Current Economic Statistics and Review For the Week 
Ended July 02, 2005 (27^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

BANKING HIGHLIGHTS  

• Punjab National Bank (PNB) is planning to increase its international presence in the current fiscal. Recently it opened a representative office in Dubai . The office would facilitate its clients in trade finance and remittance business between the two countries. In addition, it has plans to open branches in Singapore and Sri Lanka in the next few months. PNB already has a representative office in London , Almaty and Shanghai . It also has a full-fledged branch in Kabul . It is learnt that they may also launch a subsidiary in Canada . It has also entered into a joint venture with Everest Bank Ltd. in Nepal .

• The boards of Centurion Bank and Bank of Punjab have approved the merger of the two entities at a swap ratio of 4:9 (for every 4 shares of Bank of Punjab, its shareholders will receive nine shares of Centurion Bank). As on March 31, 2005, Centurion Bank had a paid-up capital of Rs.104 crore while Bank of Punjab had Rs.181 crore. There has been no cash transaction in the course of the merger, as it has been settled through the swap of shares.

HOUSING

• IDBI Home Finance Ltd. (IHFL) would raise its retail prime lending rate (R-PLR), the benchmark used by the company for the pricing of its variable interest rate loans, by 0.25 per cent with effect from July 1, 2005. IHFL has revised its interest rates across all maturities to 8 per cent per annum and 8.25 per cent under its variable and fixed rates, respectively, from July 1, 2005.

• National Housing Bank (NHB) has registered a 131 per cent jump in its refinance disbursements, which touched Rs.7,500 crore in 2004-05 against Rs.3,253 crore during the previous year. Rural housing, which was a thrust area for NHB, accounted for 47 per cent of the total disbursements in the sector. The total amount disbursed to the sector during 2004-05 was Rs.3,536 crore, up by 108 per cent over Rs. 1,701 crore during 2003-04.

INSURANCE

• Three Singapore banks, which will set up wholly-owned subsidiaries in India , will be allowed 26 per cent investment in life and non-life insurance sector under the comprehensive economic co-operation agreement signed between the two countries. India will also permit Singapore companies to hold 74 per cent stake in banking sector, which will include both FDI and FII, as per the agreement.

INFORMATION TECHNOLOGY

o        The Maharashtra Government has signed a Memorandum of Understanding (MoU) with the Indian subsidiary of global giant Microsoft to accelerate IT literacy in the state and deliver effective e-governance services. As per the MoU, Microsoft will assist the state government to set up a Bhasa Language Lab at a premier education institute which will provide students and small developers IT training and access to software tools so that they can build applications and content in Marathi. To accelerate IT literacy, Microsoft is setting up three state-of-the art academics in Maharashtra , including the one recently started in Pune.

FINANCIAL MARKET DEVELOPMENTS

• Capital Markets

§         Primary Market

o       Syndicate Bank is to tap the market on July 7 for the second time to issue five crore equity shares.

§         Secondary Market

o       The BSE sensex continued its record breaking trend and touched a new life time high of 7210.77, given the surge in FII inflows and decline in inflation rate. Also, the decline in international crude prices supported the bullish sentiments. Over the week under review, the BSE sensex gained 62.15 points; similarly, the NSE nifty gained 17.55 points to close the week at 2211.90. The daily average turnover for the week at BSE and NSE remained pegged at around Rs 3000 crore and Rs 6,000 crore, respectively.

o       Among the sectoral indices of BSE, the FMCG index recorded the highest gain of 2.89 per cent given widespread rainfall across the country, followed by BSE capital goods and BSE Bankex.

• Derivatives

o       The turnover in the derivatives segment of NSE has been quiet high during the week amidst the rollover activity. It ranged between Rs 16439.70 crore and Rs 21761.40 crore as compared with a range between Rs 12461.20 crore and Rs 15656.40 crore in the previous week. FIIs have also been active in rolling over their positions. 

• Government Securities Market

§         Primary Market

o       On July 5, the government is to re-issue 7.27 per cent 2013 and 10.25 per cent 2021 for notified amounts of Rs 6,000 crore and Rs 4,000 crore, respectively.    

o       The RBI has fixed the rate of interest on the floatating rate bond (FRB) 2017 at 5.93 per cent for the period between July 2, 2005 to January 1, 2006. Also, the rate of interest on FRB 2015 has been set at 5.78 per cent for the period between July 2, 2005 and July 1, 2006.

§         Secondary Market

o       The weighted YTM on 7.38 per cent 2015 has risen from 6.81 per cent on June 24 to 6.88 per cent on July 1, despite the decline in the inflation rate.

• Foreign Exchange Market

o       Foreign exchange reserves declined by US $ 676 million in the week ended June 24 and the aggregate reserves stood at $ 138.89 billion.

o       The rupee-dollar exchange rate appreciated from Rs 43.58 to Rs 43.49 during the week due to the expectations of further foreign institutional flows given the bullish sentiments in the domestic stock markets.  The six-month forward premia rose from 1.44 per cent on June 24 to 1.52 per cent on July 1.

• Commodities Futures derivatives

• As per the data put out by FMC, total commodities turnover has increased from Rs 57,325.58 crore in the first fortnight of June to Rs. 61,210.36 crore in the second half.

PUBLIC FINANCE

o       Fiscal deficit during the first two months of the current fiscal year accounted for 31.5 per cent of the budget estimate to stand at Rs 47,603 crore. The deficit stood at 28.4 per cent of the budget estimate in the corresponding period last year. Total receipts during April-May 2005, stood at Rs 12,134 crore accounting for 3.3 per cent of the budget estimate as against 6.3 per cent in the corresponding period previous year. Non-plan expenditure was Rs 46,788 crore, which was only 12.1 per cent of the budget estimate as against 14.1 per cent last year. Planned expenditure was at Rs 12,949 crore, which was 9 per cent of the budget estimate. The finance minister said that all the ministries had been issued strict rules that 66 per cent of the budgeted expenditure has to be spent in the first three quarters of the fiscal year and not more than 33 per cent could be spent in the last quarter.

o       The advance corporate tax collection upto June 23 has increased by 166 per cent to Rs 9,079 crore from Rs 3, 413 crore collected during the corresponding period last year. Corporate tax collection did not include fringe benefit tax, which would figure in collections from September. According to finance ministry officials the growth was on account of lower base in the previous year and collection in this category is expected to be good this fiscal year.

• The Cabinet has approved an extension of the purchase preference policy (PPP) of Central public sector enterprise (CPSE) till March 31. Contracts not exceeding a value of Rs 100 crore will be covered under the policy. In case of turnkey contracts and of those where civil works are included as part of the contract, the total value needs to be less than Rs 100 crore to be covered under the policy.

o       The Finance Minister in a presentation to the state ministers has urged the states to expand their tax base, rationalise their tax regime, improve tax administration and focus on an effective implementation of the VAT regime. The finance minister has also proposed to reduce the peak Customs duty rate by 5 per cent, which is in step with the objective of the government to align India ’s tariff with Asean levels. He has further proposed a move towards a central value added tax rate and make coverage of service tax more comprehensive.

 INFLATION

• Inflation rate, based on wholesale price index has fallen marginally to 4.10 per cent during the week ended June 18, 2005 from 4.33 per cent registered during the previous week. The annual point-to-point inflation rate was at 6.62 per cent in the corresponding week last year.

o       The WPI has risen marginally to 192.9 during the week in review from the last weeks’ level of 192.6 (Base: 1993-94=100). The index of primary articles’ group has risen considerably (by 0.6 per cent) to 190.4 from the previous week’s level of 189.4, mainly due to a considerable surge in the prices of food articles by 0.8 per cent. The index of fuel, power, light and lubricants group has remained unchanged at previous week’s level of 296.3. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight has risen fractionally by 0.1 per cent to stand at 170.7 from 170.6.

• The latest final index of WPI for the week ended April 23, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.0 and 5.96 per cent instead of the provisional levels of 191.9 and 5.91 per cent, respectively.

o       The rate of inflation has continuously declined in the last two months, i.e. May and June 2005. After a long protest, the government has inevitably hiked the prices of petrol and diesel with the effect from June 21, keeping in mind the heavy losses incurred by public oil companies. The impact of a rise in the prices of petrol and diesel on inflation will become noticeable only in the forthcoming weeks.

LABOUR

• According to the Mid Term Appraisal (MTA) of the Tenth Five Year Plan, the state governments will have to bear the burden of providing social security to more than 37 crore unorganised workers. The state governments will have to adopt their own legislations to provide social security to these workers. According to MTA approved by Union Cabinet, the state governments are expected to clearly identify the resources to be raised and benefits to be given including the institutional mechanism. The MTA also added that the state legislations should include safeguards against the problems observed in working of the state welfare boards. The government should also provide welfare services to the unorganised workers, such as compensation for accident at work, death or old age pension in the ‘risk cover mode’ as distinct from the ‘direct exgratia payments’. As per the estimates of the National Council of Applied Economic Research (NCAER) study, the number of informal workers should be around 88 per cent of the total workforce. The only state, which has taken initiative in providing social security to unorganised workers, is Madhya Pradesh, which has enacted an Act for welfare of workers through special levies and taxes on forest produce, minor minerals, mandi transactions, vehicle registrations, sanctions of building plans etc.

SOCIAL INFRASTRUCTURE

• Higher Education

• The government is planning to hike college fees substantially, as Indian universities need financial resources to compete with foreign universities. The Planning Commission has asked the central government to take the lead by increasing fees in the central universities. The Mid Term Appraisal (MTA) of Tenth Five Year Plan has advocated such fees hike, expressing the concern over quality and standard of Indian universities, which at present is non-comparable with foreign universities. According to senior government officials, when banks are offering long-term educational loans with easy instalments, there is no need to subsidise higher education. This fees hike would be combined with an aggressive scholarships and loan programme. The government has allocated Rs. 4,176 crore in the Tenth five-year plan for the growth of higher education system in India , a 67 per cent jump from Rs. 2500 crore allocated in the Ninth Plan. There is certainly some progress on the front of higher education system in India, e.g. the number of state and central universities rose from 133 at the end of the Ninth Plan to 206 at the time of Tenth Plan MTA, the number of deemed universities increased by 59 during the same period. Similarly, the number of colleges has risen to 15,500 from 12,342 and women colleges has increased from 1,500 to 1,650 during the same period. Consequently, the government’s efforts to develop a sound higher education system in India have been evident in the Tenth Five Year Plan.         

EXTERNAL SECTOR

o       India ’s total external debt rose by $11.60 billion (10.4 per cent) in 2004-05 and stood at $123.3 billion as at end March 2005. This is the highest accretion to the external debt in any single year starting from 1990-91.

o       The government has given nod to 20 per cent foreign direct investment in FM radio companies.

o       The government is learnt to have decided to allow 49 per cent foreign direct investment in the proposed Asset Reconstruction Company (ARC). On the other hand, the government has decided to allow foreign institutional investment in security receipts. The aggregate limit for FII investment is likely to be capped at 49 per cent while individual FII limit will be at 10 per cent 

o       The government has decided to put foreign direct investment in retail sector on hold, refusing to submit to the pressure from multinational giants.

o       The power ministry has strongly recommended 100 per cent FDI in trading of electricity through automatic approval route.

o       India has topped the list of developing countries making foreign direct investment in the United Kingdom (UK). More than 400 companies from India have invested in UK .

o       The Goa government is planning to apply for establishing two special economic zones.

o       Twenty-six industrial clusters have exported goods worth Rs 50900 crore in 2004-05 under the industrial infrastructure upgradation scheme (IIUS). Of this, the gems and jewellery cluster at Surat in Gujrat has exported goods worth Rs 30000 crore.

CREDIT RATINGS

• Following the announcement by Navneet Publications ( India ) Ltd. that it has acquired Grafalco brand from the Grafalco SA, ( Spain ), Crisil has reaffirmed its P1+ rating on the short term debt instrument of Navneet Publications ( India ) Ltd.

• In an another exercise, the agency has reaffirmed the rating P1+ (SO) assigned to the Series A1 pass through certificates (PTCs) and AAA (SO) rating assigned to the Series A2 and Series A3 PTCs issued under the securitisation programme of ICICI Bank Limited.

• Crisil has withdrawn the P1+ (SO) rating assigned to Senior PTC of Tata Finance Limited and AAA (SO) rating assigned to Senior PTCs originated by the CitiCorp Finance (India) Limited and Citibank N.A., as all the payouts under these instruments have been made out in full as scheduled.

o       Crisil has reaffirmed the FB+ rating assigned to Share MicroFin Limited’s fixed deposits programme. The rating reflects the company’s good asset quality, improved net profitability margin (NPM), and diverse resource profile.

Theme of the week:

The Television Industry in India*

An overview

The Indian television content landscape is rapidly undergoing sea changes. The rapid expansion of Colour Televisions (CTVs) production is perhaps the most conspicuous success of the new electronics policy. From a small beginning in the early 1980s, when kits were first imported and assembled in India , the production of CTVs has emerged as one of the fastest growing activities in the electronics industry. One of the major demand drivers for TVs has been the expansion of TV transmission coverage over the years. In the last few years the country has moved from a single government owned TV channel environment to one where over 200 channels are being beamed from satellites. The market for all these broadcast waves has also seen sizeable growth to include 42 per cent of all households within the country (85 million households). In India , the demand for CTV’s has closely followed the incidence of international sporting events like Olympics, Asian Games, and World Cup tournaments in cricket, football and others. The high growth of the Indian CTV market during the last decade is primarily attributable to a significant increase in the number of middle and high-income households.

B&W TVs

The television industry started in India in 1970 with the production of black & white (B&W) TV sets. The initial TVs were all 20-inches (20” OR 50 cms) sets. For 13 years, this was the only size offered in the B&W TV market, till 14” TVs were launched in 1984. During the 1970s, the B&W TV market grew at a compound annual growth rate (CAGR) of over 38 per cent. At the end of 1979, the B&W TV stock in the country was at around 1.19 million, which translated into a penetration level of 14 per 1,000 population.

The Government policy on B&W TVs in the initial period was characterised by licensing of manufacturing units for capacity in excess of 10,000 per annum and encouragement to the small scale industry (SSI) sector to set up production facilities with capacities in the range of 2,500-5,000 per annum. While, at the outset, expansion of these units up to 20,000 numbers per annum was allowed, in the mid-1970s there was a freeze on the further approval of capacity expansion. There were restrictions on the import of foreign technology, and the local technology provided by the Central Electronics Engineering Research Institute (CERRI), Pilani, had to be adopted by the manufacturers.

Prior to the 1980s, India 's electronic industry was heavily protected and the consumer electronics sector was looked upon as a luxury goods sector as successive government policies treated it accordingly. While, on the one hand, high rates of excise duties were levied on consumer goods manufactured domestically, on the other, import barriers were raised either in the form of quantitative restrictions or high tariff protection. As a result, the industry used inefficient production methods to produce obsolete products of low quality at high cost.

In the beginning of the 1980s, various attempts have been made to "liberalize" the industry. From 1982 onwards, the government relaxed the restrictions to some extent. The year 1983 saw the removal of restrictions on capacity expansion and on ceiling of capacity to be licensed, although the restrictions on foreign technology continued. From the late 1980s, the growth in the B&W TV market was fuelled mainly by the growth in the 14” segment. A notable development was the launch of 14” B&W TV in 1984, which evoked an even better response from the market, especially since they were affordable for households in the lower economic strata, in both rural and urban areas. In the first five years (1981 to 1985), the 14” market grew at a CAGR of more than 72 per cent.

The B&W TV market, consisting mainly of 14” models, catered primarily to low-income households. The market began to shrink in the early 1990s, but revived temporarily with an exemption from excise granted by the government in 1994. However, since 1999, overall B&W TV sales started dropping again, although there is still a potential market for around 50 million households whose first TV purchase would be a B&W TV. Of late, the B&W TV market started shrinking, owing to the increasing preference for CTVs, while ownership of B&W TVs has increased from 26.7 million households in 1992-93 to 48.1 million in 1998-99. 

In the year 2001, the size of the total global market for B&W TVs was estimated at around 8 million units and India alone accounted for nearly 45 per cent share of this market. The B&W TV market in India witnessed an annual absorption of around 3.6 million units in the calendar year 2002, as compared with 3.8 million units in 2001.

The B&W TV industry is characterised by the presence of a sizeable unorganised sector. With the shrinking of the B&W TV market, many organised sector players have exited from the market. As a result, the share of the unorganised sector has increased from 38 per cert in 1999 to 45 per cent in 2002.

Penetration of B&W TVs

The National Council of Applied Economic Research (NCAER) had been estimating until 1998-99 the figures for household penetration of B&W TVs. According to the data, in the last 10 years period from 1985-86 to 1995-96, the penetration of B&W TVs rose more than five times from a level of 47 per 1,000 households to 240 per 1,000 households, at a CAGR of 17.6 per cent. More recent data from the 2001 Census indicates that an estimated 60.7 million households in India owned a TV, representing a penetration of 31.6 per cent. However, penetration in urban areas was higher at 64.3 per cent as compared with a penetration of 18.9 in rural areas. 

Colour TVs

The rapid expansion of CTV production after the mid-1980s has been perhaps the most remarkable and conspicuous success story of the new electronic policy. From a small beginning in the early 1980s, when kits were first imported and assembled in India , the production of CTVs emerged as one of the fastest growing activities in the electronics industry.

The birth of CTV in India can be traced to the Asian Games (ASIAD) held in New Delhi in 1982. The first attempt to produce a CTV also occurred in 1982, when a government laboratory successfully developed a prototype. In that same year, the technology was transferred to a state-owned electronic manufacturer for commercial production. Ninety thousand kits were imported from West Germany and Korea , a move considered necessary to permit diffusion of the Asian Games to be held in New Delhi . The import of kits was to be barred after the Games. It was expected that the assembling of them would facilitate the companies to become familiar with CTV production technology enabling them to acquire sufficient technological competence to begin local production. The suppliers of kits were required to provide the technological know-how necessary for this purpose. The Central Government encouraged this sector, and subsequently various state governments came up with their own TV companies like Uptron (UP), Keltron (Kerala) and Meltron ( Maharashtra ).

The euphoria over cricket following India ’s victory in Prudential World Cup in 1983 and in the Benson and Hedges cricket championship in Australia in 1985, with the high-quality telecast of Channel Nine provided a great impetus to CTV demand. Numerous companies were attracted by the possibility of assembling and selling CTVs in a highly profitable market without having to make large investments in the setting-up of manufacturing facilities. Continuing its earlier policy of encouraging small firms to enter the electronics sector, only the latter were permitted to assemble these kits. Most of these companies were already producing B&W TVs and possessed the basic assembly facilities. Older players in the B&W TV market, namely Dyanora, Weston and Televista, also diversified into the manufacturing of CTVs.

The number of CTVs produced in 1986 and 1987 were 0.85 million and 1.10 million, respectively, and rose to 1.3 million in 1988. Around 35 per cent growth rate was witnessed when the CTV broadcasting network was undergoing rapid expansion, by setting up Doordarshan Kendras in many parts of the country. In the late 1980s, the CTV market witnessed a rapid growth during 1986 to 1990, with offtake of CTVs increasing at a CAGR of 19 per cent. 

By 1989, there were around 40 players in the market; many of them were very small, with an average annual production of 30,000 units. On the other hand, the 5 leading manufacturers were producing more than 1 lakh CTVs each year. Around 6-7 firms dominated the CTV industry with 80 per cent market share.

However, as a large number of components including picture colour tube required by CTV producers were not locally available, importation of these was permitted. In 1985, around 60 – 70 per cent of the value of components used by the CTV manufacturing companies were imported with the trend continuing in subsequent years, entailing huge foreign exchange outgo every year. As a result, the central government tried to restrict imports by raising the excise duties on various components. In addition, the government adopted a policy to induce firms to indigenise production gradually in order to minimise imports. 

Indigenisation

Official predictions of indigenisation had projected that local production would completely replace imported goods by the end of 1987. To increase the pace of indigenisation, government lifted earlier restrictions on the entry of large firms into the CTV field, including those with up to 40 per cent foreign equity. Actual progress, however, was considerably slower than expected for several reasons. Firstly, the growth of the components industry has been very slow and in most cases local substitutes were either not available or were of poor quality. This was particularly true for some critical components such as picture tubes, fly-back transformers, deflection components and integrated circuits (ICs).

The most ambitious indigenisation efforts were being made in the manufacturing of picture tubes. Initial efforts at localising production began in 1984 when three firms, Samtel, UPTRON and JCT were granted licences to set up production plants with a total capacity of 1.3 million tubes per year. Since then, their operating capacity has expanded and by 1989 the three companies has possessed a total combined operating capacity of 4 million tubes per year. In addition, Samtel, UPTRON and JCT also established collaborative ventures with Mitsubishi, Toshiba and Hitachi respectively.

Picture tube production is an extremely capital-intensive activity. The worlds over modern plants are highly automated and operate at very high levels of capacity utilisation. Whereas Indian plants were not only small but they also used outdated technologies thus affecting both the cost and quality. Production levels were low and less than half of their potential capacity was being utilized, thus leading to higher production costs; companies were finding it difficult to sell even their limited production. As a result, CTV manufacturing companies started purchasing cheaper imported picture tubes in its place of expensive locally manufactured tubes.

The removal of restrictions on the entry of large firms and firms with foreign equity, which was expected to accelerate the pace of indigenisation, has not been very effective either. In fact, few of these companies have been attracted to CTV production. Only two such firms, Philips and BPL-Sanyo, have a significant share of the CTV market and both had already been active in the electronics industry and possessed a long experience of import substitution. They have developed extensive networks of quality-conscious local suppliers. Both firms have attained a higher degree of indigenisation than their competitors. BPL-Sanyo, for example, reports that local production accounts for 80 per cent of the value of its components. These firms also use their technological competence and manufacturing facilities to augment value addition.

Poor R&D and Design Activities Prior to 1990

Most of the Indian CTV manufacturing companies didn’t have better Research and Development (R&D) facilities. Even large electronics firms, who have design departments and CAD facilities, for their other products, ignored designing CTVs. For several years Indian CTV firms operations were based on the designs originally imported with the kits. Companies like ONIDA, Orson and Weston were in a position to obtain new designs as well as technical assistance in solving their production problems through informal arrangements with their Japanese suppliers JVC, Sony and Hitachi respectively. The reliance of Indian CTV producers on foreign designs continued till the mid-1980s. By the late 1980s, big CTV manufacturers had initiated to make new designs, though to begin with they modified the existing designs. In the beginning of the 1990s around 2-3 companies mastered the art of making new designs.

CTV growth – Post-liberlisation

The second phase of CTV growth came on the heels of the 1991 economic liberalization programme, after which there was a reduction in both excise and import duties. Simultaneously, with the opening up of Indian skies to foreign satellite channels in 1991-92 and the launching of cable TV, the demand for TVs grew further. This was the period when domestic players like Videocon, BPL and MIRC Electronics consolidated their presence in the CTV market through their focus on both product promotion and technology – the latter through collaborations with big international players.

Post-liberalisation, the CTV market grew rapidly based as it was on an aggregation of both new and pent-up demand. The CTV market grew at a CAGR of 32.1 per cent from 1995 to 2000, though within the period, there were spells of drop in growth due to recessionary conditiond in the country. During the period 1997 to 2000, the market for CTV took off again, aided by factors such as the implementation of the Fifth Pay Commission and the Cricket World Cup. There was a brief spell in 2001 when the CTV market increased merely by 1.1 per cent, the slowdown being a reaction to increased sales during the earlier years and also due to economic slowdown and some natural calamity. However, the sales increased by 29.3 per cent in 2002 to an estimated 7.5 million units, predominantly because of increased sales during the football World Cup and the ICC Cricket trophy in Sri Lanka . 

After delivering a staid performance in 2003-04, demand for CTVs has bounced back in recent months it has witnessed a growth of 17 per cent for the financial year ended March 31, 2005.

MNC’s in the Indian market

The entry of multi-national companies (MNCs) was facilitated in the 1990s with the Government of India (GoI) embarking on a phased deregulation of the durable sector. In the Indian CTV sector, the first generation of MNCs consisted of predominantly Japanese companies like Sony, Akai and Aiwa which established their presence through value-added features. Among the first generation Japanese players Akai and Aiwa followed a strategy of using the distribution network of entrenched players like Videocon and Baron International, respectively, while Sony chose to go alone probably because its positioning as a global quality leader could get diluted in the event of a tie-up with an Indian player.

The second generation MNCs were the Korean companies, LG and Samsung, who sought to storm the market all by themselves with a rapid launch of a slew of products, simultaneously across different segments. The most recent entrants into Indian consumer electronics are the Chinese players, namely, TCL, Haier and Konka. These companies are now setting new benchmarks in price leadership through their inexpensive product lines, endangering the dominance in the low price segments of established players like Videocon and to some extent, even the unbranded players. The predominant core competence of Chinese players is their low manufacturing cost, owing to enormous economies of scale, which is supplemented by an overwhelming financial and non-financial support from the Chinese government for the electronics sector.

Increased Competition – Post liberalisation

The Indian consumer electronics industry consists of players of domestic origin as well as multinational companies (MNCs). Of late, the MNCs have gained sizeable presence in the Indian CTV market at the cost of domestic players.

As explained earlier since the mid-1990s, the Indian TV market had witnessed the entry of global brands like Akai, Aiwa, Sansui, TCL, Haier, LG, Toshiba and Samsung. Videocon was marketing the Akai, Sansui and Toshiba brands in India . (Akai was initially with Baron International). Aiwa is now a subsidiary of Sony. The other MNCs, namely, Haier, Samsung, LG and Sony, entered independently.

Till the late-1990s, the Indian CTV market was dominated by older players of domestic origin, namely, BPL, Videocon, Mirc Electronics (Brand name – Onida). BPL, which was the market leader in 2001, lost its market leadership position in 2002 to LG. The market share of BPL and Videcon declined to 10.3 per cent and 7.9 per cent in 2002 from 22.5 per cent and 16 per cent in 1999 respectively. Also, Onida’s market share declined in the mid-1990s and had reported an increased market share in 2000 and 2001, mainly because of higher sales of 14” CTVs. However, Onida’s market share had dwindled to 8.6 per cent and 7.5 per cent in 2002 and 2003, respectively, owing to stiff competition and aggressive promotion of 14” models by competitors, especially LG and Philips. Another established player – Philips India Ltd. – has also lost its market share during the period 1999 – 2000, but its market share has increased marginally in 2001.

The decline in market share of the domestic players was due to large sunk in costs in pre-existing product lines which could have reduced their flexibility to compete against well-financed MNCs as they manufactured higher-quality differential products and additionally MNCs had enough financial resources to undertake an extensive advertising and promotional campaign. In the initial years, the MNCs captured the market for higher-end differentiated products, but at the end of 1900s they targeted the middle and lower-end products by offering lower prices for quality products.

Since 1999-2000, MNCs such as LG and Samsung have managed to increase their market shares on the strength of aggressive marketing. LG claimed the leadership position in 2002. Korean companies, LG and Samsung’s market share has increased from 7.4 and 8.2 in 1999 to 14.6 and 11.3 in 2002, respectively.

While the top 5 players – LG, Samsung, Mirc (Onida Brand), Videocon and Philips – have continued to dominate the industry, Sansui has been the key loser, as its market share dwindled in 2004-05. The year 2004-05 saw aggressive overtures by Mirc, Philips and Sony on the pricing front in a bid to compete with the likes of LG and Samsung. However, LG and Philips gained market share in the flat CTV segment, while Samsung, Sony and Videcon saw a marginal dip in their market share. With flat CTVs witnessing a pick up in demand, the conventional CTV category saw a decline of around 3 per cent during 2004-05.

As indicated in Table 6 the market shares of the players in CTVs and Microwave Ovens segments illustrates the growth in market share of the Koreans and their dominance over the market. Korean company, LG Electronics has retained its leadership position for the year ended March 31, 2005 across CTVs with a market share of 25.1 per cent. Another Korean company Samsung is ranked second with a market share of 16.8 per cent. Within microwave ovens too, LG captured 41.4 per cent, which was more than twice of the nearest rival, Samsung, with 20.4 per cent market share.

In the 7.8 million units CTV industry, leading player LG has strengthened its hold by growing across all segments of the CTV market. Propelled by growth in the 21” category, the flat CTV segment gained momentum across segments.

Competitive Prices

Because of the intensification of competition, the CTV industry has witnessed significant price erosion over the past few years. In the year 1998-99, the average price of conventional CTV was around Rs.13,200 which has declined to Rs.10,200 in 2002-03.Intense competition and price erosion is expected to continue in the medium term.

The Korean Game Plan: Source, generate volumes, build capacity and expand

The Koreans, unlike other players in the domestic market, have aimed at first generating brand equity and building volumes, and then investing in building capacities and expanding the market share. The benefits of the strategy – volumes led investments in capacities result in high capacity utilisation and thereby high return on capital employed. This approach is evident in both LG’s and Samsung’s business model in the Indian market.

LG began operations in India as a trading company in 1997, importing products from its Korean parent company. Initially LG India launched low-priced models across categories like CTVs, refrigerators, ACs, microwave ovens and washing machines. The company offered Indian consumers, international quality products at affordable rates. LG India, seized market shares from virtually every player in the market — Videocon, Godrej, Whirlpool and BPL. The brand was able to record a quantum leap in market share primarily due to the price factor. Other brands present in the market at that time, like Panasonic, Sony and others offered superior quality too, but at prices that were far from affordable for the consumers

LG India, after establishing its brand equity in the Indian market, set up its manufacturing facilities at Greater Noida to manufacture CTVs, semi-automatic washing machines, and air conditioners. High-end products in each of the categories continued to be sourced from the parent company. At present LG has manufacturing facilities at Greater Noida and Ranjangaon near Pune, and the company sells CTVs, air conditioners, refrigerators, washing machines and mobile phones in India . In 2004, the company sold 7.5 lakh flat TV units and 1.6 million conventional TVs. The company is expected to increase its market share in the CTV market to 30 per cent from 25 per cent in 2005. Ten years ago, nobody could predict the Korean takeover of the Indian market.

Samsung too followed a similar strategy. The company, which started operations in India with a small presence, has emerged today as one of the leading players in the consumer electronics market. After establishing its presence in the Indian market initially, the company gradually increased its production capacities to match the demand in the market. In December 1998, the company commissioned a manufacturing facility for 50,000 microwave ovens. In 2003, the company commissioned its manufacturing at Noida.

TV Penetration in India

            Post-liberalisation, the TV market grew very rapidly, riding on the consumerist boom. Despite of achieving higher growth rates in the last decade the overall TV penetration in India is still at lower level of around 80 TVs per 1,000 people compared to China ’s 265 TVs.

As per the availability of the critical information on infrastructure in selected countries, India ’s TV penetration was 64 per 1,000 people in the year 1997-98 (Table 7).

India ’s Rural TV Market

Despite the rural marketing focus of TV companies since the end of 1990s and improvement in access to electricity, just about a fourth of the rural households have a TV set. Radios and transistors continue to be the primary source of entertainment and news in rural areas, according to estimates of the National Sample Survey Organisation (NSSO). The survey states that affordability was part of the reason for the increased penetration of audio medium. In the year 2002, TV penetration in rural houses was about 26 per cent against 13 per cent in 1993. In contrast, 66 per cent of the urban homes reported ownership of TV in 2002 against 49 per cent a decade earlier.

Government’s rural electrification plan may perhaps boost the demand for CTVs in the next 2-3 years. The rural market for CTVs is expected to grow significantly following the finance minister’s announcement in the Union Budget 2005 that rural electrification will now spread to 2.3 crore households. Industry players have viewed this as a huge opportunity to increase penetration levels. Companies are now looking to have CTVs, which will specifically target rural market. Sansui plans to launch battery-operated CTVs which will be an added feature in CTV at an entry-level price point of Rs.6,000 for a 14” model. Likewise, Videocon too intends to launch battery-operated CTVs from Rs.4,500.

India ’s TV Exports

            In the year 2003-04 India exported merely 1 million CTVs (11.1 per cent) out of the total production of 9 million CTVs. As compared to India , China exports 12 million CTVs or 26.7 per cent of the total production, whereas Thailand exports 81.8 per cent of its total CTV produced in that country.

Currently, India ’s exports constitute less than 12 per cent of total production, which is estimated at Rs.20,000 crore. On account of good economies of scale and availability of cheap labour in India , manufacturers are looking to hike export capacities of their finished products to cater to existing and new international markets. LG India, is planning to hike revenue from exports from $85 million to $175 million over the next 2-3 years. This will come through more exports to the Middle-East, Sri Lanka and Nepal apart from forays into Iran , Iraq , Bangladesh and Africa .

Meanwhile, Samsung India too is planning to export one lakh CTVs to Saarc countries, Middle-East, Africa and Commonwealth of Independent States (CIS) countries namely, Armenia , Russia , Kazakhstan , Belarus this year. With the move, Samsung hopes to garner an additional Rs.100 crore as export revenue by next year. Videocon company is also targeting higher export revenues of Rs.500 crore from the current level of Rs.320 crore.

Indian MNC

Indian corporate group Videocon Industries Ltd., the country’s largest TV maker, is making acquisitions in the domestic as well as international market. Recently, Videocon has signed a deal to acquire Thomson SA’s colour picture tube (CPT) business for €240 million (Rs.1,264 crore). Spread over five plants in China , Poland , Mexico and Italy , Thomson’s 19 million units of CPT capacity has annual revenues of €850 million euro. Videocon will finance the all-cash deal through its off-shore company Eagle Corporation Ltd. Videocon proposes to fund the acquisition on its own by accessing domestic international debt/equity market. Videocon, on its part, has lined up $500 million investments towards upgradation of these units. The deal will be closed in August or September 2005. Around 12,000 employees of Thomson will be transferred to Videocon with this acquisition.  Post-acquisition, the total turnover of the Videocon group is expected to be Rs.17,500 crore ($4 billion) with more than Rs.8,700 crore coming from global operations. Thomson’s facilities include full-fledged R&D facilities at various places located in Europe and China along with access to a large resource of the patents and IPRs relating to the most basic technologies in CPT.

Videcon signed one more deal on July 3, 2005 with Electrolux India , a loss making company. Videocon is set to take over Electrolux Kelvinator Limited (EKL) in a no cash outflow deal. The Videocon-Electrolux deal is believed to be on the lines of the recent deal it signed while acquiring Thomson’s CPT manufacturing business. 

Critical Issues for Domestic Companies

In segments such as CTV, factors like access to internationally proven technology, brand image and extensive distribution network are essential for higher TV sales. In a world of continuous product innovation leading to ever-shortening product life cycles, access to technology has been a significant core competence. The few successful domestic players of today like BPL and Videocon have acquired international proven technologies from global majors, whereas companies like Orson and Salora were not sufficiently efficient in improving their manufacturing technology. The success story of the second generation MNCs, especially the Korean players LG and Samsung, got scripted largely because of their ability to offer a wide range of innovative features through a rich technology base built up through years of global experience.

There is a growing concern that liberalisation has eroded the industry's technological base and made it far too dependent on imports. A policy shift is likely to occur in the near future to promote greater localisation of component production as well as local research and development. The Department of Electronics has acknowledged that while liberalisation has allowed the industry's rapid expansion, it has also been responsible for weakening its technological base. Major findings in a Department’s report are:

a)      A significant drop in R&D activities with even simple products which could feasibly be designed locally were furnished through imports;

b)      Foreign collaborative efforts were undertaken exclusively for the import of plants and kits to the neglect of technological know-how and know-why;

c)      A sharp decline in domestic production's share in total consumption and

d)       Stagnation of exports

In addition, brand image has been a major source of success in the highly competitive scenario in India . The Korean players have been able to capture significant market share because of their global brand image, which was reinforced in the Indian market through extensive advertising and promotion.

The profitability of the domestic players has been low, mainly on account of the following characteristics of the industry:

a)      Overcapacity: The industry has been plagued by overcapacity due to rapid capacity expansions by the players, expecting high growth rates. However, growth has been slow and volatile as compared to expectations, due to infrastructure bottlenecks and seasonality of purchases. Therefore, low capacity utilisation and low operating efficiencies have resulted in lower profit margins.

b)      Intense competition: Owing to intense competition, companies need to spend heavily and consistently on building brands. Around 4 – 6 per cent of the operating income of most companies in this sector goes towards advertising expenses. This expenditure, coupled with the need to service and maintain extensive distribution networks, results in low operating margins.

c)      The Korean dominance: The market share of the Korean companies is rising consistently since 2001-02, resulting into larger dominance over the Indian market. This dominance is underpinned by three strategic choices: volume-led capacity growth, diverse product portfolios, and close touch with movement of stocks on the ground.

[*  This note has been prepared by Bipin K. Deokar.]

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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