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The Great Gamble

How Pertech, India's largest PC maker, tripped in the fast lane

A branded PC for lesser than a cheap assembled one? We Indians love good bargains. So when Pertech Computers Limited started offering home PCs at under Rs 25,000 in September 1996, there was a mad rush to order PCL's systems. Would-be buyers were happy to pay up the entire amount in advance, never mind the eight-week delivery period.

PCL received "a veritable flood of orders, exceeding even the most optimistic projections". PCL PCs were in demand all over the country. Fifteen thousand PCs were sold in September, making for a total of 55,000 in the half year March to September 1996. Compare this to the sales figures for the whole year April 1995 to March 1996 of 66,820 systems. Optimistic projections claimed sales were likely to cross 110,000 by the end of the financial year. PCL was billed as a major IT success story of the Nineties.

But the picture did not remain so rosy. Delivery dates started slipping back by days. And then weeks. Consumer organisations filed suits against the company. Some of the customers who had paid amounts up to Rs 27,000 in advance for their PCs are still awaiting delivery. PCL is currently offering its customers the option of cancelling orders.

What happened? Why was the PC giant not able to keep its promises? PCL was already the number one PC brand in India for over three years. So why did it slash its prices so aggressively in the first place? How did PCL expect to meet the demand of over 30,000 consumers in two months - a dream figure in terms of PC sales in India? Let's see:

The PCL saga begins in 1987 when PCL entered the IT industry. Dadan Bhai, the man behind PCL, foresaw the expanding PC market as a more lucrative business proposition, compared to selling electronic typewriters.

A tie-up with Dell Computers followed, with PCL being the sole seller of Dell PCs in India in return for manufacturing motherboards for Dell. PCL also tied up with Hewlett Packard for a while to market their PCs and servers.

Pertech later got into the 'solution provider' business, providing a single-window solution using latest technologies from its international partners. This concept of a 'virtual corporation' took off with tie-ups with big names like Microsoft, Novell, Motorola and 3Com.

The PC business also did well. By 1994-95, PCL was the number one selling PC brand in the Indian market. Yet, in 1996, when PCL observed the hold of the unorganised 'grey' sector (the unbranded PC sector) on the home PC market it felt it was time to take it on. The company decided that it had to be wiped out.

PCL began to re-study the cost of manufacturing a PC. It found that above a certain basic amount, the interest element forms a major part of the cost. Advance payments could eliminate that. Also, PCL saw the benefits of economies of scale. By outsourcing components from original equipment manufacturers in Southeast Asia, PCL saw itself able to provide PCs at Rs 25,000. The minimum cost of an unbranded PC, assembled in the grey market was around Rs 35,000 at that time. The cost of a branded PC from say, Compaq, was closer to Rs 60,000.

PCL's arithmetic was simple: It would ask customers to pay the price 100 per cent in advance and wait for up to eight weeks for delivery. Meanwhile, it would place its orders in the Taiwan and Singapore markets and get huge discounts for bulk orders paid for in advance, put the PCs together in India, and complete the orders.

So, as people in the US and elsewhere were busy forgetting what a 486 is, PCL was supplying 486s at Rs 24,999. This was brought down to Rs 18,499 in the 1996 Diwali season. Pentiums were going at Rs 26,999. The big order boom that PCL received was unprecedented in volume and spontaneity. Even other brands like HCL slashed its prices to comparable levels soon after the PCL offer.

But that didn't work out. Why? Different people have different theories. A grey market dealer says, "Seeing its prices, at first we were baffled. We realised that PCL had a careful strategy of finishing off the grey market. It succeeded to a great extent. Even foreign suppliers were showing little interest in the grey market after the PCL offer."

"There was another aspect to the PCL strategy. It did not really lose the interest element by slashing prices. The company reinvested the money in the market, earning interest on that. Its profit margins were very low. So the investments enabled PCL to still make a profit," says another friendly neighbourhood PC assembler.

Dealers feel PCL failed because the company did not place its orders in time. But the only loss suffered was a loss in reputation. It had made its profits by reinvesting the customer deposits.

A consultant for PCL in Bombay had a slightly different view. According to him, the deposits were diverted for the setting up of a highly advanced plant at Calcutta by PCL which confronted the cash crunch prevailing in the Indian economy at the time. That is why PCL was not able to place its orders in time.

Som Satsanghi, country manager, PCL, has denied all this. He told Rediff On The NeT, "PCL has become the number one PC company only by satisfying more customers than the competition. Consequently, there is no question of giving the customers a second preference. No customer advances were diverted to fund the plant at Calcutta. Nor were they invested in any money market."

An industry analyst had yet another viewpoint. PCL had based its prices, expecting huge discounts in the Southeast Asian markets, which are totally volume-based. But its orders, though unprecedented in volume in India, were too low for the suppliers to be interested in. They curtailed their discounts, putting PCL in a tight spot.

PCL denies any such miscalculation. Says Satsanghi "That was not the case at all. The components we required became unavailable in those markets at the time of execution of our orders in India." For instance, the PCL 'Millenium' offer was of a 486 with a 600 MB hard disk drive. By December 1996, only higher configurations were available, and at a slightly higher price. This upset the fine financial balance PCL was riding on and landed the company in a soup.

PCL is still struggling with completing its orders. The company claims to have met 95 per cent of its pending deliveries. Customers have been offered interest at 24 per cent per annum on a refund if they opt to cancel their offer. The systems currently being delivered come with higher configurations than the customers had originally ordered, simply because the company has no choice. This is being done at a considerable loss.

Industry circles believe PCL will seek a global partner to pull it out of the current financial crisis. Arthur Andersen was reportedly commissioned to undertake an audit of the company and suggest a way out. The company is now likely to hive its solutions provider division and software division into separate companies. Mindware, its software export division, is a major earner for the company and is perhaps what has supported it through the crisis.

But now, PCL shareholders have approved the company's motion to transfer Mindware's activities to PCL Software Limited, a new subsidiary to be launched soon. This was resolved at the PCL annual general meeting at Calcutta on June 26. Shareholders also approved the motion to transfer the solution provider division to PCL Systems Limited, another proposed subsidiary.

At the same meeting, it was also resolved that Webel Carbon and Metal Film Resistors Limited will be assigned the computer manufacturing project. The extra investment of Rs 263.3 million in the software export project diverted from the computer manufacturing project was also approved. PCL officials maintain that these funds flowed from share capital and were not made up of customer deposits.

With all this juggling going on at PCL, it will be interesting to see how the IT giant manages to please most of the people for at least some of the time. PCL's shareholders have stood by the company. But the customers who are still in queue for the computers they ordered last year will be less patient.

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