Unkind Cuts

THE customer is finally king. Or, at least the customer for computers. But it could be at someone else's cost: the domestic manufacturer. With the Government slashing import duties on computers from 40 to 20 per cent, global hardware giants are now able to bring in state-of-the-art products at prices comparable to—and often lower than—the organised sector Indian computer manufacturer, who, in most cases, is anyway offering less-than-latest stuff. Also, with duties on PCs and components equal, is there any point in importing components and putting them together? Says a top industry source: "The writing on the wall is clear. To survive, Indian companies will all finally have to stop manufacturing and become distributors for foreign computer makers." 

Prices. Take Apple's Macintosh Performa. The entry level product which was priced at Rs 52,000 two months back, today sells at Rs 47,000. Or consider Compaq's Presa-rio range of home PCs. While its price ranged from Rs 1.3 lakh for a Pentium 100 entry level product to Rs 1.8 lakh for the top end Pentium 120, today the price hovers between Rs 1 lakh to Rs 1.4 lakh.

It's not only the duty cuts but also a slew of other factors that are paring the price tag: poor market conditions, shorter product life cycles and heavy competition among the numerous foreign and domestic brands available today have left marketers with no other option. Indeed, according to Sandeep Bhagi, Apple's country manager in India, the duty cuts announced in the 1996-97 budget in July, "which should have been a catalyst in reducing prices, didn't have as dramatic an effect as it should have." Though, he agrees that prices have come down by 10 to 15 per cent due to the duty cuts. His contention is that a 20 per cent reduction in import duty resulted in a 12 per cent reduction in the CIF value of the product, slightly lower than what it should ideally have been, primarily because the rupee has depreciated slightly during the last two months. Others in the industry, however, argue that the reduction in import duty has resulted in a net effective reduction in CIF value only to the tune of 8.5 per cent. In any case, the eventual reduction in prices due to the import duty cut has been enough to satisfy Ravi Parthasarthy, head of Compaq's consumer division. "The market for home PCs is nascent, but with duty cuts the home PC will become more affordable," he says.

Unfortunately, domestic manufacturers don't seem to share his optimism. For, more than reducing prices, if there is anything the import duty cuts announced in the Budget achieved, it was to edge out the domestic manufacturers, some of which, like Zenith Computers, actually stopped production. "Manufacturing just did not make sense," says Raj Saraf, CMD, Zenith Computers. That was because, import duties on PCs and components were made equal, rendering domestic production unviable.

On September 11, the finance minister provided a bit of succour to domestic manufacturers by cutting import duty on flo-ppy disk drives, hard disk drives and CD-ROM drives from 20 to 10 per cent. "This announcement has shifted the balance back to indigenous manufacturing," feels Saraf. Concurs Vijay Thadani, president, Manufacturers Association for Information Technology (MAIT): "These concessions are reasonable enough for domestic manufacture to remain viable and ensure economies of scale. Unfortunately, import duties on components for peripherals remain the same. However, this is at least better than what it was. " But only just. For, broader industry trends may yet ensure that distribution becomes the staple business for Indian companies in the long run. With duties likely to only go down in the future, and global manufacturers looking for wide-coverage distributors to peddle their ware, it may become impossible for Indian products to compete with imported machines on the value-for-money parameter. Currently, domestic machines have 70 per cent of the market. That share could erode fast.

In the meantime, with the credit squeeze easing somewhat, and since September is the last month when companies can buy computers and claim full depreciation, competition has turned cut-throat on the price front. Plus, with product life cycles far shorter, most foreign brands are offering models that are around a year old, at major discounts. All of which spells a bonanza for the buyer. Pity one can't say the same about Indian manufacturers.