DIVERSIFICATION: Partners Seek Greener Pastures

Consider this: Delhi-based Elcom Trading forays into healthcare,
Thiruvan-anthapuram-based Logtech Systems diversifies into real estate, Mumbai-based
Computer Corner has taken up supplying OT table to hospitals. This represents an
increasing breed of IT channel partners, who were hitherto entirely focussed on
the lucrative IT products market, and are now venturing into different terrains.

Although partners have been contemplating diversification for long, the trend
has become more evident over the past year since the impact of overall economic
slowdown began to have a bearing on the sales and bottomline of IT partners.

Vendors
have traditionally positioned the IT channel community as a premium set of
partners, tech-savvy and more knowledgeable than their counterparts selling
consumer electronics. Over a period of time, vendors–themselves pushed to the
wall in their bid to meet sales targets–have saturated this select community
of tech-savvy partners to increase their channel base. The community, which
burgeoned for a while is today faced with a glut, ‘a potent time bomb, waiting
to explode anyday.’

DIVERSIFICATION IS IN

Diversification was natural for partners. Faced with an over-saturated
market leading to intense competition and thus shrinking margins, geographic
penetration by distributors into smaller towns and cities, tighter credit
policies coupled with the general economic slowdown, partners had to look for
businesses which would provide them with better cash flows and quicker return on
investments.

By and large, most diversification activities are concentrated in the metros.
Partners in emerging markets like Pune and Hyderabad attribute the lack of
diversification to resource constraint. But a more likely reason is that markets
in smaller cities have not reached saturation point yet.

With credit cycles reduced to two weeks and distributors themselves moving
into smaller cities, the regional distributors have either moved up the value
chain in terms of services or diversified into different businesses altogether.

WHEN TELECOM CALLS

Cellular: One of the most common diversification activity has been to deal
in mobile handsets and take up franchisee of the local cellular service
provider. While big timers like Delhi-based Challenger Computers and Vidur &
Company have made a serious debut into mobile dealings by setting up separate
entities, others have simply added on cellular handsets as another item in their
trading list. These are small retailers who look upon mobile handsets as an
allied business and an extension of their IT activities.

Partners who deal in mobile handsets have found the business to be a steady
source of income with margins in the range of 10-15 percent as against the three
to five percent margin from IT-related businesses. Sunil Gupta, Director,
Challenger Computers, sums up this diversification perfectly and says, "It
was important for us to diversify into a related trade that requires minimum
investment and bring constant liquidity. We wanted to reduce our exposure in a
particular segment as much as possible to minimize our risks."

Challenger Computers has a huge showroom dedicated to the cellular business
and is one of AirTel’s major franchisee in Delhi. The company’s cellular
business has already recovered its investments and is well on its way to
profitability.

It is worthwhile to mention here that big time IT distributors like Ingram
Micro have added on mobile phones. Others like Tech-Pac say they are watching
the market dynamics and shall add mobile phones as soon as the gray market
shrinks further.

Basic telecom: Diversifying into cellular handsets and cellular connections
may be a common phenomenon but becoming franchisee for basic telephone service
providers is not so common. Yet, here is a lucrative business opportunity with
market estimates giving the operational break-even timeframe as 10 months or so.

Delhi-based Compro Computers has just signed up as the franchisee for Tata
Teleservices in the warm up to the launch slated in the very near-future. A
separate company called Compro Teleservices has been set up for its franchisee
operations with an investment of Rs 10 lakh and 15 dedicated employees.

Says Pankaj Bandlish, Director, Compro Teleservcies, "We are the
exclusive franchisees in the Patel Nagar, Karol Bagh region and are optimistic
about the new venture since TTSL has promised to protect our margins."
Later when the number of franchisees increase, TTSL is expected to allow
franchisees to do the billing and the collection which promises to bring in very
healthy margins.

NON-TELECOM DIVERSIFICATION

If telecom may sound like an extension to the IT trade, there are some
really imaginative diversification happening. Like Delhi’s Elcom Trading
taking up the franchisee of Apollo Hospitals in Delhi. And why not? Since the
opening up of the insurance sector, healthcare has increasingly emerged on the
radar of investors. Elcom’s new initiative will be called Acme-Life Care in
which the management and administration would be Elcom’s responsibility while
Apollo would undertake the training of doctors.

Elcom Trading has made an investment of over Rs 2 crore with funds sourced
from internal accruals and loans. The company has estimated break-even over the
next three years.

Speaking about this new venture, Sumesh Narang, Director, Elcom says that
healthcare is an emerging sector and it was important to spread risks. The
company is exploring further diversification in areas like beauty care with
plans of taking up franchisee-ship of Lakme beauty salon in the offing.

And there are adventurous diversifications as into real estate.
Thiruvanathapuram-based SK Hari Kumar of Logtech Systems says,
"Diversification is the only option. We have diversified into real estate
as competition in IT as well as in telecom is too high." Logtech started
its real estate business some six-seven months back and found business there to
be more healthy and secure unlike IT. Hari feels that in real estate, there are
no issues like roadmap, service and warranty.

And there are stray cases like Sameer Mehta of Computer Corner in Mumbai who
has recently undertaken the supply of hospital beds and OT tables to hospitals.
Says Sameer, "Even if I make such supplies once in a while, I make good
margins to supplement my business. Besides I do not have to keep stocks which
makes things easy on the investment side."

Despite the diversification, all partners are firm about their commitment to
the IT business. Ashok Grover of Delhi-based Groovy Communications is emphatic,
"We have moved into office automation and are contemplating diversification
into training. But at no time have we contemplated exiting IT business."
This is more or less the standard response from partners who have diversified
into other activities.

Partners have agreed that although competition was always intense, it is the
current tough market that is making people look at diversification. The
HP-Compaq merger has also largely distorted the channel equations with too many
partners vending similar product lines.

Vendors have also noticed the diversification trend but have not done much
about it. Some attribute it to natural market forces and look at it as a process
of channel rationalization. "Some may not be able to weather tough times
and would naturally diversify into other areas. This is actually good for the
health of the community as a process of rationalization would take place
eventually," says Ranbir Singh, Head-Northern Operations, Wipro
ePeripherals. This naturally rules out the bigger question of whether vendors
would get bitten in the process.

The channel community is optimistic that diversified activities would help in
bringing stability to the IT channel community. This in turn will bring about
more discipline and boost organized reselling.

BALAKA BARUAH AGGARWAL