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PC Components: Is market recovery in sight?

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Sandhya
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The PC components division has seen its fair share of highs and lows in the past few years. In 2012, the market has been pretty tough for the IT industry due to rupee devaluation and Thailand floods and the resulting hard drive shortage. The Thailand floods made the situation worse for the components division and since then the PC component market could see a sluggish movement of the component world for the first 3 quarters.

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The mood in the IT channel and amongst vendors in 2012 was that of uncertainty and doubt and the market was volatile for most parts. Business was down in Q1 and Q2 and even the Diwali festive season didn't pick up as most people in the industry expected. The impact of the crisis of 2012 catapulted the emergence of some evident negative trends in terms of channel investments, reduced holding capacity of partners and also an increase in bad debts. Even the repercussion made partners to be more cautious about open credit and have realized that a wafer thin margin business module will no longer work. The recovery thus by far is slow but is expected to be faster in the latter half of the year.

However, this year the domestic IT industry is expected to grow in the range of 7-12% over 2012, which, considering the current macro-economic conditions, is a healthy growth rate. Moreover, since JAS 2012 the hard drive and RAM prices have stabilized and the DIY market has also found a stable position in the market. This growth was the change needed for the market. The estimated size of the DIY market is about 2.5 mn PCs per year. Overall market expects 2012 and 2013 to have similar results and not expect any change in the same.

The PC components industry is linked to the Indian PC market. According to IDC's Q3 report, the Indian PC market continued to be resilient last year despite challenges such as economic slowdown and high inflation.

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Showing her concern over the components market, Sushmita Das, VP, business, Kobian says, "The component industry has become stagnant, thus recording neither growth nor slump. The slow decrease in demand of desktops has affected the component industry in a major manner. Notebook business witnessed a fast growth with nearing 100% y-o-y growth rate. This did affect the assembled PC market and thus the component industry. But still the market is huge enough to have promoted growth in both desktop and notebook category. But in last 2 years, with the emergence of smartphones and now with tablets, there is a quick change in consumer trends and people prefer the mobile computing option. With tablets gaining the market in last 1 year, the component industry has felt the heat at the highest."

According to recently issued MAIT and IMRB IT industry performance annul review report 2011-12, the assembled market has clocked in a fabulous growth of 56% in FY'12.This surge in PC penetration has been from the household segment, with SEC-C towns registering the highest growth of 45%. In fact, most of the tier-2, tier-3 towns have robust demand where Indian consumers recycle old PCs, upgrade them in order to make effective use. These are additional factors that have contributed to the market momentum and indicate a business advantage for components. Also homes, schools, colleges, SMBs are still using assembled PCs as it offers the flexibility in customizing the configuration, avail dedicated support from the neighborhood partner and affordable price and the possibility of upgrade options in future.

The PC industry is projected to grow at 15% to reach 12.4 mn units in 2012-13. Most component vendors are optimistic that the market will provide a long-term opportunity as the Indian market has shown a consistent preference for assembled desktop. As multi-national PC vendors entered India one by one, there was wide spread speculation that the assembled market would lose out but over the years, this market segment has continued to hold its sway as the market expands to embrace more first-time PC buyers.

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POST THAILAND FLOODS SCENARIO

The major transformation was consolidation of vendors and distributors as the strong steady and longtime players have stabilized and are growing in the industry. Sudhir S, MD, Inspan Infotech highlights, "Thailand floods effect was there only for a quarter or two, after which it has

come back to the usual status. Thus it is fully recovered."

Shiv Bhambri, CEO, RS Components comments, "This has slowly but surely recovered. The component industry supply chain was impacted badly by the incident as Thailand used to be the ground for most components and the replacement market sourcing. The floods led to a total breakdown of the supply chain mechanism. Although the recovery has been slow but is expected to bounce back by end of year."

Echoing same sentiments Deepak Gupta, country manager for India, Bangladesh, Pakistan, Sri Lanka and Nepal, Zotac adds, "The market has bounced back post the floods but at an alarmingly slow pace. Due to the price rise and the unavailability of the products the market was de-growing for certain time last year - but now again it is picking up."

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It has been noticed that the market has become more specific to quality and many IT distributors are already promoting mid and high end products which can provide the consumer with more in terms of monetary benefits and service.

Elucidating on the market scenario for component market, Rajesh Goenka, VP, Rashi Peripherals says, "Currently, we have a 30-40% of market share in the PC components distribution segment with a scope of growth in the future. The high end products available in the market provide new solutions in the market like high-performance PCs can be made using AMD solutions and ASUS high end motherboards and Gaming PCs with high end NVIDIA GPU are also quite popular."

Rashi is also concentrating on its old and consistent partners with whom the distributor has grown together in the last 10 years. This loyalty factor helped in tough times and helped emerge as one of

the leaders in the market. Overall, Rashi expects a flat component year ahead and partners will have to find ways to value add to improve their bottom lines.

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After the rupee depreciation and hard drive crisis, it has been noticed that mid and high-end segment were not much affected and buyers in these segments are more value conscious and are willing to pay for quality products. There is a drop in the entry segment demand but the demand from the mid and high end PC users have shown positive growth.

According to Vinay Shetty, country head, component business, ASUS (India) says, "Gaming motherboards are now a rage with more and more vendors starting their own line of gaming motherboards in recent years we have seen a strong brand recall amongst enthusiasts due to our

Republic of Gamers series launched years ago. Mini-ITX form factor is also now seeing a viable market because of various thin client applications like PoS."

Additionally, the industry has been seeing a strong growth in graphics cards business and also the attach ratio of graphics cards with motherboards is increasing at a rapid pace. It is also expected that

graphic cards attach ratio will double in the next 2 years and the mid-range segment eating into the entry level pie. If the chip-set makers can offer their new offerings at similar competitive prices

this trend is expected to continue.

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Gupta of Zotac mentions, "In terms of graphics cards, the market is definitely turning into a niche segment. Since everybody is shifting from traditional desktops to notebooks and tablets only a certain segment, such as PC gamers, graphic designers, engineers, etc, prefer to have desktops. In the last 2 -3 years there has been a flood of new technologies and gadgets. Hence most of the VGA manufacturers have started diversifying in other segments such a memory or multimedia."

Akhil Singh, director of AVS Infomatics, Delhi based largest partner for Seagate and Western Digital hard drives says, "Post Thailand floods, we have noticed a price stability ann hard drive is back to normal. Moreover, the price gap between lower capacities and higher capacities hard drives have come down drastically, which as a result is driving more sales of the higher capacities. With the HDD makers consolidating recently from 6 to 3 makers it would be natural to expect to see less price volatility than the market has suffered in the past."

ASSEMBLED PCs TO FLOURISH

Despite predictions by several analysts of its impending death, the assembled PC market segment continues to push component market. One reason for this is the large demand for assembled PCs which is still coming from smaller cities. The other reason is that many distributors are heavily reliant on the component business for driving their margins, and hence they want to ensure that the market for assembled PCs and component stays robust.

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Analysts believe the white-box PC market would disappear because of the decline in the growth of desktops vis-a-vis notebooks. But distributors such as Rashi Peripherals, Inspan and Cyberstar are much dependent on their component business.

In addition, there are several niche distributors such as Aditya Infotech, Creation Computer tech and AVS, Ralco Synergy, Digital Waves and Tirupati Computers which are attempting to grow specific product segments.

In the case of Rashi, almost 75% of its business is accounted by building blocks, components and accessories, with the rest contributed by branded desktops, servers, notebooks and software.

"Around 90% of our bottomline comes from the component and accessories business. If I wanted to double my turnover, I could easily do that by signing on more PC vendors and taking on all their product lines. However, it would seriously affect our bottomline," reveals Goenka.

Singh of AVS informatics also adds, "In the past 1 year, the branded desktop market is shrinking many branded players like Samsung, HP and Acer have either out of the desktop business or went slow on the traditional desktop, this shift has given major push to the assembled PC market. Nevertheless, in the A-class cities, end customers are buying smartphones, tablets and laptops, but we see the growth of assembled PCs continue to flourish in smaller cities, corporates and semi government."

INNOVATION IN PC COMPONENT

The impact of global recession on the computer hardware companies is left behind and they are back on the progress track. It seems that the forecasts that were made before recession are going to turn true. Different segments of the computer hardware industry are growing with improvement in their design and functionality and rise in their demand. Not only the big computer hardware manufacturers, but the small and medium sized enterprises too are making big contributions towards the industry growth at a global level.

In the new emerging designs that will come about like the much talked about NUC, motherboard vendors will again have an opportunity to offer new products and technologies. The market will now be open for other vendors to fully capitalize on this increased opportunity to further grow the market with different solutions.

Shetty of ASUS adds, "We are focusing mostly on the value proposition to the customers; that they need to sell products on feature and not price. They need to diversify into the various products ASUS offers and make the most of the varied SKUs and product lines from ASUS.

NEW OPPORTUNITIES

On the desktop side, consumers are now ready to pay a premium for gaming PCs. The IT spending in India is projected to a total of $71.5 bn in 2013, a 7.7% increase from the $66.4 bn that

was forecasted for 2012. According to Gartner, the computing hardware market in India is projected to reach approximately $8 bn in 2013 and is growing at a rate of approximately 8%.

The growth drivers are from the emerging B, C & D-class cities and towns where the growth is about 20%. The new segments where there will be growth and business are surely gaming and high-end PCs for specialized usage like designers, animation, studios, VFX. Assemblers who can tap high end buyers by offering good high end hardware will be able to grow their profitability.

Shetty points out, "The growth of IT in the commercial segment is likely to range between 10-12% and will be driven largely by virtualization, business applications, BI, storage solutions and cloud computing. The good news is that the SMB segment will grow faster than the rest of the industry, maybe by 15-20%."

Gupta adds, "Current situation is desktop market is shrinking hence, we plan to grow with variety of different product in graphics card segment and also introduce some kind of mobile and display related products because in coming future, such product will be very vital in between of handheld and large display hence we have launched a new product called "StreamBox" which is a bridge between handheld and large display. Apart from that we are also continuously expanding our

mini PCs line up."

Kevan Li, sales and operations head, Antec, India says, "With continuous growing standards in the specification of most components of a desktop PC mainly including CPU, Graphics Cards, Dram, motherboard, it would generally require a real and higher wattage power to support the system reliability and stability. Consequently, all consumers who have been using a fake or peak power supply would substantially face problems with their PC. So they would need to turn to a quality power supply that delivers true and continuous power to ensure a reliable and stable system. So we do see this trend transition in India."

FUTURE PROJECTIONS

There has been a drift in consumers' choice towards the branded quality components. The market for quality components is slowly consolidating, as consumers have understood the value proposition for a good quality product. The component market follows a very cyclical growth pattern. This is

due to over-booking when equipment markets are in a dynamic phase, followed by massive cancellations when equipment demand starts falling.

Variations in component demand are thus strongly amplified, and this can be very awkward for the component suppliers. In addition to the grand concept of rapid component convergence (more boxes built and more parts per box) there are signs of positive growth in the component supply chain for FY 2013. In the end the positive continues to outweigh the negative expectations when it comes to component market outlook for FY 2013.

Talking from a graphic cards perspective Gaming sector will be very important by 2014, Indian gaming services will move up the value chain with shoring work in terms of development services coming to India. Hence the demand should rise by 40-50%.

The storage components have seen a gradual change due to device proliferation. Notably in 2011, following the Thailand floods, HDD shipments were severely impacted. Simultaneously, flash memory based storage devices used to create and delivery content more rapidly in enterprise applications and in thin client mobile storage devices gained popularity in the last two years.

Therefore, this year the opportunities would increase in devices which combine flash memory and HDDs. Thus flash memory in ultra thin notebook computers will be most popular either incorporated into a hybrid HDD or as a dual storage device configuration where the OS and applications are stored on a small SSD and user data is stored on a HDD.

Sandhya Malhotra

(sandhyam@cybermedia.co.in)

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