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September 8, 1998


 Pentiums are French fries! Just because they don't look it, customs decide Pentium II and Celeron are not chips. They are 'dutiable' circuit boards ;-) Priya Ganapati
in Bombay

Looks matter. Only because the Celeron processor from Intel has a slot instead of pins and is being shipped with a different kind of packaging, the customs authorities have questioned its classification and moved it along with big brother Pentium II under the 'printed circuit board' head.

Email this story to a friend. This happened two months ago and means that Celeron and Pentium II have been attracting significantly steeper duties that should not be applying to processors.

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It also means reluctance to import the chips and their consequent shortage in India. The markets have only felt the crunch this month and if matters continue the way they are, within two months, Intel processor based personal computers are likely to cost more.

Now that must be something, defying the very fundamentals of the PC business, where prices are actually supposed to fall.

In the thin-margin PC business, prices of both the branded and unbranded PC segments in the country are bound to rise.

In the extremely price-sensitive Indian market, the large unbranded PC segment is important. Small entrepreneurs assemble PCs in their homes or tiny workshops and sell them. The only guarantee for quality that they can offer is that they are using an Intel chipset.

Intel was quick to realise this and set up a large community of these entrepreneurs by calling them 'genuine Intel dealers' or GIDs.

Now, it is this community of GIDs, Intel's ambassadors, that is worst hit. They may not be a tolerant lot. After all, for them it is putting their livelihood on the line. The shortage robbed them of 30 per cent of their business this month. And just because there is a winning bet in every situation, these GIDs are making it.

Cyrix, Intel's archrival in India too, has emerged as the best alternative and a rescuer of the GIDs. A GID estimates that Cyrix sold 3,000 to 4,000 chips a month. In the last two months they may have been doing between 30,000 to 40,000. A tenfold rise!

One GID explained to Rediff "I have to use Cyrix chips to deliver as per schedule. The market has been extremely down for more than a month now. We are facing a lot of problems. There is a terrible shortage of Pentium II chips in the market."

The only way out would be to opt for PCs without the Pentium II or Celeron processors. Yet, their branding is so strong that it may actually result in a fall of PC sales if the popular processors are not available.

Intel, which has about 85 per cent of the Indian market, is unfazed, or at least appears to be. "We are competing in a different kind of segment. Our competitors, who hope to gain out of the situation, are waiting for too much," an Intel executive said.

PC manufacturers like Wipro, HCL and Zenith are trying hard to tide over the crisis. The production schedules of such larger companies have not been affected yet. But then they too are keeping their fingers crossed.

Girish Paranjpe, vice-president, finance, Wipro, denies they are facing any problems in procuring Pentium II chips. "We are not having any difficulty right now. But if the increase in duty continues for another three months then it would lead to an increase in costs. The margins in this business are very low so we would be forced to pass the cost hike on to our customers," he told Rediff.

Paranjpe also laments that the increase in price of PCs would curtail demand and spell doom for a country that already has the lowest PC penetration in Asia.

Kanwaljit Singh, marketing manager, Intel, in a faxed statement, told Rediff, "Intel is currently experiencing temporary availability issues with Pentium II processors. It is not uncommon to experience temporary shortages through product ramps and process transitions. This temporary shortage is because we underforecast demand and the demand for Pentium II processors has been growing robustly. Intel is actively working on increasing processor production to close this gap."

But in the note he failed to address the customs issue, the root of all the troubles.

The Pentium II processors were earlier imported into the country as 'integrated circuits' under the head CPU as per rule HS 8542. The chips would then bear a duty of 5 per cent basic and 18 per cent countervailing.

However, Celeron came with a different packaging and a different kind of technology. Celeron chips are of the stand-up type and fit into slots on the motherboard instead of the pin-grid array design of the Pentium chips.

The customs then questioned the classification of the processors and declared that both would now fall under the head 'printed circuit boards'.

PCBs attract a steep duty of 22 per cent basic and 13 per cent countervailing.

Intel is extremely diplomatic about the entire affair. Varun Bhargava, finance manager, Intel, told Rediff, "The customs has indeed raised questions regarding the appropriate classification of Pentium II and Celeron processors. They are both part of the Intel processor family using advanced silicon and packaging technology. We believe they should continue to be classified in the same manner as processors have hitherto been classified."

Another Intel executive said, "The socket design has moved to a slot design. The appearance has changed, but the function remains the same."

However, sources at Intel admit this has led to orders getting stalled and has given opportunity for competition to become active.

But then all is not lost yet. The problem that started about two months back will "hopefully be resolved by the end of next week" well-informed Intel sources have hinted.

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