Sub-10K PCs Utopia or Mirage?

How viable are the sub-10K PCs from a margins point of view? As per industry
estimates, vendors will gain a maximum margin of 2% or less for these machines.
Clearly it's a low value high volumes game here. In order to arrive at decent
margins, vendors' need to sell, on an average, an estimated 1,500 to 2,000
units per month.

It was 'breaking news' when HCL unveiled its PC for Rs 9,990 at a gala
launch in Chennai recently. Ajai Chowdhry, Chairman and CEO, HCL Infosystems,
spoke passionately about his company breaking the price barrier with this
launch, offering a fully functional desktop. Other companies to join the sub-10K
PC bandwagon were Kolkata's Xenitis Group-with its Rs 9,750, Intel-based
desktops-and companies like Kobian and Sahara.

While the sub-10K PC market is heating up, it's obvious that the magic
figure of Rs 9,990 is an illusion. As you do your calculations it becomes
evident that tax included, the end user price works out to be around Rs 11,500.
So, if the vendor is including taxes in his pricing, the PCs are truly sub-10K,
which he's clearly not doing.

Reality check

The key question is how viable are these PCs from a margins point of view?
As per industry estimates the vendors will gain a maximum margin of 2% or less
for the sub-10K PCs. Clearly it's a low value high volumes game here. In order
to arrive at decent margins, vendors' need to sell, on an average, an
estimated 1,500 to 2,000 units per month.

Meanwhile,
while none of the companies divulge much information on the expected volumes for
these PCs, they say that the response, so far, has been good. One of the leading
players in the sub-10K PC game is the Kolkata-based Xenitis Group. This is what
the company's chairman, Santanu Ghosh has to say, "Our expectations for
this sector are conservative, we see it more as a developmental platform. At
present, sub-10K PCs contribute only around 10% to our total product
sales."

From the customer's perspective

The consumer is unlikely to pick a machine only because it's cheap. So
vendors need to do a lot of convincing to make the user accept that these
machines are worth buying. There is clearly the question of 'value' and 'expectation'

Right now, the sub-10K PC business is clearly a gamble. The only USP here is
the price, and one is not getting into the performance debate. For the price,
the configuration most vendors offer is rather neat-128 MB RAM, 40GB HDD, 52 X
CD ROM Drive, 15 inch monitor, mouse, and Linux OS. On the processor side,
Kobian and HCL offer a VIA 1GHz processor, and Xenitis comes with the Celeron
and Cirix models. Sahara offers an AMD processor.

With this configuration, a user would be able to run basic applications like
word processing, email, and Internet. But the absence of a modem de-sells the
entire configuration-a PC just for word processing does not make sense to a
user.

While Linux-based applications are available on these sub-10K machines, Linux
adoption in the desktop space being still in its infancy negates that advantage.
User awareness on applications available on Linux is also very low. Assuming
that a user migrates to a Windows platform, how much of the implementations
would really be legal?

Some sections of the industry are vehemently arguing that these low-end
machines will drive piracy, though vendors, obviously, refute it stoutly. Says
Ghosh, "First of all I doubt whether this perception actually exists. There
are lots of situations and loopholes that instigate piracy, which have to be
dealt with in a totally different way. The introduction of the sub-10K PC is a
social need in the country; I don't think it has any connection to the ever
increasing piracy."

HCL's Ajai Chowdhry is bullish about the road ahead for the sub-10Ks. At
the time of launch, he said, "Our idea of launching a fully functional PC
at this price is to drive home the point that low cost does not mean low in
quality. All our PCs follow very stringent quality tests before they reach the
consumer. We are adopting a multi-pronged strategy for increasing the reach of
our sub-10K offerings-by informing people how a PC can aid in shaping an
individual's aspirations." That would be the key challenge, as vendors
would be addressing the buying segment at the bottom of the pyramid.

Who's the buyer?

According to Santanu, the target audience is not the existing high-end PC
user. Companies are trying a combination of marketing approaches for pushing
more of these low-end offerings. He says his sales team works directly with
customers and helps in decision-making.

If one looks at the enterprise side of things, these PCs might have a
spillover effect. Take a typical Indian SMB. Not all employees are given a PC,
like, for instance, junior office assistants, who use a common PC for their
work. Now with the sub-10K PCs, these lower rung employees can be given their
very own PC.

On a large enterprise front, government and education verticals will be the
main focus for vendors. They can better manage their IT budgets by accommodating
more number of PCs, thereby enhancing the installed base in their own
organizations.

In a large corporate environment, current specifications prohibit any
large-scale deployments. But, as cost cutting and optimizing on IT spend is at
the top of the CIO's agenda, he might be tempted to look at these machines
more closely.

Large enterprises, today, involve themselves with various social causes. They
could be the buyers for these PCs. Right now they are more polarized at the
home, education, and government verticals.

As this quarter moves on, one will see the actual market response to these
PCs on a wider scale. If the existing sub-10K PC vendors are able to gain
traction, more players will jump in and, ultimately, the configuration will also
become more value-based. (Right now the absence of a modem and use of low-end
1GHz processors puts the mass adoption of sub-10K PCs in question.)

 The target consumer-the middle class-is unlikely to pick a machine
only because it's cheap. If the friendly neighborhood assembler sells him a P4
with all connectivity options at 16K, he would gladly shell out the few extra
thousands for a PC that's industry standard. So vendors need to do a lot of
convincing to make the user accept that these machines are worth buying.

There is clearly the question of 'value' and 'expectation'. So a user
demanding value is the most unlikely target. On the other hand, a user whose
expectations are not too high-one who just needs a basic PC to start on is the
key consumer. He can be lured into buying a PC only when the mindset-that the
PC is a commodity-takes root. HCL's Ajai firmly believes that by increasing
the purchasing power of the lower income group segment, one can increase
penetration. He says that his company's 'PCs on EMI' was a great success.

Like Xenitis' Santanu says, "The question is not who can afford, the
aim rather is to invite people who never thought they'll ever own a PC. With
even junior school education demanding an exposure to computers, and more and
more government and NGO initiatives coming up, low cost PCs are a market
need."

Summing up, seeing how things have gone in the last two months, the sub-10K
PC is a significant milestone for the Indian PC industry, despite its
shortcomings. If one analyses questions like: Will it increase PC penetration?
Does it offer value for money?

There are still no valid answers. No concrete pointers indicating any major
trend in the low cost desktop industry in India. Vendors are just scratching the
surface, but they might just be on the verge of creating a whole new market that
will alter equations for the Indian PC industry!

SHRIKANTH G