NETWORKING PRODUCTS: Optimism Abounds

After a negligible growth during 2001-02, the networking
products market has begun to experience a double-digit growth once again.
Vendors and channel alike have seen the first quarter of the current fiscal
showing positive signs with the second quarter notching up on an average 10
percent growth.

Compuage Infocom, one of the distributors of networking products
saw a growth of 50 percent in networking revenues cumulatively in the AMJ and
JAS quarters this year, as compared to the same period last year. "Our
revenue this year from networking products for AMJ was Rs 75 lakh and for JAS Rs
1.2 crore making it close to Rs 2 crore in the first six months of this fiscal.
Last year this figure was Rs 1.25 crore," informs Atul Mehta, MD.

Tyco
which had registered only 12 percent growth last fiscal, is looking for much
higher growth this year. The vendor had business worth Rs 34 crore and 38 crore
coming in during the AMJ and JAS quarters respectively.

D-Link’s Marketing Manager, Anand Mehta informs that though
overall the industry had a flat growth last fiscal, all signs are pointing
towards a double-digit growth for the current fiscal.

Adcom, which started its networking business in OND last year,
saw this segment garnering Rs 40 lakh each in the AMJ and JAS quarters.

Dax’s revenue for 2001-2002 was Rs 50.80 crore. States Sujit
Singh, Country Manager, Dax, "Though our volume sales went up by seven
percent last year, our topline took a dip and profitability was battered."
In terms of quantity, Dax registered 27 percent growth in AMJ and JAS over the
first six months period last year, while in terms of value it registered 13
percent growth for this time frame.

THE YEAR GONE BY

According to Voice&Data, the networking equipment industry registered a
growth of mere four percent in 2001-02. V&D estimates that the total
business conducted during the previous year was Rs 2,852 crore. Players like
Cisco, Enterasys, D-Link, Nortel, Avaya and CommWorks all consolidated their
business. The top 10 vendors alone contributed Rs 2,215 crore to the overall
revenue.

S Narayanan, MD, MRO-Tek  “Regulations set by the Government on excise duties should be relaxed creating a conducive ambiance for companies to grow”

Anand of D-Link feels that these figures are slightly on the
higher side and pegs the market to be around Rs 1,500 crore. Sujit of Dax, on
the other hand, agrees that the market for networking and data-communication
touched Rs 2,000 crore last year. He is optimistic that it will grow by 25-30
percent this fiscal. Atul of Comupage states that more than half this market is
dominated by active and passive product segments. Says he, "Active
networking products such as NICs, switches, hubs and routers and passive
products like copper cables, fiber optic cables and connectors constitute Rs
1,500 crore." The rest of the market is for products like dial-up and
leased line modems, VSATs and wireless LAN equipment.

LEADING THE PACK

According to V&D, last fiscal, Cisco was the leading networking vendor
with a turnover of Rs 930 crore followed by Enterasys with Rs 315 crore
turnover. Nearly 75 percent of Cisco’s revenue came from switches and routers
while Enterasys rode high with its switches. D-Link was the leader in hubs, NICs
and dial-up modems and with revenues of Rs 25 crore, Rs 28 crore and Rs 65 crore
respectively pouring in from these product segments. Its total revenue in the
last fiscal stood at Rs 241 crore.

Atul Mehta, CMD, Compuage Infocom  “In passive networking products, AMP, Avaya and D-Link were most-sold brands, while for routers, Cisco and Nortel were key players”

According to market sources, routers form a bulk of the
networking market at 40 percent, of which 80 percent marketshare is commanded by
Cisco. Says Chander Purswani, Country Manager, Allied Telesyn India, "On
the managed and unmanaged switches, 3com, Cisco and Dlink lead the market.
D-link is strong on the low-end market of networking."

When it comes to brands that sold well in the market, Cisco and
D-Link win hands down. "In the passive networking products, AMP, Avaya and
D-Link were most-sold brands, while for routers, Cisco, Nortel were key
players," informs Atul. Cisco again scored in switches for Compuage while
D-Link, Dax and Accton brought in moolah in the low-end segment.

A major bulk of Neoteric Infomatique’s sales in the low-end
segment came from D-Link and Dax, while Cisco and D-Link reigned in the high-end
segment, contributing 65 and 15 percent business respectively.

Delhi-based Tulip Software found 30 percent of its revenue
coming from Cisco, while Samtech Infonet’s business was boosted by sales from
Cisco, Nortel, and D-Link. "Avaya and Krone did not do as well
comparatively," says Alok Gupta, MD, Samtech Infonet.

EXPECTATIONS IN 2002-03

Optimism abounds among vendors and partners alike for 2002-03. Says Sujit,
"The networking market is likely to touch Rs 2,500 crore this year."
Adds S Narayanan, MD, MRO-Tek, "We are expecting a growth of about 15
percent this financial year." Compuage hopes to get Rs 6 crore this fiscal
solely from the distribution of networking products. "We are also looking
forward to add new product lines in this segment, which should bring in the
additional revenues this fiscal," informs Atul.

Milind Kamat, Country Manager, Accton India  “Currently the channel is not much equipped to address the enterprise segment, especially in wireless technologies”

Expectations from the OND quarter are mixed. Vendors like Tyco
expect a 18 percent growth in OND over the earlier quarter. Venkat Raman, Sr
Manager-Channels, Nortel Networks, on the other hand, believes that routers and
switches sales will register a flat growth during these three months, but LAN
sales will grow by five to 10 percent.

Partners too are eyeing this quarter with interest, though not
all are optimistic about good sales. Says Atul, "OND quarter is usually a
slow quarter for us in this segment but we are very bullish about JFM quarter.
We are looking at Rs 60 lakh in revenues in OND." Samtech did not meet its
targets for the JAS quarter and hopes to catch up in OND. Lt Col HS Bedi, MD,
Tulip Software has "seen a number of potential cases pile up since JAS and
hopes that business will become brisk in the days ahead."

MANAGING MARGINS

Margins in networking products vary depending on brands and customer
segments. Overall margins are thin and volumes contribute to revenues,
especially in the case of entry-level products. Rajesh Namdar of Sejutronics,
D-Link’s western region distributor, says that the minimum margin for a
distributor is three percent and if sales are made to SIs, it could go up to
seven to 10 percent. Explaining how D-Link manages to give high margins to its
distributors, Anand says, "Our core competency is in large volumes. As we
have the ability to manufacture on a large scale, our cost of operations comes
down significantly. The result is that we can sell these products with higher
margins." He points out that even with these higher margins, D-Link’s
prices are still comparatively lower than its competitors.

Talking about margins enjoyed by partners, HS Bedi says,
"On Cisco products we enjoy 10 percent margin, while in the wireless domain
this ranges between 15 to 20 percent." Tulip largely sells to banks, large
corporates and ISPs, and is trying to foray into the government segment too.

Selling to the educational and government segment has ensured
that Samtech’s margins range between 12 to 15 percent.

PM Prabhu, MD, PAM Networks finds that the margins from product
sales are a dismal two to three percent, which is why the company is trying to
earn more from services.

UPGRADE TO SUCCEED

There are several issues in the networking segments, which vary for vendors
and partners. Vendors are more concerned about upgrading partners to sell total
solutions, while partners want more support for sales and after-sales.

Dax Networks is trying to educate users as well as partners
about the tremendous opportunities that various new technologies can offer them.
"There is a wide gap in reaching out to the market place as awareness
levels on such offerings are still weak among users," says Sujit.

Narayanan, on the other hand, feels that regulations set by the
Government on excise duties should be relaxed creating a conducive ambiance for
companies to grow. Jimmy Goh, VP-Sales, APac, SMC Networks agrees, adding that
once Government rules are relaxed, it will be easier to get into wireless
products for long-range networking.

Milind Kamat, Country Manager, Accton India says, "With the
networking market converging, the channel has to be more specialized and
qualified. Currently the channel is not much equipped to address the complete
requirements of the enterprise segment, especially in the area of wireless
technologies." Shetty agrees with him and says, "There is a shortage
of qualified installers for telecom networking products." Manish Garg,
Manager, Networking Products, Adcom too finds it difficult to get the right
partners to sell the right product. "Because of the very nature of the
products, all resellers don´t have the skill to sell them." This is why
Adcom has adopted a strategy where it sells entry-level products through
resellers and high-end products through the SI channel.

CHANNEL ISSUES

Foremost amongst the problems that the channel faces in the networking
business is the presence of cheap Taiwanese brands with suspect quality. Says
Viren Gujrathi, Business Manager, Neoteric Infomatique, "More and more
customers are attracted towards these cheaper brands." Even Chander
acknowledges this problem, but states that eventually sensible buyers will go
for brands that might be a tad expensive, but offer better value for money.

Anand Mehta, Marketing Manager, D-Link India  “Though overall the industry had a flat growth last fiscal, all signs are pointing towards a double-digit growth this year”

Service as a business might make a great revenue stream in
theory, but in reality, customers are not willing to pay a premium for service.
Says Alok, "Customers today want more out of less and quality of service is
an issue. Moreover, the business is becoming a commodity business so margins are
getting squeezed." Prabhu reiterates, "Customers want cheap products
and free service. We have trouble convincing them to pay for service. If we
design a service scheme, they may not pay for it. They want this to be included
in product cost."

Also, purchase decision cycles have become longer in recent
times. But HS Bedi feels that this is getting reduced again with the upturn
happening.

Delay in getting payments is also affecting the bottomline of
partners. "A typical case of ‘project delay’ due to the default by any
other vendor affects us equally and customer payments do not come on time. So we
end up sharing the burden despite being prompt in supplying the products that we
deal with," laments Atul.

GIVING SALES THE PUSH

In a bid to make the channel go full throttle at selling networking
products, vendors are leaving no stone unturned. Tyco is concentrating on
training partners on technologies, devising back-end schemes for distributors
and getting closer to partners by penetrating B and C-class cities.

Accton too is focusing its efforts on conducting seminars and
conferences for channels and end-users. It has also devised the Star Channel
Program "to develop the channel and motivate them for handling the new
generation networking products and services efficiently" informs Milind.

D-Link has launched a point-based scheme for SIs, giving away
consumer durables as prizes, which has generated a lot of interest. In addition
to this, it holds three training sessions annually for different sets of channel
partners, like SIs and NIs. "This is besides, the roadshows held in 12
cities in less than two months," adds Anand.

Besides regular training programs and roadshows, MRO-Tek is
planning to introduce joint marketing initiatives for channels. "We are
offering demo and sales kits for partners to help them with their marketing
activities," informs Narayanan.

Allied Telesyn organized SI meets in Mumbai, Delhi, Kolkatta,
this October. Chander says, "We also have an incentive program for partners
with cash gifts and foreign trips thrown in addition to distribution of small
gifts like pens, scribbling pads, T-shirts and so on."

Keeping the festive season in mind, Dax is offering an assorted
cracker box worth Rs 1,000 to resellers and SIs for purchases worth Rs 20,000 of
any Dax switch.

SERVICE NETWORK

Service plays an important role in this business and vendors have realized
this very well. Most companies offer over-the-counter replacement for products
through their network of service centers. Allied Telesyn, for instance, has an
authorized service center in Mumbai where it give across-the-table replacement.

Adcom too offers spot replacements at 16 locations in the
country to ensure minimal downtime for the customer. "The broken­down
product is then shipped either to our centers or our test and research center in
Delhi for repair," says Manish.

Dax has come up with the instant replacement anywhere (IRA)
offering for service and warranty support. "This is realized at our 24
partner locations in addition to 11 AFL locations, which is our logistics
partner for availability of products and services," says Sujit.

Accton too has 17 centers for service/replacements all over the
country, while Nortel has 12 centers. D-Link has service centers at Goa, Mumbai,
Delhi and Bangalore. "The turnaround time for getting replacements from
D-Link’s depots is around four days. But from our end, we offer on-the-spot
replacement to our customers," informs Rajesh of Sejutronics.

ENTRIES AND EXITS

Tie-ups, acquisitions and exits were the highlight of the year gone by. The
exit of 3Com from the high-end networking market augured well for Entrasys,
catapulting it to the number one slot in the switching market. Cisco acquired a
technology-driven California-based company called Exio Communications Inc, which
specializes in providing wireless solutions for corporate networks based on the
CDMA standard.

Ditto for MRO-Tek´s JV with Israeli-based RAD, whereby RAD has
set up its first R&D facility outside Israel. MRO-Tek and RAD Communications
will jointly research and develop the 16E1 Optimux for global markets in this
center.HP tied up with Accton to market, demonstrate and sell the former’s
Procurve switches and hubs.

Novatel Wireless, a wireless data access solution provider,
signed up Convergent Communications India to distribute its dual-band Merlin
G201 GSM/GPRS wireless PC Card modem.

NO WIRES ATTACHED

A lot has been spoken on the utility of wireless networking products. And
while some brands have even launched a few wireless products in the country,
overall the opinion is that the market is still not ready for it. Part of this
can be blamed on government regulations. According to Narayanan, "The
government’s policies to issue licenses for wireless networks is a big
bottleneck in this business, even though there is a high level of acceptance
amongst users." Seconds Chander, "The wireless market has not picked
because one requires special license to import, which is available with very few
SIs."

Lt Col HS Bedi, MD, Tulip Software  “On Cisco products we enjoy 10 percent margin, while in the wireless domain this ranges between 15 to 20 percent”

Rajesh highlights another reason why this market is not taking
off the way it should. "Vendors say that unless sales take place, prices
will not come down. And the market reality is that unless prices do not come
down, sales will not take place." Essentially it has resulted in a catch-22
situation.

Anand is, however, confident that the year 2003 will be the year
of wireless. "10 percent of D-Link’s worldwide sales comes from wireless
products, while in India it is just one percent at the moment. But, by next
year, our Indian sales will also be in double digits," he says confidently.

But the channel is enthused about the potential in wireless
products. Compuage sees it as a growing market, while Adcom has already gone
ahead and launched products with a speed of 22 mbps in this domain. In fact
Manish is confident that 60 percent of Adcom’s networking revenue will come
from wireless products in the next six months.

Tulip too expects 50 percent of its revenue to come from
wireless by the end of next fiscal.

Nortel Networks has also entered into an alliance with Simble to
offers wireless networking products in India and Venkat is confident that the
demand for these products is likely to increase with mobile access becoming
ubiquitous.

VINITA BHATIA in Mumbai with inputs from MOHIT CHABBRA in Delhi
and SUNILA PAUL in Bangalore