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Back on a roll

Demand for computers and tech gear goes into an overdrive in India, catching vendors such as Dell and Acer by surprise. That happy state is here to stay as government ramps up spending like never before.

The rising prosperity of the Indian middle class is showing up in the way it sleeps and has Pertish Mankotia hassled.

Spring-coiled mattresses are selling by the thousands and the Head of Information Technology, or IT, at Sheela Foam, better known for its Sleepwell brand, has been busy as his company pushes into a sales overdrive.

Mankotia has been spending long hours with Sheela's IT vendors rapidly upgrading the company's creaky computing hardware—built around fiveyear-old servers, typically with software and hardware bundled together for specific applications. Sheela has already replaced three servers and is buying at least a dozen personal computers, or PCs, a month.

"There is a firm recovery in progress and we need to be prepared to tap this revival," says Mankotia. While tech budgets may have been frozen or, as in the case of Sheela, shrunk at the trough of the economic slowdown, a rebound in business has IT managers across India Inc. scrambling to replace and upgrade ageing hardware.

Brisk spending by Mankotia's fraternity in India is causing ripples in Austin, Texas, in the US, home to computer maker Dell, which is struggling to regain its second spot in global sales after Taiwanese rival Acer overtook it in late 2009 to rank behind market leader Hewlett Packard (HP).

In India, it's a pleasant contrast for Dell. In the past three years, the company has gone from being a one-trick pony focussed on just sales to large businesses, also referred to as enterprises, to serving small businesses.

It is also aggressively attacking lucrative long-term government contracts, and, more recently, making deep inroads into the home-user PC market. In making this transition, Dell India's sales have surged to an annualised $1 billion, or Rs 4,500 crore, and it has vaulted to the top place in the fast-expanding "notebook" segment, overtaking HP.

In desktop computers, Dell ranks second behind HP. Much of this resurgence has happened in the consumer market. Dell has, over the past year, opened new retail outlets, launched 17 new models, increased its service centres from two to 14, and, to increase its reach, has expanded into the indirect sales channel through distributors. "This has helped Dell reach over 300 towns, through 5,000 partners, something that it didn't have until early 2008," says Sameer Garde, who runs Dell's India business, which still depends on enterprise customers for the bulk of its offtake.

"The industry is due for a refresh cycle and we see strong growth across large enterprise segments, including manufacturing, telecom and financial services." Not only do PCs make for the biggest segment (up to 45 per cent by revenues and 90 per cent by unit sales) in the computing hardware market— estimated at Rs 55,926 crore in 2009 by researcher International Data Corp., or IDC—their sales are also seen by companies and analysts as a bellwether for the fortunes of the broader tech hardware industry, including servers, storage and networking equipment.

To take on market leader HP, Dell has added new initiatives to its marketing mix, says the firm's Consumer Business Head Mahesh Bhalla. For example, Dell has introduced a Complete Cover option for customers priced at Rs 800, which allows them free repairs or replacement for Dell machines in case of any accidents— think of coffee spilt on a keypad. Dell has the most extensive home servicing network in India, Bhalla claims, as also wide pricing options.

"We have created specific product lines for each demographic—with products costing as little as Rs 19,000 to a few lakh for luxury customers." Elsewhere, Acer India's Marketing Chief S. Rajendran says the jump in PC demand in recent months has been even stronger than in end-2009. "The January-March quarter and March have been the best in Acer India's history," he says.

Data for the January quarter, which saw a big spurt in enterprise buying, are yet to be published. But, if the preceding quarter—when PC sales crossed the two-million-units mark for the first time—is anything to go by, the three months to end-March will likely make for a new record. Sales growth was as high as 90 per cent for netbooks, the lightweight, inexpensive laptop computers designed primarily for Web applications, in the October-December months.

Firms like Acer gained with the introduction of Intel's N450 processor for low-end laptops that opened up new markets among small businesses, homes and small office home office, or SOHO, buyers. Acer wants to regain its global rank in India, too. "We want to be among the top two players in the overall PC market (in India)," says Rajendran.

For good reason. India is a hotspot in the global tech market. After a prolonged slump in 2008 and the first half of 2009, global PC sales scrambled to a growth of 2.3 per cent from the third quarter of 2009 and then gathered steam to grow around 15 per cent year-on-year in December, according to IDC data.

In India, the market recovered earlier and more sharply, with PC sales rising around 25 per cent in the third and fourth quarters of 2009. In step with the revival, HCL Infosystems, the largest Indian vendor of computers, is reviving its 15-year-old Beanstalk PC range, starting at Rs 39,990. "Desktop PCs account for 60 per cent of the Indian market and the segment is growing around 3.4 per cent annually on a large installed base," says George Paul, Executive Vice President, HCL Infosysystems.

"With just 30-35 computers per 1,000 people, PCs will be the route to a deeper computer usage." Another factor driving a strong recovery in PC buying, says Diptarup Chakraborti, Principal Research Analyst at tech research firm Gartner, is new software releases from Microsoft and refresh buying in hardware. Vendors like Dell and Acer are stretched but happy to be caught breathless by the surge in demand.

Boom not Just Confined to PCs
Government, SME businesses spur the demand for servers and other tech hardware.

The current step-up in tech hardware demand is only the start of a big change in the buying of such wares in India, many in the industry believe. Manoj Chugh, President, India and SAARC, for data storage company EMC, says budgets, which were tight for the first half of 2009, are easing.

Sales of servers, which had been in a slump in India since late 2008, grew 30 per cent year-on-year to 27,000 units in the December quarter—making for a record three months in the industry.

Alok Ohrie, Director, Systems and Technology Group, IBM India/South Asia, says: "IBM's overall server revenues in India have grown 58 per cent quarteron-quarter (December quarter over the one ended September 2009)." Rival HP does not release India numbers but the company's Director, Industry Standard Servers, India, Rajesh Dhar, says India contributed strongly to boosting server sales in the BRIC nations (Brazil, Russia, India and China) to 41 per cent more in 2009 over 2008. In India, adds Dhar, "we are seeing strong demand from customers in the telecom, banking, government and public sector markets".

Perhaps the biggest tech hardware buying over the next five years will come from large government projects. Different arms of the Union and state governments will contribute to a near 12 per cent expansion in demand in 2010 to Rs 62,400 crore, predicts IDC. "The government is making significant investments in the National e-Governance Plan, UID project, e-Passport initiative and the National Rural Employment Guarantee Scheme," says Naresh Wadhwa, Country Head for networking gear giant Cisco.

"Mega events such as the 2010 Commonwealth Games are also likely to spur infrastructure development and thereby IT and telecom growth," he adds. Projects such as the UID and the current National Census, reckons Gartner's Principal Research Analyst Diptarup Chakraborti, will spend half of their outlay on hardware (Rs 50,000 crore for the UID). India's public sector firms, reckons Springboard Research, will spend over $5 billion annually by 2011 on technology, up from $3.1 billion in 2008.

A large swathe of businesses— small and medium enterprises— across India as also sectors like banking and manufacturing will add to this market. Small businesses in India, shows data from AMI Partners, a New York research and consultancy firm, will spend nearly $4.5 billion on tech hardware in the next three months alone.

In addition, companies are now increasingly focussing on opting for modular platforms with lean computing assets inhouse and dependence on the Internet-based hardware and software or cloud computing. "As cloud computing goes mainstream we think Indian enterprises will lead the way in re-architecting the conventional data centre to ride this wave," says Chugh of EMC.

Dell aims to get a fifth of its clients globally on to cloud-based solutions. A new server line by IBM promises to halve the number of servers required for a given task and cut storage costs by 97 per cent. The writing on the wall is clear: capitalise on government spending and new business models if you want to ride the new wave of tech demand in India.