T&M rental model catches on in India

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Test and measurement (T&M) instruments is a derivative market that’s linked to five major verticals namely, defence and aerospace, telecom, manufacturing, government departments and the educational sector. In 2009-10, the T&M industry in India grew by 10.8 per cent, and the total market size today stands at Rs 8 billion, up from the Rs 7.22 billion of the previous fiscal year. The growth of T&M in the telecom sector has been fuelled by fast growing subscriber base and the arrival of new technologies like 3G, WiMAX, LTE, etc, that demand specialised measurement equipment. Besides, with the escalation in security concerns across India, the T&M industry has a huge potential to meet mission critical testing needs. And with increased R&D activities, the growth in the T&M field is certain.

By Richa Chakravarty

Monday, September 05, 2011: Growth drivers

T&M instruments play a vital role in every phase of a product’s lifecycle. India’s proven strengths in semiconductor design, infrastructure development, migration of voice and video to Internet protocol (IP), the growth of the mobile phone market, etc, are major reasons for the growth of this sector. Moreover, design and R&D establishments have created innovative products in this domain, further boosting the growth of this sector. The demand from the defence sector is also growing with new projects being undertaken by DRDO labs and by ISRO. The opening of new IITs and investments in high value equipment by other universities has led the educational sector to also boost the overall development of the T&M industry.

Why rentals?

Madhukar Tripathi, manager, teleco segment, Anritsu

The T&M industry has its own challenges. Ever increasing labour costs, government policies and bureaucratic delays are the major woes that this sector faces. Non-availability of locally manufactured key components, total dependence on the import of components and inadequate infrastructure are major hindrances to the development of local manufacturing. If the product is to be manufactured in India, raw materials like electronic components and mechanical parts need to be imported, and that would attract customs duty ranging from 5-10 per cent. Thus, local manufacturers would lose out on cost competitiveness. These factors hamper the growth of the T&M sector.

Therefore, the new rental model is quickly picking up in the country, though at present, this concept is still at a nascent stage and is yet to gain traction. However, in developed markets like the US, consumers find this model attractive. With increasing pressure on reducing capital expenditure, rentals seems a viable solution for buyers. With industry moving towards outsourcing, T&M rentals are increasingly viewed as a way of outsourcing T&M management.

“In line with the business philosophy of the West, any organisation would like to concentrate on its core business without getting involved in

Rajan Prabhakar, director, Livingston India

managing non-core functions such as administration, payroll, finance, etc. Management of T&M systems is now considered a non-core area for most users of T&M instruments. They would rather concentrate on their basic task of development, deployment or manufacturing rather than managing T&M. So it’s just a change of mindset which has helped this option in gaining momentum,’’ says Rajan Prabhakar, director, Livingston India Pvt Ltd. Having served various countries across the globe for over 40 years, this UK based company finds great potential for this model in India. It has a range of services catering to rentals, leasing, rent-to-buy, used equipment, equipment disposal and calibration management, which will enable its customers to source T&M equipment as and when required.

Growth prospects for rental model

Research shows that over 50 per cent of purchased equipment is either infrequently or never used after the initial reason for purchase. There are huge benefits that customers can reap by adopting the rental model. This is especially true in the fields of design and R&D, where people are constantly looking for innovations in products and business models, in which case, this model turns out to be economical, as users only have to pay for the specified period of time. For short term needs, for a specific project or when there is uncertainty about whether the equipment will be in use continuously over its life, then it makes sense to rent.

Venugopal J, country manager, business development, VTI Instruments

With rentals, one has the flexibility to change or upgrade without worrying about the cost of looking after the equipment. Globally, the rental model has gained immense momentum as the US market recorded total revenue of US$ 500 million, the European market grossed US$ 100 million, while the rest of the world seems to hold the potential for US$ 50 million. However, this option, which has been less tried in India, has a business potential of US$ 5 million.

End users opting for a rental of T&M equipment can save around 20-50 per cent of the cost of new instruments. Opines Madhukar Tripathi, manager, telecom segment, Anritsu Pte Ltd India Branch Office, “India has good potential for this model and it is increasing day by day as all those involved in equipment installation, R&D, etc, are under pressure to reduce capital expenditure (CAPEX). A few companies are already offering this service. Renting model suits those companies who are involved in short term projects or have tight budgets.’’

Echoing the same opinion, Sadaf Arif Siddiqui, technical marketing engineer, Agilent Technologies India Pvt Ltd, feels that Indian industry is moving towards globalisation and is very much in sync with global markets. Some of the sectors that involve huge investments like telecommunications and semiconductors are actively looking at this new model as it is cost effective.

What are the benefits?

In the traditional purchase model, a huge CAPEX is involved to procure T&M equipment, especially in the case of high end devices. Based on a project’s requirements, the customer can now rent these equipment at a minimal price, hence avoiding CAPEX.

Sadaf Arif Siddiqui, technical marketing engineer, Agilent Technologies

Apart from being economical, this concept quickens the process of procurement. “Sometimes the buying process takes a considerable amount of time as the purchase cycle involves a lot of factors like drafting specifications, finalising, tendering and procurement. It may stretch to a period of 6-9 months, depending on the nature of the buyer and the complexities involved. Just to make this process faster, customers prefer renting over buying as it cuts down the whole process by a significant amount of time,’’ explains Siddiqui,

Rapid changes in technology and changing requirements force customers to procure the latest devices, especially in the case of design and R&D establishments. “Buyers get their job done by spending a lower amount. They do not have to worry about maintenance issues like calibration and repairs, nor about ROI. So it’s beneficial for them. But if an instrument is required for a longer period or needs to be used repeatedly, then buying is the best option as rentals would be more expensive,’’ adds Tripathi.

The challenges

For the rental concept to become popular, a change of mindset is what is required. Some view this concept as a hindrance, as sales of T&M equipment get affected. “As a manufacturer, we do not patronise this approach as it is a loss if customers rent products from vendors as and when required,’’ says Venugopal J, country manager, business development, VTI Instruments Pvt Ltd India. Siddiqui echoes the same feeling. “This new model promotes distributors to stock the products, which, in turn, gives quick business to manufacturers but we, at Agilent, want to maintain a balance between direct sale as well as new model of renting so that both customers and company are benifitted.”

Yet others believe that the manufacturers will face problems if this model becomes established as they will have to strike a balance between purchases and renting. “Renting on the one hand reduces the sale of equipment, but on the other hand, since the financial risk associated with renting is less, many equipment can be taken on rent by the buyer. Increased usage always leads to better sales in the future,’’ adds Tripathi.

Moreover, the public’s attitude regarding caring for the assets taken on rent has to change. Lack of care and unwarranted damage may make the rental model unviable. Though the model is quite flexible from both the sellers as well as the buyers point of view, yet there are a few challenges or limitations in this approach.

In order to keep the products in stock and, that too, in large numbers, rental companies will have to make big investments and also maintain teams technically capable for supporting this business model.

Apart from that, the rental company has to have a streamlined logistics setup for the smooth flow of equipment. “No agency with any amount of financial assets can ever create a large enough inventory to cater to all requirements within the region. The success lies in synergising global assets to cater to demands across the globe. For this, the logistics should be streamlined,” explains Prabhakar. However, in India, a major hindrance relates to regulatory issues. If that is sorted out, the renting model is bound to gain momentum.

Benefits of renting

Commercial reasons

  • Financial forecasts: Financially, the long cycle time to procure instruments makes it difficult when sudden needs crop up, which require immediate availability of T&M instruments.
  • High initial cost vis-a-vis low utilisation: In 90 per cent of the cases, T&M instruments are underutilised for 30-40 per cent of their life time, thus giving poorer returns for the investment.
  • Higher maintenance costs: T&M equipment maintenance is an elaborate affair in terms of storage conditions, accounting, calibration, etc. It has now been acknowledged that the cost of ownership of T&M instruments far exceeds the cost of purchase.
  • CAPEX vs OPEX: Rentals offer the opportunity for organisations to bid for a project without worrying for the permanent assets that they need to create. Thus, what’s spent on renting the instruments can be made up as the company earns revenue.

Technological reasons

  • Rapid obsolescence: With constantly changing technology, it becomes difficult for customers to keep their T&M inventory up to date. Hence, there is always a fear of obsolescence and the rental model provides firms immunity against this.
  • Technology diversity: Any organisation such as a development centre may work on different technologies at any given point of time. It is difficult to stock T&M instruments to cater to all technologies. Hence, renting comes as a boon.

Time considerations

  • Right technology just in time: Rarely do projects have enough time to procure relevant T&M instruments. Rentals offer the best solution in such cases.
  • In time for the time: Rentals allow you to procure items just for the period that you require the instruments and at the time when you need it. So once your requirement is over you can get rid of the equipment.

Source: Livingston India Pvt Ltd

Players in renting model

• Toshniwal Enterprises Controls Pvt Ltd

• Livingston India Pvt Ltd

• Test Equipment Connection Corporation

• Sumitron Exports Pvt Ltd

• Seven Hills Opticommunication (P) Ltd

• DD Group, The Mining & Engineering Corporation

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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