Zero Duty: Channel Seeks Clarity

Back in June this year, when 360 Magazine first mooted the question about the impact zero duty will have on the Indian IT industry, most just shrugged it off. For most manufacturers and distributors this was something too far off in the future to worry about. But 360 Magazine’s Anniversary issue on the topic did set the industry thinking. This time round when we spoke to industry leaders, the reaction was expectedly
different.
With WTO’s zero duty regime now looming large over the horizon, industry leaders are a worried lot. Confusion is the order of the day with even the most optimistic industry leader sounding befuddled about the scenario that will emerge.
360 Magazine decided to put things in perspective by putting the spotlight on the benefits that will accrue while highlighting the areas of confusion.

Implications
The positive aspect of the move is there for all to see. The market will explode. More global brands will now foray into the Indian market. And thanks to this increased competition, prices will fall and PC penetration will rise substantially. According to Aditya Bhuwania, director, Priya Group, “The customer segment that initially opted for refurbished PCs can now afford a new one, as the price difference would be marginal.”
Industry veterans expect zero duty to not only opens up the market but also iron out inefficiencies in the distribution system. This will bring in more structure into the way the business is now managed. Says Suresh Pansari, managing director, Rashi Peripherals, “While market size will increase, manufacturers will have to offer more benefits and schemes to attract end-users.”
Most manufacturers have been giving the best possible prices to India. Some have even been subsidizing. This opens up the possibility of developing India as an export hub. But Pansari feels that the government needs to take more positive steps like rationalizing the tax structure since India can develop itself as an export port to neighboring countries as well as the Far East markets.
While gray market dominance has been on the decline, zero duty is expected to be the final nail in the coffin. Says Rajshekhar Bhatt, Sales & Marketing Manager, Creative Technology, “Since service plays an important role in India it would discourage customers from the gray market products, as zero duty would do away with the cost advantage the unofficial channel currently enjoys.”
Even the official channel will have to contend with issues like thin margins, over distribution and heavy competition. Other than this, the industry also faces issues like inverted duty structure, as basic raw materials and dual usage items attract higher customs duty than finished goods. Says K. R. Naik, chairman and MD, Dlink, “The obsolescence rate of IT products is high. The issue gets compounded when factors like high cost of capital, energy and other infrastructure deficiencies are taken into account.”

Affected Manufacturers
While things look rosy for the end-user, indigenous manufacturers are not so happy with the turn of events. While the actual implications can only be gauged post budget 2005, most domestic manufacturers are worried about losing the price advantage, which they now hold, as zero duty will provide a level playing field to international brands.
Low cost of manufacturing is the single biggest advantage India has to offer to the world. Also, India is centrally located between manufacturing nations like China and Taiwan and major markets like Europe, Africa and West Asia. India could be developed into a base for hardware outsourcing and supply to these markets. For this, India needs to focus on developing world-class logistics and bringing down transaction time down to international levels. Says Naik, “Infrastructure required for hardware manufacturing need to be improved and manufacturing-friendly policies need to implemented by the government to encourage domestic manufacturing.”
Another factor that has proved a dampener is India’s local market. Most manufacturers are reluctant to invest in the country, as internal volumes don’t justify the costs involved. Says J. Kulkarni, CEO, Redington, “The cost of manufacturing is lower in India than in either Malaysia or Taiwan. But the domestic volume has to go up before indigenous manufacturing actually takes off. Manufacturing is linked to duty becoming zero, domestic market size and business friendly customs processes.”
India’s archaic customs laws and unpredictable government policies has also served to discourage potential investors. But issues related to duty on warranty products will now be sorted out.
But Bhuwania says, “The belief that manufacturing in India is cheaper is a myth. While labor costs are lower, India loses out where productivity is concerned.” According to him, in China, the estimated cost of packaging and manufacturing a motherboard is Rs 150 whereas in India it is around Rs 300, as China boasts six times higher productivity.
Indirect factors like cultural issues too come into play. Indian manufacturers have been attempting to change the work culture for a long time now. Most have managed to bring down the cost to viable levels. But most industry leaders agree that on the manufacturing side, India lost the battle a long time ago. Only the government can now take steps to alter this status quo.
Sujay Chohan, vice president-research director, Gartner India puts things in perspective. Says he, “India was never a manufacturing destination. What we call manufacturing is actually assembling of imported components. Hence, zero duty won’t have an impact on domestic manufacturing. The market only stands to grow. But domestic manufacturers will now have to compete on global standards. Even internationally acclaimed brands will be forced to compete on the basis of price as well as quality.”

Absolute Zero
An absolute zero duty regime would prove good for the channel, as many more manufacturers will foray into the market. This will in turn enhance quality standards, improve profitability, raise service levels, get additional backend initiatives and increase profitability. But based on past experience Indian government will not allow absolute Zero duty (i.e. nil customs and countervailing duty) and lower VAT. One reason for this is that the government needs to protect the local IT Industry by imposing reasonable tariffs.
Bhuwania too feels that though basic duties might be brought down to zero, CVDs and other tariffs would remain. Says he, “CVD will remain, as both PCs and color televisions use the same PCBs (populated circuit boards). The government can’t have separate duty structure for the same component.” Adds Pansari, “CVD will continue to be at 16 percent. So the minimum tax liability will be around 15 to 20 percent.”

Emerging Scenario
For the distributors and channel partners zero duty brings with it promises of increased business opportunity. But Pansari feels that transaction cost needs to be brought down further. According to him, distributors need to adopt a cautious approach while selecting brands for distribution, as the market will be flooded with multiple products and brands. “Quality and not price should be the deciding factors,” says he.
Plain box movers without focus stand the risk of being wiped out. Distributors need to change delivery systems to reduce transit time and damages. Pansari suggests that distributors should take proactive measures like re-organizing its marketing staff based on regions instead of states, increasing post sales support and tapping the retail channel if distributors want to survive the onslaught.

Conclusion
At the moment, the distributors role is to provide logistics, support and credit. Even post zero duty its role would remain the same. But the difference is that many more manufacturers would enter the market. Hence, distributors would have to develop USPs to attract these MNCs.
Manufacturers that were not able to make headway in the Indian market thanks to the monopolistic hold of a few will now get a more level playing field. This will improve service levels, as multiple manufacturers will now compete on services, back-end incentives, and absolute profitability. This will open up new opportunities for the channel.
Whether India emerges as an export hub remains to be seen. Since the privileges given by MNC manufacturers might no longer be available, the product price would be decided at a global level.
Lowering of zero duty will bring in more business and increase affordability. The biggest advantage of zero duty if implemented effectively, will be that India can compete globally as a manufacturing hub, as power and labor cost is much cheaper. But Indian manufacturers definitely need to ramp up its exports.
In a truly zero duty environment, growth will be exponential. The industry should now focus on strategies to harness this new phenomenon.