The Indian IT channel has always lived by its own unique rules, and while these did not raise any hackles during the heady boom days, most of them either had to be written off or reinvented to help channel players survive the downturn. Chris Ann Fichardo has an update on the current survival strategies of India’s IT channel

Saurin Shah says that for mid-size integrators like him it’s going to be tough for the next one year at least

It has been a struggle for survival in Indian IT channels for the last couple of years. Margins, the bread-and-butter of channel players, dropped from double digits in the late 90s, to a pathetic 2-3 percent currently.

In a bid to survive the downturn, vendors explored new distribution models, thus hitting the earning capacity of the channel even further. Regional distribution gained strength, and sub-distributors saw their market share dropping. Under-cutting, selling at cost and giving more for less in terms of services are the new rules that the channel plays by today. As the monetary noose gets tighter, the game of survival gets murkier. Resellers, value-added distributors and solution providers are all asking themselves today, “Is survival worth it? And where do we go from here?”

Take Rajiv Sethi, who set up Liberty Automation in 1987. Today, Sethi is wondering if he’s is in the right business. “No other industry works on margins as low as that of the IT distribution industry. In the last two years there has been an exponential decay in margins, and no one, especially the vendors, is bothered to do anything about it,” laments Sethi.

Kamlesh Patil of white-box server company Ockam bluntly states that the channel does not have long-term players in its ranks. He says that he prefers dealing directly with customers as dealers cannot be relied on. Ockam, which once had a 21-member strong channel, now just has seven to eight resellers under its belt.

Sandeep Karnavat, general manager for marketing at distribution company Datapro says, “A lot of channel players are out of the game and most of the survivors are forced to add value. Most of them are not even earning enough to run their business. And though they know what they have to do in order to survive, they are unable to do that either because they lack the funds or the skill-sets required to help them overcome their present situations.”

The status quo
The boom in the IT industry spearheaded growth in the channel. IT was fast gaining acceptance among corporate, SME and the home user segments. The Internet and the dot-com boom also opened new vistas for growth. And the channel rode this growth wave—margins were lucrative, sales were plentiful and customers were buying.

Drawn by the huge margins and the relative ease in establishing a clientele base, a large number of players got into this industry. The late 90s and early 2000 saw the largest growth ever in the channel. Vendors too were eager to create a market for their products and were willing to forego proper business practices and procedures in their haste to reach the end-customer.

The end result? A channel that was driven by profit and which did not have too much expertise either in the business or in technology.

According to Sandeep Karnavat, most channel players are not even earning enough to run their business

Then came the slowdown. Margins, which once stood at 8-10 percent, fell to 6-7 percent and now stand at 2-3 percent. The corporate segment, which was the largest purchaser of IT, became a cautious buyer, and the home segment postponed buying for a better economic climate. Business dynamics changed overnight. Resellers found themselves with high inventories and no buyers.

Distributors too were faced with a dilemma—large stocks with no takers. Like Datapro, most other distributors too increased the number of products in their portfolio, in a bid to widen the distribution net and address a larger client base.

Channel players too had to find new avenues for growth and most of them latched on to the value-added bandwagon. Says Datapro’s Karnavat, “During the boom days we tried to convince our resellers to look at the value-added option but they were not too keen because money was rolling in anyway, but during the slowdown the initiative to add value came from resellers themselves!”

Sampat Iyengar, managing director of the retail outlet Sam7 puts it even better: “Two years ago everybody was seeing great margins. I used to have something like Rs 15-20 lakh in the bank, today my goal is to at least be able to earn Rs 1 lakh a month.”

Though the value-added strategy helped channels break even, it did not prove very sustainable. Vendors started looking at the direct route to capture mindshare. This hit the resellers’ business margins even further. In fact resellers say that it’s only the law that has stopped vendors from increasing direct selling revenues. As of now, a direct sale attracts a 10 percent resale tax, while a sale routed through a channel member is taxed at 4 percent.

But once these laws are changed, it could well mean the doom of the reseller, say channel partners. Though money continues to flow in the channel, the pace is extremely slow and unsteady. Cheaper products from Taiwan and China are also finding their way into the market through the parallel import route. Vendors are reassessing the capabilities of their partners and in a large number of cases the partners are found wanting. Partners too have realised that resorting to tactics like under-cutting are only short-term survival measures. And as in any war-like situation, the weak have fallen by the wayside, the tough have survived. Mainly because they had the good sense to save for a rainy day or add value at an early stage. But even established players don’t know how much longer they will be able to hold out.

The churn out
Innovation has become the name of the game. Those in the box-selling business look for growth opportunities in bundling or in value addition. While those higher up the value chain, like system integrators and network partners, have sought to increase the contribution coming from services towards their revenue pie. There are also those who have not survived the downturn. Insiders say that the channel is working at one-third of its earlier strength. And though the tough have survived, the struggle is far from over.

Saurin Shah, managing director of system integration company Ashtech says, “The market is still not expanding and if at all there is any growth, it is in the SOHO segment and not in the corporate segment. In most cases, the corporate segment is handled directly by the vendor or through large system integrators. For mid-size integrators like us it’s going to be tough for the next one year at least.”

Though product sales still contribute a larger share to overall revenues, channel partners know that there is not much scope for growth in just selling a product. As a result most of them are now focusing on enhancing the services offered to their customer, in a bid to establish a sustainable business model.

But this service-oriented strategy has developed a flip side. Competitive pricing, which was prevalent on the product- and box selling-front, has now moved on to the services-side of the business as well.

Explains Sethi of Liberty Automation, “Though we have consciously worked towards increasing our revenues from services—from 10 percent in 1997 to 30 percent last year—it has not been an easy task. Today, the customer is asking for a lot more and is willing to pay a lot less. Yet, in order to survive we have to establish a 50:50 ratio between products and services by 2005.”

Sampat Iyengar says his goal is to be able to earn at least Rs 1 lakh a month

The road ahead
The one question that nearly every channel player is today asking himself is: Is survival worth it? For over a year IT channel players have worked tooth-and-nail to make money, and the earnings have been meagre. Most players that Express Computer spoke to do not have a clear answer for this question yet—indicating that exiting the business is an option being seriously considered.

Yet the will to survive is perhaps what keeps most of them going. And depending on the line of business they are in, they plan out growth opportunities. For instance, Sam7’s Iyengar has switched to selling assembled PCs, when HP withdrew the exclusive retailer status from his business. Unable to afford high rentals in prime locations once sales starting dropping, Iyengar moved to a self-owned shop in the interiors of Andheri, Mumbai. HP was not too happy with this move as it felt that its brand was not getting the relevant exposure, and knocked off Iyengar from its list of PC resellers. He now sells assembled machines and proudly states that one of his biggest clients is ICICI.

While most resellers are willing to do their best to survive, they know that it’s going to be an uphill task. But the bad times have also brought the once-fragmented channel together. Issues such as warranty and price concessions—which earlier were topics that everyone knew were irritants, but no one wanted to deal with—are today being brought out in the open and are being discussed with the aim of resolving things. Policies and frameworks too are falling in place—as was evident when members of the Traders Association of Information Technology (TAIT) for the first time ever introduced a price card for services, to be endorsed by all its members.

The channel is also learning to stand up for its own against the mighty vendor, as in the case of Pune resellers boycotting HP peripheral sales until the vendor changed its stand on octroi-paid goods.

The last year has seen the channel mature and though this maturity has come at a huge price, it has resulted in a stronger and healthier channel. The grain has finally been separated from the chaff and the hurdle-ridden road ahead will refine this grain even further.