For the networking industry,
1998-99 proved very rewarding. The market grew handsomely on the revenue front beating the
general economic recession. And while the traditional LAN segments consolidated their
positions, the carrier market opened up new avenues of business for the vendors. On the
buyer side, the vertical segments got even more spread out, with networking activities
getting divided evenly among all segments.
alt="*Note: Total market does not include the revenues from carrier switches and RAS."
align="right" border="0" hspace="4" vspace="4">The
total market size of the industry–comprising of hubs, NICs, switches (carrier as well
as enterprise), routers, and Remote Access Servers (RAS)–was Rs 537 crore. The size
of the industry excluding the two components of carrier switches and RAS–the norm
practiced by us till the last Networking Masters–stood at Rs 456 crore. This was a
growth of 62 percent over the total size of the industry in the previous year. In 1997-98,
the networking market was at Rs 280 crore and had grown only by a mere 7 percent. If the
values for structured cabling, modems, and multiplexers too are added to the above figure
(Rs 537 crore), total size of the market aggregates to Rs 750 crore.
The year also saw networking
companies coming to terms with the changing environment. They did well against many
odds–the general economic recession looming large over the consumer market as well as
an unexpected increase in levy of taxes, when several networking products were grouped
under the Special Import Licence (SIL) category. But there were several positive
developments that offset these adverse conditions and spurred the deployment of networking
products towards the year end.The most obvious being the IT Task Force report. It
envisions India as an IT superpower in the next few years. Other factors that helped the
industry grow include opening up of the Internet provision industry and the
government’s drive for automation especially in the banking and defence sectors.
The growth of the networking
market points to yet another important factor–the growing importance of IT
infrastructure in the overall business objective of organizations. Connectivity and
greater bandwidth have become very important for organizations looking at implementing
complex applications like ERP, Electronic Data Interchange (EDI)/e-commerce, as well as
companies going in for simple initiatives like web hosting, e-mail, and intranet. An able
and accessible network became the need of the hour. Last year’s revenue figures are
but a translation of these needs into some real deployments. All these suggest clearly
that IT investments cannot be put on hold anymore. And more networks will get revamped and
new connectivity links will get implemented.
Beacon of Light in Darkness
One fact that is explicit this time is that the networking industry clearly outpaced the
overall domestic IT industry in terms of growth rate. PCs are estimated to have grown by a
decent 35 percent in unit terms and 15 percent in value terms. But what was most
surprising was the fact that servers are estimated to have posted a negative growth in
revenue terms and an insignificant growth in terms of units sold in the calendar year
1998.
So, what got the networking
industry to turnaround? Before 1998-99, it had been growing, at best, moderately.
Moreover, the fiscal 1997-88 was a bad year for the networking industry, which grew by
only 7 percent. The poor growth of networking in the initial phase was due to the fact
that there were quite a number of IT applications that were being stymied by a poor and
prohibitively costly communications infrastructure. Already quite a few LANs have been
operational since the last few years. However, these networks have been of the bare basic
kinds.
As bandwidth demand went on the
upswing, switches started replacing hubs at the server-end of the network. This trend was
more visible last year. The share of switches was almost double the size in the previous
year. Interestingly, the demand is such that the switches of slower speeds themselves are
being replaced in several networks. The hot combination in the new networks that are
coming up is that of 10 Mbps (Ethernet) switches at the workgroup-end and 10/100 Mbps
(Fast Ethernet) switches at the server-end.
There is also a momentum that has
been gaining for some time among companies/organizations to link up their several offices
too. The one stumbling block that was felt here was the poor and costly telecommunication
infrastructure and the absence of a datacommunication network. Last year was the start of
that phase when the demand for such connectivity could no more be sustained by government
departments and PSUs alone. The ground for Internet access was at last opened to private
participation. Moreover, the price of datacommunication services like leased lines, VSAT
access, and Internet access dropped steadily through the year. The latter part of 1998
clearly witnessed a sharp decrease in prices.
As the communications
infrastructure improves and becomes more affordable, deployment of networks is only going
to get hectic. More bandwidth-intensive applications and Wide Area Networking (WAN) will
be soon possible through a good communication infrastructure. These would keep the
networks busy and put the current equipment to severe tests in the near future. The
resultant bandwidth demand would invariably force existing networks to improve their
capability. Last fiscal’s stellar growth indicates that a fair amount of this
activity has already started happening.
However, the low-end networking
market has not grown so rapidly as the entire market has. The huge growth in the market
seems to have mainly come from the carriers–ISPs and telcos. The enterprise market,
the small isolated workgroups, and the lower half of the small and medium enterprises have
contributed to a lesser extent last year.
The other trend witnessed last
fiscal was concerning the supply side. Though companies in the distribution business
targeting the lower-end of networking grew steadily, they were completely overshadowed by
companies targeting the upper-end of the market–the NI/SI business. Especially,
companies that have strong SI partners and a carrier focus have grown rapidly. Companies
with only hub and NICs have posted stagnant to moderate growth. However, as Internet takes
computers to the masses and the interaction between companies and customers starts to
happen in the form of e-commerce, the LAN market is bound to pick up considerably. LAN
deployment will happen as WANs come up. The two are too interdependent to not affect each
other’s performance.
align="right" border="0" hspace="4" vspace="4">The
Upward Slope
When it comes to networking, there is no semblance to logic. In the previous year, JFM was
a poor quarter. But in 1998-99, JFM was the star quarter–the three months brought
back the smiles to many faces in the networking industry. This quarter accounted for a
whopping 40 percent of the total business. During this quarter, many of the top rankers in
our survey have done business that exceeded their expectations.
Looking back, 1998-99 was the
classic exponential growth, the market growing in full force towards the latter part.
During the first three quarters, the networking market recorded about the same amount of
revenues. And then suddenly came the upward slope, the market climbing skywards–the
last quarter contributing almost double of the third quarter.
How does one explain such a
growth? Let’s take some of the events directly and indirectly related to the industry
during last year. In the beginning of the last fiscal, a change of government took place
at the Centre. Caution was the catchword for businesses. People were not sure of the
government at first, going by the experience in the past few years. The annual budget did
not make matters any better, as there were not any significant developments. The first ray
of hope came in the form of the National IT Task Force report which took into
consideration the importance of communications infrastructure to enable a digital world.
Some of the proposals that promised to make a positive impact were the info-infrastructure
drive to set up the NII, halving the leased rentals for leased circuits, abolishing
surcharge on leased circuits, permitting cable operators to provide Internet, and setting
up of public tele-infocentres to offer multimedia services than just voice calls.
As the year progressed, the
importance of these proposals and the repeated statements of the Prime Minister committing
his government’s efforts towards realizing the goals of the Task Force report started
hitting the right chord among industry captains. Finally, the go-ahead signal came in the
form of the Internet privatization. Several companies decided to become ISPs and went
ahead with their strategies and network build-up. As Internet got spread out, with VSNL
itself giving subscriptions beyond expectations and towards the start of the year, private
ISPs starting to provide access, usage naturally touched peak.
The bulging figure of the fourth
quarter can be explained by the sudden culmination of action from just proposals on paper.
The upward climb of performance can be easily explained by the great business that
companies did during the last fiscal. The large gap between third quarter and last quarter
was because mainly the carrier market opened up during the end of the third quarter, and
activity took place in JFM. More than Rs 80 crore of the Rs 214.8 crore was from the
carrier market itself. And JFM has always been the best quarter for most companies. So it
is not after all a great surprise that figures add to the magic figure of 40 percent of
business during JFM.
Once you look into individual
cash movement of companies, the nature of industry growth can be understood on a better
perspective. Companies like Compex, D-Link, Accton, and LanBit have had a
characteristically normal year–each one of them posting a straight line moderate
growth over the four quarters. On the other hand, companies like Cisco, Nortel, RAD, and
Motorola more or less had a similar year as their counterparts till December. However,
after that, it was bull-run throughout JFM for these companies. The former category of
companies are basically companies that more or less compete on the price sensitive low-end
hub and NIC markets. They mostly follow the indirect route of business. The latter group
of companies who have shown great JFM performances are companies that have more of their
business done the direct way through systems integrators and have high-end switches and
routers as their core strength. And these companies have a strong carrier focus while the
companies like D-Link and Accton have little or no carrier focus.
Cheaper, Hence Better
Prices of networking products over the year dropped by about 15 percent across the board.
Again, the switches stole the show here, becoming cheaper by the maximum proportion (about
25 percent). Hubs dropped by an estimated 20 percent. Router prices remained stagnant. And
this was in spite of a number of players trying to compete with Cisco, which has an
indisputable leadership in routers. However, the router prices may see some decline this
year due to competition from Layer 3 and Layer 4 switches. These switches have the ability
to route as well–and route at a fast speed.
After reaching the nadir in
1997-98, low-end products somewhat stabilized in price. However, companies were forced to
offer better functionality at the same price. As a result, products at the middle of the
value chain were the ones that witnessed considerable slump in prices. A 24-port managed
Ethernet hub costs an average of Rs 28,000 in comparison to the Rs 35,000 that it cost
during 1997-98. A 24-port Ethernet switch costs Rs 48,000, dropping 31 percent from a
price of Rs 70,000 during the fiscal 1997-98. The modular products in both hubs and
switches did not see much drop in prices. And like the router, it was a good segment for
the vendor to address because of the high-margins.
In terms of sheer volume of units
and ports that were shipped in this low-end segment, the amount is immense. And there was
an extraordinary growth. The volume of NIC units touched over 600,000 units. And the
volume of hub ports shipped was in the region of 100,000 ports. These were mostly of the
low-end type from Taiwanese vendors. However, this did not have much of an impact on the
revenues of Taiwanese and low-end hub/NIC companies. The prices of these products being so
low, the boom did not really translate into mega cash flow.
Like the previous years, in terms
of product arrivals, nothing much changed last year. Except for a few brands of analog
modems, low-end hubs, and cabling connectors, the bulk of the networking products that got
consumed were imported. Thus, the value of the rupee still plays an important role in the
performance of companies, especially those that report figures in Indian currency.
Moreover, the taxable amount on the product is equally important to the toplines of the
companies.
Thankfully, the Indian rupee did
not fluctuate as much in the previous year, remaining around Rs 42 to a dollar almost
round the year. However, the duties as usual were not better than in previous regimes.
Products like routers and switches which go into infrastructure projects still invite
steep import duties. And the way products are grouped together go more with the whims and
wishes of the revenue department than deserved and valid technical reasons. During the OND
quarter, a major scare was caused by a sudden Customs notification shifting various
networking products including multiplexers and routers into the Special Import Licence
(SIL) category, thus increasing the CVD on these items. Similarly, there was the usual
complaint among vendors that networking products were being segregated from the rest of
the IT products. The feeling amongst them is that networking products should enjoy all
duty concessions as any IT product.
Enable Good Growth
- An encouraging IT Task Force report.
- Forward looking NTP. Carrier business could multiply.
- Delicensing of oil industry—competition to drive IT
projects. - Insurance industry may be deregulated. Companies have
started the process of automating branches. Investments to further pick up from July
onwards. - More affordable networking products.
- Convergence to start getting tested in India.
- Maturing of several networking technologies like ATM,
Gigabit Ethernet, xDSL, and cable may get completed this year. Some implementations are
likely towards the end of the year. - Replacement of existing infrastructure. Ethernet products by
Fast and Gigabit Ethernet in LANs. TDM switches by Frame Relay and ATM in the carrier
networks. Campuses to further implement ATM backbones. - ISP boom. E-commerce regulation being formulated. IP
technologies to push networking growth. - Heavy reduction in prices for leased circuits to push rest
of the top 600 corporates to go in for leased lines for WAN. Routers and RASs to be hot. - Government sops for investments on Y2K to push IT
investments in banking sector till June. A slowdown is likely thereafter up to December.
There could be a resurge in the last quarter. - SME starts to grow. Networking likely to spread to B cities,
and to other segments like hospitals and government departments.
Growth
- Political instability.
- Cash crunch among companies, though positive signs of
economic recovery are already there. - Cut-throat price war.
- Obsolescence of technologies. Companies that do not add new
features and technologies to be out of business.
The customs duty applicable to
networking products during fiscal 1998-99 varied from product to product from around 40
percent to more than 60 percent of CIF. Some of the products having to pay additional 6 to
10 percent in case of SIL requirements. Thus, the average total customs duty on networking
products was around 55 percent of CIF, meaning every dollar worth of shipment imported
translated into about Rs 65 when it landed on the customer premises in India. And the
average margins given by OEMs varied from 5-10 percent depending upon the product. So, the
average dollar shipment translated into approximately Rs 70 business done in India. Hence,
we have taken Rs 70 as the multiplier to get to the rupee value of the total shipment of
companies that report their revenues in dollars.
A consolidation of market shares
by the top five networking companies meant healthy gross margins for them. Gross margins
of 40-50 percent for recognized vendors compared to an above 65 percent margin of market
leaders like Cisco. Cisco’s higher margins can be attributed to the leadership held
by it in router sales world-wide coupled with high software content in its routers.
Liaisoning Is Just Not Enough
India is indeed a diverse market in both regional as well as vertical spread of the
networking business. Out of the total business done in India, all regions except for East
had about the same share of the deployment. However, West still leads with total 38
percent market share. But this lead is now marginally reduced to 3 percent over the 35
percent market share of the South market. North is not too far back, with a market share
of 21 percent. East is still the laggard with just a 6 percent market share.
The West’s leadership speaks
volumes of the rapid industrialization and commercialization process that is taking place
there. The big names that contributed largely to West’s bag were BPL-US West, Dena
Bank Mumbai, ETH Dishnet, Ispat, Mumbai Port Trust, Rashtriya Chemical Fertilizer, RBI
Mumbai, Reliance, RPG Group, Telco, and VSNL. The South’s kitty was filled in by
customers like BHEL, Chennai Corporation, CIPET, GEC Alsthom, Hyderabad Hi-Tec City,
Infosys, Nagarjuna Fertilizers and Chemical Ltd, and Satyam Infoway. In the North, the
significant contributors were Bharti BT Internet, BHEL Bhopal, BHEL Jhansi, CRRI Delhi,
Indian Oil Panipat, IRDE Dehradun, MTNL, Maruti Udyog, Marriot Hotel Delhi, Punjab
University, SGS Thompson, SM Microelectronics, and Telco Lucknow. The list for East is a
much shorter one, significant names being ISM Dhanbad, Jadavpur University, and Numaligarh
Refineries.
In terms of vertical segment
contribution, the most significant contribution was by the manufacturing segment. Out of
the top 88 big network purchases in fiscal 1998-99, that we kept a tab on, about 26 were
by manufacturing organizations. Telecom companies accounted for 18, while
education/research organizations followed slightly behind with 15 purchases. IT houses
made nine such purchases.To address this diversity, many companies had to give a relook at
its operations in India. 3Com is one of the prominent companies which turned subsidiary
towards the end of the fiscal. Ascend toyed with the idea of coming as a branch office,
but got acquired by Lucent Technologies. Companies also spread out, with most companies
being represented in the northern, western, and southern regions with at least an office
in each of the regions. Companies like MRO Tek tied up with RAD to form a manufacturing
JV. At the same time, in segments like modem and cabling, many had set up units which
manufactured cabling accessories. Companies, especially the ones that had a focus on NICs,
hubs, and low-end switches, took the help of distributors like Godrej Pacific, Ramco,
Microsell, and ERIL to address wider regions and to reach down to mass levels. And as is
the trend today, SIs play an important role in the networking industry. In the case of the
top companies, most of their business was contributed by the creamy 10-15 clients. These
are the kinds that deploy hundreds and sometimes thousands of LAN nodes at one go. These
are also the ones which set up WAN nodes all across the country in a single project.
Indefinitely, all these rich clients have gone in for a turnkey kind of implementation
involving integrators to plan, design, and implement the networks. SIs that brought in the
moolah for the top networking vendors were Compaq, Datacraft, HCL Comnet, HCL Infosystems,
IBM Global Services, Microland, RPG, Tata Infotech, Tata Technologies, Tata Elxsi, and
Wipro to name a few.
Outlook for the Current Fiscal
Considering all the factors before the networking market, the industry should grow another
60 percent next year before subsequent stabilizations in the years to come. It is unlikely
that growth will subdue till at least the year 2000. Even if government incentives are not
enough, the compulsion to become competitive before foreign players come in to exploit a
zero duty market, as per WTO agreements, will itself drive companies to go in for putting
up their infrastructure in place. A large part of the investment will be on networking.
The networking initiatives of state governments have already started off. After Andhra
Pradesh, it was the turn of the Madhya Pradesh, Karnataka, Tamil Nadu, and Maharashtra
governments to show keenness to connect citizens. The shadow of Sam Pitroda looms large on
the states of Tamil Nadu and West Bengal. If things go well, WorldTel is likely to pump in
some amount of funds, under its infrastructure development programme for developing
countries. Last year, several company officials met the chief ministers of these states.
At least a few of these states will see action. The BOO APSWAN network under AP’s
Janmabhoomi initiative has already kicked off. The project spending for this itself is
worth Rs 22 crore and has a potential of going up to Rs 100 crore. RBI is known to have
sanctioned large amount of money for networking bank branches this year. According to a
top country manager, there are close to 60,000 bank branches across the country. If the
drive to connect them in the next few years pays off, then the networking industry is in
for huge growth. Political instability at the Centre is of some worry. However, if a year
like the last fiscal could be a good business year for networking, then why will this year
not be. Despite instability and recession!