The shocks of consolidation
Two developments of the last fortnight clearly indicate the churn and transformation going in the industry—IBM selling off the x86 server business and Sony offloading Vaio PCs. Both developments point to the fact that the traditional hardware market is set to consolidate. The PC market has already shrunk from 381 million units globally in 2011 to 314 million units in 2013, decelerating at a CAGR of more than 7 percent. In India, two national OEMs— HCL and Wipro, have exited the PC market. Globally, Sony has sold its PC business, and analysts are predicting that smaller global OEMs like Samsung, Fujitsu, and Toshiba may also exit the fray, sooner than expected. Speculations have suggested Acer and Asus merging their PC business. While this has been denied by both companies, it can’t be ruled out going forward.
The x86 server space is on the brink of consolidation too, set in motion by IBM. Not only has this market become commoditized, the economic downturn coupled with increasing adoption of cloud computing and virtualization, has led to its negative growth. With the emergence of concepts like SDN, the networking segment is bound to see a major consolidation as well. Networking hardware sales have been muted for the past couple of years and companies like Avaya and Juniper are facing tough times.
Clearly, the consolidation story will play out in a major way over the next 2-3 years and the IT ecosystem is likely to be very different than what it is, by 2018. What this means for the channel is that their business will be significantly vulnerable, and to survive, they will have to prepare themselves to absorb many big shocks emerging from the consolidation.
For instance, Sony’s sell-off has put its partners in a major soup. Japan Industrial Partners (JIL) which acquired the Vaio business has stated that it will initially focus on consolidating and stabilizing the PC business in Japan. Analysts have interpreted this as JIL withdrawing from various geographies including India. This will be catastrophic for Sony partners. A regional distributor told me that the withdrawal of Vaio from the Indian market, will dent his topline by ` 40 crore and force him to cut down on operations and employees.
Similarly, a IBM partner admitted a major dent due to the server business sell-off. This partner’s IBM business is close to ` 20 crore annually with x86 server business contributing 70 percent. His experience with Lenovo for PCs hasn’t been any good and hence he is not keen to align with Lenovo post the acquisition. As a result, he will need to align with HP or Dell, and the partner realizes that changing the vendor is a tough job.
If partners have to survive they will need to brace themselves to take such heavy blows. Hopefully these blows will help them harden up and set them on the right path.