Market Characteristics: Demand Supply, Competition and Prices

Demand-Supply

The broad industry classification 'electronics' encompasses numerous product categories.

These may be classified based on their end usage into categories such as consumer
electronics, industrial electronics, communication and broadcasting equipment, strategic
electronics and components. While the range of product categories covered under consumer
electronics, spanning washing machines, televisions, audio and video products, air
conditioners, etc is by no means narrow, the spread of the other categories is immense.
They cover products as diverse as spectrometers, oscilloscopes, ultra-sound and bar code
scanners, capacitors, connectors, printed circuit boards, gas discharge tubes, transistors,
semi-conductors, transformers, coils, etc. The size of India's electronics industry is
estimated at close to Rs. 25,000 crore, with consumer electronics being the single largest,
and fastest growing category.
 

The factors influencing demand vary between industrial and consumer electronics. Firstly,
'industrial electronics' is a broad classification spanning electronic goods with highly varied
end uses. These goods therefore, are characterised by a derived demand, dependent on the
prospects and peculiarities of the particular user segment. For example, the fortunes of
printed circuit board (PCB) manufacturers are closely linked to government policy on the
telecom sector, since telecommunications represents a major end usage for PCBs. In
general, given that industrial automation and process control represents a major application
area for industrial electronics, growth is significantly correlated to overall industrial growth.
The table above reflects the marked difference between growth rates of consumer
electronics and other categories over the last few years.

Productivity improvement, reduced maintenance costs and higher quality end products drive
the demand for electronic control and instrumentation in industry, particularly in process
plants. This consequently contributes in overall development of core sectors such as steel,
mining, textile, jute, paper and pulp, food processing, etc. Further, here is an increasing
trend in the manufacturing industry to integrate Enterprise Resource Planning (ERP)
Systems with control and instrumentation equipment, as part of the overall drive towards
automation and enhanced process efficiencies.

The electronic component sector is largely dependent on the consumer electronics industry.
Certain component categories such as Colour Picture Tubes have recorded significant
growth, in line with the growth in the television industry. However, in general, India's
production base for components is weak, with manufacturers facing severe competition
from cheaper imported components. Demand prospects are favourable, with demand for
components being projected to exceed supply by over Rs. 10000 crore by 2001-02
(according to the Ninth Five-Year Plan). However, domestic manufacturers may be unable to
fully exploit the demand growth, owing to competition from imports, lack of investing
ability, and absence of significant research and development.

Several units both in the public and private sectors manufacture a variety of state-of-the-art
equipment based on indigenous technology. The Indian strategic electronics industry
produces radars for defence and civilian applications, navigational equipment, underwater
electronic systems, sonars, infrared laser based systems, communication equipment for
defence/civilian use, specialised computers and simulators, GPS /DGPS receivers, automatic
dependent surveillance system, etc. Given the need for constant improvement in
surveillance mechanisms and strategic communication equipment, the demand in the
strategic electronics segment is expected to remain healthy, though the dependence on
government agencies could imply unpredictability in order book positions.

The experience over the last couple of years has not borne out any correlation between
economic growth and the demand for consumer electronic items. Sales of consumer audio
and video products, particularly colour televisions have been moving ahead at a fast clip.
The growth rate of colour TV sales during 1999-00, for example, is estimated at 37%, which
appears quite an achievement for an economy supposedly emerging from a recession.
Consumer electronic items are still regarded as a luxury by the majority of the Indian
populace. However, long-term demand potential, driven by low penetration levels,
increasing urbanisation, higher levels of disposable income, and a large middle class, are
favourable. Currently, the penetration of most consumer products in India, including
consumer electronics is skewed in favour of urban demand. However given the latent
demand in India's rural markets, it is only a matter of time before the leading players in
electronic goods bring out a basket of offerings targeted primarily at rural audiences. Rural
marketing strengths would, in the coming years, be a significant determinant of success in
the consumer electronics segment.

Demand is also influenced by the need for replacement. The constant upgradation of
product features has resulted in the creation of replacement demand, particularly as
existing products near the end of their optimum life cycles. In the consumer electronics
segment, the significance and position of a product in the need hierarchy is an important
demand determinant. It is generally believed that audio products head the consumer's
priority list, followed by televisions, refrigerators, and washing machines. The emergence of
satellite television has dampened demand for video tape recorders, while certain products
such as dishwashers have yet to make serious inroads into the Indian market.
 

As electronic goods are often high value equipment, the availability of financing options is
yet another important influence on demand. In recent times, the financing route to
acquisition of electronic items has gained in popularity, particularly in the consumer
segment, and certain areas of industry, such as medical electronics.

The electronics industry is not as capital intensive as process industries such as steel
cement and fertiliser, with capacity expansion being primarily a function of additional
assembly lines. Investments in the electronics sector as of December 1999 constitute a
mere 0.3% of total industrial investments in the country. An estimated 90% of India's
requirement of semiconductors is imported. In the near term, the domestic supply of
electronic components is expected to fall well short of market demand, with the major part
of demand being met by imports.

Sales in the industrial electronics segment are carried out primarily through direct
marketing channels. However, distribution assumes primary importance for consumer
electronics, owing to the retail nature of sales. The spread and depth of the dealer network
is a significant source of competitive advantage. The strengthening of distribution, through
tie-ups with companies having a strong distribution network, if required, forms a primary
consideration for the leading companies in the consumer electronics segment.
While an extensive distribution network aids first time sale, it requires to be backed by a
strong after sales service infrastructure, for consumer as well as industrial electronics.
Electronic items being of relatively high value, are generally kept in use for long periods of
time, requiring periodic service support. A company's ability to provide customers with
strong after sales support, is therefore a key determinant of its standing in the market.

Exports

The following table reflects the Indian market's dependence on imported electronic goods,
and the relatively small proportion of exports in the electronics sector:
 

Imports of Electronic Exports of Electronic

goods  Goods 
 US $ Million  1210.6  264.2
% of total 5.31% (of imports)  1.51% (of exports)  
imports/exports

While the decision by a few multinational companies to use India as a global sourcing base
for electronic items is expected to provide a thrust to India's exports, the fourfold growth
projected by the government over a three year period appears unrealistic.

Competition

Competition is far more evident in the arena of consumer electronics than in industrial
electronics. The advent of liberalisation and the expectations created by visions of a huge
middle class, have lead to a virtual explosion of consumer electronic brands. Multi-national
companies pose a significant threat to well established Indian brands. These players, based
on their access to state-of-the-art technology, compete on the basis of superior product
features, such as larger screen sets and digital features. The huge overseas capacities of
some international players also enable them to compete favourably on price. The hotting up
of the consumer electronics market in India over the recent past is evident in the numerous
discount and promotional schemes being offered to consumers by most leading companies
in the industry. The global players, with their advantages of technological superiority,
financial muscle and global-scale capacities,  would continue to pose a serious threat to the
market share of the domestic leaders.

The growth in the domestic electronics components has been affected by cheaper imports,
and high  production costs. The lack of ability to make investments, and absence of any
meaningful research and development, have been some of the factors plaguing the
domestic electronic components sector. Several units have had to be closed owing to the
non-viability of operations. The declining trend of import duties in the country, suggests
that the competitive threat posed by imports is unlikely to fade in the near future. Given the
trend towards zero import duties by 2004, the continued viability of electronic component
production would need to be re-examined by manufacturing units in the sector.

While the unorganised sector has a significant presence in the industry, it does not compete
directly with the organised sector. The unorganised sector has a significant presence in low-
end components, and in certain consumer electronic items such as audios, semi-automatic
washing machines, and black & white televisions.
 
Prices

Competitive forces are the single most important determinant of prices, particularly in the
consumer electronics segment. By and large companies seem to be targeting products with
the latest features at the premium end of the market, while the middle class is lured with
the 'value for money' tag. Pricing forms a very important part of the manufacturer's
marketing strategy, as it is a key determinant of market share, as well as profitability.
Prices of electronic components are linked to international levels, particularly those
prevailing in South East Asia and China. In recent times, India has seen severe price
competition from East Asian component manufacturers. For example, in the international
market, Indian made black & white televisions are estimated to sell at around $ 38 - $ 40
per set, which is marginally higher than those produced in China and South East Asia.