Services Set To Grow

Dataquest figures show that for the second time in the history of PC market,
year-end shipments worldwide experienced a decline of 4.6 percent from the year
2000 to just 128 million in 2001. PC industry has not experienced such a
difficult year since 1985, when worldwide PC shipments declined by 2.3 percent.

Economic conditions combined with saturation issues in developed markets
continue to impact PC market growth rates. Reasonably good performances
delivered by the present PC platforms are allowing existing users to postpone PC
upgrades.

Weak present, dull future

Last collected data show that there was no return of the buying trend among
the Fortune 500 customers but there was a slightly improved performance in the
consumer segment. Poor performance in 2001 has impacted all major suppliers but
one company has made progress, which is Dell.

Dataquest figures show that all top-tier vendors experienced double digit
decline worldwide whereas direct seller Dell grew by 18.3 percent and finally
moved past Compaq as the number one vendor, based on shipments.

With the PC market contracting for the first time, Dell seized the
opportunity to begin PC price war, based on its ability to manufacture PCs more
efficiently than any other supplier. With its position as a leading
manufacturer, Dell has been able to use that position to reduce its costs.

Despite the proposed merger, HP and Compaq saw a decline in their respective
market shares and were not able to reduce their costs - putting more pressure on
their market share and creating a vicious circle.

This bleak outlook of the overall hardware market is expected to continue
with a forecasted decline of 7.1 percent in 2002.

The server market was particularly affected since replacements were delayed
due to slow economic growth. This was combined with declining prices in the
entry-level server market.

Though high-end servers experienced some growth but couldn’t manage to have
a positive effect on the overall decline. The future of portable PCs is looking
bright in the second half of 2002 and this will be driven by wireless
applications and users replacing their desktops with portables.

Datacoms and networking equipment market only grew by 0.1 percent during 2001
and is expected to improve slightly in 2002 with a growth of 3.1 percent. The
enterprise market in this segment will slow down in 2002. 2002 will also see a
consolidation of IP as the default enterprise network architecture. Traditional
legacy infrastructure are typically more expensive to maintain in terms of
equipment pricing, after-sales service and management.

Software spending was also effected by this downturn thus giving a growth of
only eight percent in 2001. Security software has become the most prosperous
sector in the market and in addition enterprise applications are also expected
to increase the streamlining of front office and back office applications. Trend
is towards the growth of packaged software.

Move up or get out

Due to these economic conditions corporates are now finding ways to increase
their competencies and productivity and this is expected to give a boost to IT
services sector. The outsourcing of core competencies will increase as these
corporates redefine their own core competencies.

Many organizations are reworking their approach to e-business and are looking
for guidance. The integration of applications is becoming a key priority and
this is driving demand for consultancy and implementation services.

Volume products distributors are the most endangered species and even those
with some of the largest operations have found it hard to earn adequate margins.
A few likely survivors are managing to pull ahead by skillfully moving up the
value-add ladder or by tightly controlling their volume operations.

Value-addition is a term that´s been flogged to death but we can apply it to
those players who have made the jump to a solutions or services model. The real
danger is in pure product distribution since margins have shrunk to the point
that traditional distributors need to once again assess their cost base, build
volumes or get out.

Restructuring business models

To achieve these objectives, many large players in Europe are considering
mergers and consolidation. On the other hand, vendors are shifting gears by
reducing large distribution partners and pushing channel partners with more
focus on solutions and services.

In fact the proposed Compaq-HP merger also throws a dark shadow over the
future of many distributors and lot of fat will be trimmed out if the proposed
merger goes through. They will soon start scrutinizing core skills of each
channel partner.

Vendors are also bringing pressure on partners in terms of reduced market
development funds (MDF) and channel discounts.

Most top brands have already started cutting on this front. As one industry
commentator says, "Quite frankly this creates a 200 pound gorilla in the
market. If you are a distributor of a vendor which has 60 percent share of
channel sales, then you dance to that vendor´s tune. If that vendor decides to
drop your margins then you have to accept it. Channel politics is a power play
and this power is going to be seriously eroded." This will force
distributors to restructure their business model.

Many still have a structure that depends on volume discounts and MDF from
vendors to make tiny margins by them. If product distributors have to survive
into the future, they must think about cutting inefficiencies, improving
operating structures and growing market share. Some of the future winners in
Europe have already laid foundation for their survival by streamlining their
cost base and moving rapidly into higher value market areas.

AJAY
AGARWAL
is the MD of Pune-based Seacom Solutions.