WTO duty-free regime to change equations in channel business 



Come January 2005 and the PC business in the country could see a change in many an equation. From this period onwards, duty-free regime as part of the WTO agreement, is expected to come into existence. This means that MNC PC vendors would enjoy the benefits of zero customs duty on their products and hence, be able to price them more competitively. According to market sources, this could pose a serious threat to both, Indian PC brands as well as small scale manufactures
(SSM). 

Currently, both the Indian PC brands (like HCL, Zenith, PCS) as well as SSMs are at par with each other on the price front. However, when compared to MNC brands (like HP, IBM), they stand to be cheaper by 15% to 25%. If the customs duty is done away with, which is around 15% for fully built machines, the price differential can reduce further. 

Currently, MNC PC vendors command nearly 19% marketshare (MAIT figures) with Indian brands having 16% of the pie. The rest 65% belongs to the SSM segment. This sector so far, has been able to have a price-advantage on counts of low overheads, small marketing expenditure and low operating margins. Using bulk purchasing powers for components to reduce their costs, on the other hand, has benefited the Indian OEMs.

However, in case of MNC vendors, their products have traditionally been viewed as one with high price tag and unappealing to budget-conscious users. But, with WTO’s recommendations for free trade, they can now look forward to enjoying many duty-related sops. As a result of which, price differential can be brought down to 10% to 15%. “Once that happens, which I believe is very likely, the SSM segment will come under severe pressure,” opines G Balakrishnan, Director, Ontrack Solutions. 

And vendors sure are looking forward to it. “The WTO regime would definitely increase in the branded PCs marketshare. This business will witness the kind of growth that mobile phones are witnessing today,” states Nitin Chaudhry, Country Manager, HP India Commercial Desktops. 

According to him, the duty-free regime would result in a level-playing field for all players in the industry and would see a shakeout in the SSM segment. This would lead to consolidation of the IT industry as is witnessed in the developed world.

Partners too are closely watching the ramifications of such a scenario. “Post-WTO, only the VARs would be able to survive and pure box-moving assemblers would find it difficult to sustain,” explains Chetan Shah, MD, Xpress Computers. An outcome of this fact would be that once WTO agreements are implemented, there would be an international pressure on the Indian Government to rationalize its domestic tariff structure. 

This could mean lowering of excise duty, roll-out of VAT and amending disparities in the current duty structure. As a result, those operators, who survive by way of duty evasion, would succumb in the long run. Points out B Shankar, VP, Sales and Marketing, Ashtech Infotech, “Only those players who are able to offer value, be it MNC or Indian brands, or even SSM, would survive in the intensifying competition.”

Sources feel that Indian brands would further get squeezed between the SSM and MNC brands. “We are already matching prices of SSM PCs and it is quality and service support that will protect our marketshare,” says Arun Narayan, Product Manager, PCS Industries. He adds that reduction in duty will only increase the market and there would be a bigger playing field for PC vendors.

“The customers would then become more aware of the variety of features and services, which they can get at lower costs, and therefore the dynamics of the market will then shift from cost to value,” suggested
Nitin. 

A point that even MAIT openly endorses. “In our recommendations to the Government, we have always stressed that duty structure should change in a way that PC becomes far more affordable; this way price doesn’t remain the single largest factor for a buyer in decision making,” informs Vinnie Mehta, MAIT Executive Director. 

While it would be foolish on anybody’s part to blindly assume that SSMs would gradually be forced out of business because of changes in duty structure, it would surely be interesting to notice the way business models of different PC manufacturers evolve over the next two years. 

GOLDIE
MUMBAI

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