The dot-com bust. The general IT industry slowdown. And the collapse of ISP activities and data centers. That was the state of affairs when fiscal 2001-02 began for the networking industry. The overall mood was that of caution, chaos, and catastrophe. The industry decided to take all this in its stride. Players set out to beat the sluggishness, pushed hard, stayed focused, did business realignments, and looked for other emerging opportunities. As a result, the industry managed to beat the recession.

The initial quarters of the year were sluggish but later major orders really revived and changed the situation. Orders like the BSES Telecom’s MAN project, bank projects, and defense and government deals pushed up the networking business in the country. Those who were prepared and confident made the difference. The business for networking vendors grew by 4 percent over the previous year’s figures of Rs 2,852 crore. The network integration market grew by 14 percent to Rs 1,906 crore. The total size of the overall industry is estimated to be Rs 3,235 crore. The distribution market fell by 14 percent and was estimated at Rs 591 crore.

Despite the general market conditions and a precarious situation at the beginning of the year, the year ended on a better-than-expected note. This was primarily because the companies focused on improving margins and generating significant revenues from services on one hand and looking at minimizing operational costs on the other hand. The strategy was to have better project management and cost control. Also, sectors like banking and finance and call centers were major contributors to growth.

In the market analysis this year, we have considered the business from the LAN and the enterprise WAN segment. The product categories under review have been NICs, hubs, switches, structured cabling, routers, RAS, modems, spread spectrum radios, and VSATs.

This year we have not taken the transmission segment for our analysis.

Vendors: Direct Deals Pushed Sales
The overall vendors business was Rs 2,852 crore. Clearly, big got bigger in this space. Cisco, Enterasys, D-Link, Nortel, Avaya, and CommWorks all consolidated their businesses. The top 10 vendors alone contributed Rs 2,215 crore in revenues. Despite the pressure on various product categories and stiff competition, the big three managed to retain their market positions. Mainly because they continued to get repeat orders while they also managed to fetch new direct deals. Their strategy has been that of instilling more confidence in their partners. Also, each of these vendors focused on their strength areas only. For example, Cisco put a thrust on VoIP and security besides its switch and routers portfolio, Enterasys was aggressive with its SAM (security, availability, and mobility) strategy, and Nortel went all out for the call center space. D-Link laid focus on the SME segment.

The story is self explanatory. The top 10 vendors succeeded in grabbing the largest shares in one or the other segment. Cisco was the leader in switches and routers with revenues of Rs 335 crore and Rs 353 crore, respectively. Enterasys did strongly on the switches front and recorded Rs 283 crore in revenues from this business. D-Link was the leader in hubs, NICs, and dial-up modems and did well in other segments like structured cabling and switches too. Its revenues was Rs 25 crore from hubs, Rs 28 crore from NICs, Rs 65 crore from dial-up modems, and Rs 48 crore from structured cabling, among others. CommWorks was the clear leader in RAS products with revenues of Rs 105 crore. Nortel did all-round business in switches and routers, but its call center solutions clearly pushed its cause. Avaya was the leader in structured cabling with Rs 110 crore in revenues while RAD (MRO-Tek) was the frontrunner in leased line modems. A focused approach led to this consolidation.

Integrators: Focus on Consultancy, Services
The industry saw a strong shift towards outsourcing and services. Storage and security were becoming inevitable. Expected arrival of VoIP and wireless LAN, continuation of WAN implementations, and centralized computing really set the ball rolling. Here too, what separated the winners from the rest was the ability to clearly rebuild and refocus. For example, Wipro’s strategy was to be a partner of preference to all its principals and move to the Asian region; NetSol added people and software skill sets to consolidate itself post the acquisition of its consultancy and design division by Intel. Similarly, a significant stake in CMC was bought over by TCS. Datacraft concentrated on its Millennium strategy while Ramco focused on end-to-end solutions.

As a result of such focused activity, network integrators actually feel they did better than the expectation. The heartening trend has been that the margins have gone up. This was mainly because the network integration market has finally arrived to the point where consultancy, design, and implementation services revenues came in significantly. There were several projects that involved just consultancy and implementation services, while the products were coming from different suppliers. This year, about 30 percent of the revenues came from the consultancy and integration services.

Wipro continued to be the leader with a total business of Rs 244.5 crore. Wipro, Datacraft, HCL, and NetSol have been the top integration providers without presence in the VSAT domain. HCL Comnet and HECL have substantial revenues coming from VSAT connectivity and services too. The significant attribute of the VSAT providers has been their ability to elevate themselves to offering value-added services in security, remote management, and facility management as addition opportunities.

The banking and finance sector was the most promising one for all players. This segment alone accounted for above 25 percent of the total revenues. IT and telecom sectors, which were the top sectors in the past few years on deployment, remained sluggish. This year, for the top integrators, revenues from these segments accounted for less then 40 percent of their total revenues. Also, the call center market opened new opportunities. Most of the vendors rushed to harness this new gold mine.

Distribution Business: Falling Margins
Although the vendors and integrators managed to fight the recessionary conditions, the distribution business was affected. Unit-wise sales grew but the prices really came down. The reason clearly was that most of the distributors have been handling the products on the low- or mid-end and in this space, price-performance is always the most important consideration while making buying decisions.

The distribution revenues saw a dip in revenues from Rs 687 crore to Rs 591 crore. As mentioned earlier, the margins were depleting. For example, Avaya drastically cut down prices in the structured cabling space. Similarly, prices of hubs, NICs, and dial-up modems were all down. Except for i2i Media, almost everyone faced dipped revenues or flat growth. Tech Pacific suffered a decline of about 22 percent, MRO-Tek of 32 percent, Ingram Micro of about 17 percent, and so on.

Segments: Switches Ruled the Roost
Switches on account of high value have clearly been the largest revenue generators. While LAN switches, routers, spread spectrum radios, multiplexers, VSATs, and the structured cabling segments grew, the dial-up segment, NICs, hubs, RAS, and leased line products saw negative growth. LAN switch revenues were Rs 783 crore and grew by about 28 percent. Routers generated revenues of Rs 423 crore and growth of 4 percent. The VSAT segment grew by 17.5 percent to Rs 252.4 crore, the structured cabling segment by 20 percent, multiplexers by 33.9 percent and spread spectrum radio revenues by 28 percent to Rs 94.3 crore.

While RAS and leased line modems have been big markets by size, the revenue growth dipped. RAS at Rs 170 crore was down by 14.3 percent while the leased line modem segment was marginally down by 0.4 percent with Rs 136 crore in revenues. The hubs market was Rs 38 crore, down 22.4 percent. Dial-up modem sales generated Rs 116.4 crore—a negative growth of 41.4 percent. The negative growths were primarily due to price reductions and also on account of slowdown in some verticals like ISP and IT.

Outlook
Many experts believe that the worst phase is over and with most of the vendors and integrators taking a different approach, this year could be a different one. In particular, new technology deployments in network security, remote services, storage etc
are coming up while verticals like telecom, datacenters, government, and education are intending to go for increased deployment. Sectors like banking and finance will continue with renewed buying on the WAN front and the big telecos are also in the set-up stage. This gives the industry more space to grow.