additions by providing

consultancy, design and network planning. The flowering of the integration and

services in the whole spectrum of NI roles meant that the projects fetched more

money for the product implemented and commissioned in the past years. The NI

industry grew a good 64 percent during the last fiscal, registering a total

sales revenue of Rs 1,675 crore.

This year’s NI survey also included telecom turnkey implementers as well.

We were forced to do this, as the core of the communications network was getting

converged. Also many of the telecom turnkey service providers were looking at

undertaking packet-based networking deployments as well. Both Global Telesystems

and HFCL tied up with Cisco, last year. ITI was already into various managed

data network implementations and ATM/VoIP network deployment, in addition to

setting up SDH backbones and access networks for the telecom service providers.

These companies had already added competencies in providing CTI and IP-based

services solutions. VOICE&DATA Networking Masters 2001, estimates that the

telecom turnkey services market including established SDH fiber-optic equipment

in the transmission layer and multi-services WAN switch in the access layer of

telecom networks, was worth approximately Rs 857 crore.

Networking Products Distribution

The distribution market last year was worth Rs 687 crore. Routers, switches,

modems, structured cabling, NICs and hubs formed a bulk of the products that

were sold by the product distributors. It was observed that the networking

market is more profitable for channels that are in the first layer of

distribution, whereas the channel partner in the last layer gets meager margins

against extensive activities.

As the margins were better in networking products, one saw many computer

systems and peripheral distributors moving towards networking products. Also,

the networking products distribution industry saw the emergence of many new

players. As a result of which there was the need for value addition to have an

advantage over the competition. Some did this value addition, in terms of

developing better logistics and better channel management, there were the ones

who clearly stood out by adding value to the products, by locally manufacturing

them to suit the Indian environment.

The Outlook

If networking products, solutions and services is your business, banking and

finance sector is by far the surest shot. It easily contributed about one-third

of the entire networking revenue during last fiscal. The projects that started

off during last year continues on, while many more second tier banks are

expected to join in the activity this year. Projects are expected to come from

these financial organizations in the form of LAN for several branches as well as

VSAT/leased line-based routed networks to connect the branches. Setting up of

ATMs is likely to be another activity that will require WAN connectivity. Banks

like ICICI and HDFC are expanding their ATM networks all over the place. Others

will follow suit to compete in the market.

Though the shadow of a gloomy US economy over the Indian IT industry has not

cleared, there are signs that India will not be as affected as one would have

feared. One, there is already a move by the US multinationals to stretch their

dollars by employing the best technical brains at a much more affordable rate

than they would have spent in the US for development of products. Also, the IT

outsourcing trend is rather to pick up in the mid-term than face the initial

snags that is being felt now. Though, competition may be coming from China and

Russia to grab these opportunities, still India is in a far better position due

to the advantage of familiarity to English as well as the reputation of Indian

engineers. The IT industry could be a major contributor to networking this year.

The big telecom network deployments that did not come last year, might be

finally there this time. If one is going by the recent $1 billion investments

that Bharti has managed from SingTel, Warburg Pincus, IFC and AIF, the big guys

at least will manage to roll out the initial phases of their optical networking

projects. And with that happening, the bandwidth dependent ISP industry would be

boosted to invest on their end as well for the next stage of growth into

value-added services, apart from operating dial-up access.

Clearly, the networking industry is looking at a growth of anywhere around 60

percent.

The Regions

Southern India

This region of the country has been resilient with activity throughout the

past calendar year. The enhanced competition among the states of Karnataka,

Andhra Pradesh, Tamil Nadu and Kerala, to attract as much investment as possible

in the sphere of IT and IT-enabled services led to real excitement through out

the year. Bangalore has been the stopover for all these visiting dignitaries

like the former Japanese prime minister, Yoshiro Mori, Chinese leader Li Peng,

etc. Moreover, the southern states looked at global investors needs and

conventions.

The southern region almost saw the establishment of over five new technology

companies, last year. Furthermore, almost all the big networking majors

increased their investment on their development bases, be it Cisco, Sun, Nortel,

SGI, IBM, Lucent, Microsoft, Motorola, Alcatel or Philips.

Distinctly, there were investments on three types of companies–wireless,

telecom development and IT. As a result, there were a lot of expansion

activities for the networking infrastructure. Further, the entire host of

telecom and converged networks came over. These include Huawei Technologies,

Ittiam, Mobiapps, Tejas Networks, Ditium, Amber, Ishoni, etc.

Another important feature of South is that it has been the base for

structured cabling vendors. Tyco, Krone, Molex, Deltaful, Panduit, TVSNet, all

operate from here. Then the top integration king Wipro drove the business from

here. Among its others, we have a host of integrators like Network Solutions,

PAM Network, Ramco, Gemini, right under the nose. And, it is the hub for the

transmission products. ITI, ARM, UTL, BPL, HTL, and Crompton Greaves, all

operate in South. All these are the reasons why there has been an increased

activity in the South, during FY 2000-01.

Western India

West seems to be the mantra for networking companies in the country. Be it

Intel or 3Com, vendors realized the importance to have its presence felt in the

financial capital of the country. Probably, that’s because of the fact that

this is where the headquarters of the best-breed corporates are based in. This

has proven to be the most fertile soil for service providers, especially the

ones in the broadband fray. Take a look at the number of data centers

operational in Mumbai alone — Cyquator, Enron, Netmagic, Asianfrontiers,

Satyam and Global Tele Systems. No wonder why Intel has moved its lock, stock

and barrel with its products targeted towards data centers.

Though Gurgaon is still considered to be the Mecca of contact centers, Mumbai

is playing catching-up game. Some of the big names like TCS-HDFC combine,

Transworks, Global Tele-systems and Sitel have already setup their shop here.

When it comes to network integration, though Mumbai doesn’t have much of

national scale integrators like Banglore or Delhi does, the number of regional

players are staggering. And already, these local players are in the process of

spreading their reach to other parts of the country. With the whole networking

industry bullish on the opportunities abound in the banking & finance

industry, it is imperative for the players to have a major presence in Bombay to

pitch for these projects. The western region alone has some 140-odd banking

software companies and its time for their networking counterparts to follow

suit. With real estate prices crashing down and action spreading to the

outskirts of the city, Mumbai is once again on the verge of becoming an

irresistible location for all and sundry in the networking business.

Northern India

The northern region of the country is a step behind the most prosperous

regions of South and West, but things are changing fast. The e-governance

project of Madhya Pradesh, Haryana and Uttar Pradesh, and domestic long distance

is driving the networking market, as broadband pipes are being laid by Reliance,

Spectranet and Bharti for providing connectivity to corporates and SMEs. The

places that are inaccessible through optical fiber can be easily connected

through VSATs, as North is also the hub of VSAT service providers like HECL, HCL

Comnet, TelstraV-Comm, HFCL Satcom and Essel Shyam.

North is also considered the Mecca of call center operations in India, as one

can find Spectramind, E-funds, Air Infotech, GE and Daksh already operational.

But there are many large call centers, which are in the pipeline like Bharti

Teletech, Hero and others that would be operational in this fiscal, opening up

new opportunities in networking.

With lot of corporates moving out from Delhi to spacious locations in Gurgaon

and Greater Noida, connectivity is what they would be asking for. And once the

connectivity is stored, bandwidth and quality of service will be at the

top-of-their mind. North is like a home for networking majors like Cisco, 3Com,

HNS, Avaya, Alcatel, Motrola and Siemens. Also



integrators like CMC, HCL Comnet, HCL Info and IBM Global form a formidable
group.

Eastern India

The e-governance project of the West Bengal state government is likely to

generate networking business in this region, which lags far behind other

regions. What is stopping the IT growth in this region, especially the

North-East, is a highly inadequate transportation infrastructure and the lack of

PCs and telephone penetration. The government sector is easily the largest

deployer of networking equipment, followed by the manufacturing sector.