The Hindu Business Line : Financial tsunami gives hard time for hardware sector

New Delhi, Dec 26 The year 2008 offered virtually no respite to the IT hardware industry, as falling rupee dented margins of PC manufacturers and, in turn, prompted them to effect multiple-rounds of price hikes on a slew of products.

With financial tsunami raging in the US and Europe, the consumer sentiments back home took a severe beating, leading to less-than-anticipated demand and massive inventory pile-up in the cash-strapped IT channels.

IDC data

According to the latest IDC data, between January and September 2008, the overall PC shipments grew 6.4 per cent over the corresponding period previous year at 6.43 million units. Notebook PC shipments grew a robust 54.5 per cent to touch 1.87 million units, but the desktop PC shipment tanked to 4.56 million units, against 4.8 million units in the year-ago period.

The PC shipments were up 1.7 per cent in quarter ended September 2008 at 2.26 million units. While the desktop computer sales dropped 8.9 per cent, the notebook PC shipments again made up for the blip, growing at 37.8 per cent year-on-year. IDC said the PC shipments to large and very large businesses contracted 13 per cent in Q3. The home segment, however, registered an increase of 16 per cent, as buying increased due to the beginning of a new academic session.

However, industry watchers feel that the overall consumption of PCs has been significantly hit in the last two months. The non-availability of liquidity in the IT channel community has added to woes of hardware industry.

SMEs, households

In addition, SMEs and the households – which together accounted for over 60 per cent of the total PC market in India in FY08 – have been very impacted as finance from banks has dried-up.

The currency continued to be volatile during most part of the year. As the local currency depreciated against the greenback, leading PC makers initially hiked prices in June, then followed it up with another price increase of nearly 4-8 per cent across multiple categories such as desktops, laptops and IT peripherals, in late September.

This is because bulk of the components that go into a PC, including processor, hard disk drive and motherboard are currently imported - a weaker rupee means a higher tab for the same imports by IT manufacturers.

Government’s decision in December to cut the CENVAT rate by four per cent also did not do much to lift the sentiments in the market. Despite a few announcements now-and-then on price drops ranging from 1-4 per cent on various products, issues such as old inventory pile-up, and CENVAT overflow due to 12 per cent service tax on pre-loaded licenced software, reduced the impact of the rate cut. Or at any rate, delayed the benefit for consumers.

As a result, the industry under the aegis of MAIT has sought rationalisation of levy on software. This assumes significance as excise duty on computers and software (customised) has dropped to eight per cent whereas the pre-loaded licenced software still attracts 12 per cent service tax. The anomaly is leading to a CENVAT overflow in case of local computer manufacturing.

Semiconductors

The country’s hardware manufacturing dream took-off to a promising start at the beginning of the year when the Government’s policy push on semiconductor fabrication and other micro and nano technology manufacturing industries brought an impressive line-up of applicants. By December 2008, the number of applications under Special Incentive Package Scheme (SIPS) had surged to 17, with cumulative investments worth Rs 1,55,000 crore.

This included Videocon Industries’ plans to set up LCD fab (Rs 8,000 crore), and a slew of proposals pertaining to Solar PV space include Moser Baer PV Technologies (Rs 6,000 crore), Titan Energy Systems (Rs 5,880 crore), KSK Energy Ventures (Rs 3,211 crore), Signet Solar (Rs 9,672 crore), Phoenix Solar India (Rs 1,200 crore), Tata BP Solar India (Rs 1,693 crore), Solar Semiconductor (Rs 11,821 crore), and TF SolarPower (Rs 2,348 crore).

Besides this, Department of IT also received applications from EPV Solar, Vavasi Telegence, Lanco Solar, Emco Energy, Optisolar Inc, and Bhaskar Silicon for proposed PV projects.

However, December brought in some bad news in this space as well, as the shadow of the global financial meltdown loomed large on the most ambitious semiconductor project. Reliance Industries’ Rs 18,521 crore semiconductor wafer fab project is learnt to have been relegated to cold storage, for now.

For the overall IT market too, the end of the year – which traditionally rides on festive season sales - has been lacklustre. In fact, the IT demand seems to have slumped nearly 25-30 per cent this month, compared to year-ago period, if initial indications are anything to go by. However, the industry is keeping its fingers crossed that the Government buying between January and March would bail the sector out to an extent.

“The auction of 3G and WIMAX spectrum also could create the necessary pull factor for IT purchases, as it would spur broadband-led IT consumption” says MAIT Executive Director, Mr Vinnie Mehta.

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