Portable Power

If you’re looking for a theme to dominate this year’s Gitex show then it’s a fair bet that mobile PCs will be in the running. The industry’s leading hardware vendors all promise to be out in force, showcasing the latest notebook models that hold the key to their fortunes in 2007. But behind the wide smiles and glitzy exhibition stands resides the pressure of keeping pace with a fast-moving sector and establishing the go-to-market channels that will guarantee ongoing growth.

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By  Published  October 31, 2006

Mobile PCs are rapidly becoming the dominant form factor in the Middle East and there are no signs of this trend being abated, especially after the regional notebook market increased an almighty 31% to 675,000 units in the second quarter.

And while computer traditionalists will argue that the desktop market still remains almost three times as large, the fact that it is growing at half the pace means the chasm between the two categories is forever narrowing.

Recent data published by IDC confirmed that notebooks were the driving force of the GCC markets in 2005 with shipments shooting up by more than 75% and accounting for 48% of total market volume.

That trend is expected to be even more pronounced this year.

“The flexibility notebooks afford is now seen as essential to business in the region,” said Omar Shihab, research manager PCs and systems at IDC's Middle East office.

“Small and home offices and SMB businesses in particular invested heavily in portables and will continue to do so, especially as wireless technology makes mobility a growing reality.”

In markets such as Saudi, notebook sales are even outstripping desktop sales by a considerable margin, offering a glimpse of what is likely to happen to other countries in the region as internet and broadband penetration increases.

Mathew Thomas, head of IT for MEA, Turkey and CIS at distributor Redington, cites Saudi Arabia, UAE, Qatar and Kuwait as the hottest markets for notebooks at the moment.

“There is a fairly decent population in these countries and the general economy is strong - mainly because of the oil prices, government spending, events such as the Asian games in Qatar, and investment in retail.

The cost of connectivity is also coming down, which is another reason that these few countries are doing well.”

Toshiba, the third largest notebook PC producer in MEA with a market share of 16%, grew second quarter sales 11% year-on-year to more than 100,000 units, and regional boss Ahmed Khalil admits the emphasis is on scaling with the market.

He explained: “In Europe the challenge is to keep the same numbers and revenue as last year, but here it is how to grow faster in a really fast growing market.

It requires a slightly different mindset. I expect the Middle East to grow around 60pc year-on-year in notebook PCs.

That is our expectation for the fourth quarter, and on average for 2007,” he added.

Khalid Wani, channel manager at Lenovo Middle East, hails Saudi and the UAE as key markets, but warns that each geography must be treated on its own merits.

“The market size for Saudi is far bigger than UAE, but UAE has become a tangible hub because of its flexible infrastructure.

A lot of fulfillment happens from there so the market dynamics are more complex than what you have in Saudi.

In the notebook industry, Saudi is primarily seeing a lot of movement on the consumer arena so the strategy that you would probably adopt would be slightly different to what you would in UAE.

And if you compared it with Bahrain, for example, it would be a different strategy again because over there you still have a lot of growth to come from the consumer segment.

The financial and banking sector is booming there too,” he added.

The GCC nations might be setting the pace when it comes to notebook consumption, but the pattern is already catching on elsewhere.

In the non-oil based economies, like Levant and Egypt, notebooks contribute a low portion of the overall PC market, but burgeoning growth rates — in Egypt’s case the market doubled to 27,000 units during the second quarter - suggest change is imminent.

“You can compare [Egypt] to the Saudi and UAE markets five years ago,” said Sascha Haake, director SME and channel at the Middle East operation of PC vendor Fujitsu Siemens.

“The trend is really moving in the direction of notebooks, but at the same time they are still selling huge amounts of desktops.”

This development has not been lost on the distribution community either.

With the market still demonstrating plenty of potential for further growth, wholesalers are aggressively trying to whip up demand among resellers who haven't already embraced the mobile revolution.

“Now is a good opportunity for resellers to focus more on the notebook business because its share of the market is booming,” declared Frank Sheu, CEO at Almasa, a large partner of notebook vendor Asus.

“The margin percentage for the notebook business is quite a lot higher than for other IT components.

It’s almost 7% to 10%, while other components are 3% to 6%,” he added.

Rival Redington is also looking to push mobile lines into SMB partners that may currently focus on other product sectors.

“We are trying to encourage companies that may typically resell printers, for example, to also provide notebooks due to the higher margin opportunities,” said Thomas.

Those looking to make additional income beyond the box need to consider selling complementary products, such as web cams, external storage devices and software, alongside the notebook.

“A smart reseller is able to sell the features of the notebook which will solve business problems and it will be able to basically sell the customer things which add value to the product and the experience,” said Anil Gandhi, general manager PSG at HP Middle East.

“For example, if you are going to go on a long flight, you want a notebook which can last eight or nine hours.

We sell accessories that allow the notebook to work for nine hours at a stretch.

In a home office setting or even in the office you could sell a smart docking solution to the customer, which would then give you an opportunity to sell devices that can connect to the docking station like printers and LCD panels,” he added.

Rival Lenovo insists is also eager to boost add-on sales among notebook partners.

“We are working strongly on to ensure that our attach rate on the other peripherals that we offer improves,” said Wani.

“We initially had a limited portfolio of peripherals that could go along with a notebook, but over the past couple of months we have added a lot of new products and are promoting a lot of valueadded bundles for the resellers to make additional bucks.”

One distinctive aspect of the notebook channel is that the consumer and corporate sector remain very different beasts, requiring vendors to adopt a separate strategy to tame each one.

“If you are selling in the notebook space you really have to offer the full bandwidth of products,” agreed Haake at Fujitsu Siemens.

“On the one hand you must have the consumer products with gaming capabilities and other features, and on the other you need the professional perspective that goes from an entry-level price performance notebook up to the high end tablet PC convertible notebook.”

The notebook market in the Middle East is already divided into multiple price bands, ranging from US$500 low-end devices up to US$9,000 models containing the latest technology.

Pricing remains a sensitive issue in the market, particularly with the sharp descent of average selling prices.

Some vendors, such as Sony, claim they have put mechanisms in place to prevent local partners from instigating a price war.

“The price control across all VAIO selling outlets is strictly maintained,” insisted Dhamendra Lalai, senior manager at electronics giant Sony’s IT marketing department.

“This ensures that consumers can focus on buying VAIO from a place of their liking without fear of finding it cheaper elsewhere and channel partners focus on providing the value added buying experience to the customer without wasting time on price negotiations.”

While growth in the commercial sector is considered steady and more predictable, the consumer market is recognised as the catalyst for the current peak in demand.

However, the market hasn’t been without its challenges and at least three sources cited channel stuffing and inventory surpluses as issues that have been dogging the notebook market since the end of Saudi Gitex.

Meanwhile, the cancellation of the Dubai Shopping Festival in the first quarter, and subsequent stock market troubles in Saudi, also created some temporary anxiety among buyers in the market.

“We’ve been able to grow in a healthy manner but when the consumer confidence is low they tend to buy the most economical product offering in that case,” said Khalil at Toshiba.

“When I specifically look at my product mix in the second quarter I would pinpoint it as one of our weakest quarters when it comes to achieving a healthy product mix.”

However, with the fourth quarter now in full swing, the conversation in the consumer notebook sector has again turned to the subject of how quickly the market is growing.

Developments in the region’s retail channel have put many vendors in good heart.

Khalil at Toshiba said: “More professional retailers are opening, especially in Saudi Arabia.

Whereas one retailer like Jarir dominated the market for a long time, there are now many other retailers coming in, such as Extra.

Carrefour is opening up across the Middle East and that also fuels demand because it displays the product in the right way and has the right floor sales people to demonstrate the product.”

Not everybody is keen to court the low-price customers that are associated with the volume retail channel, however.

Lalai at Sony acknowledges that a substantial chunk of notebook growth stems from new adopters of mobile PCs that simply want basic internet access and home computing, but he added: “For these customers economy is critical as long as the performance is delivered.

At Sony we are consciously staying away from this segment because consumers expect a lot more from VAIO than cheap price and a very basic level of performance.”

Selling notebooks into the enterprise sector requires an entirely different go-to-market approach, both for vendors and the channel.

While the European and US markets have come to rely on the large corporate sector for a big chunk of laptop growth, the same can't be said of the Middle East.

“One reason I can think of is the fact that there aren’t too many corporations belonging to the region which can be called enterprise customers,” observed Gandhi.

“The second reason, which is somehow related, is that most of the large corporations which buy notebooks for their employees are multinational companies and that, by definition, limits the number of companies who do this.

Thirdly, some of what constitutes the enterprise segment in the Middle East is really owned by the government.

Culturally, the public sector everywhere is reluctant to let their employees walk out at the end of the day with a company asset and company data.”

As commercial IT needs are often highly sophisticated, and require systems to run powerful business software, far more emphasis is placed on the end-customer and the specific vertical requirements that dictate their purchasing decisions.

Only once those factors have been established are vendors in a strong position to sell through a value added reseller with the application and hardware skills to deliver a tailored mobile solution.

Fujitsu Siemens believes that while it boasts adequate channels to deliver standard notebook products, it still has more work to do when it comes to locating partners with vertical expertise.

Haake revealed: “What we are definitely trying to do is approach vertical customer segments.

Partners are a necessary part of providing dedicated vertical segment solutions when it comes to software.

That is something we need to dig into and are currently investigating.”

One vertical sector that remains at the forefront of notebook adoption is education.

“The education sectors in the Middle East were reasonably early adopters of a notebook strategy — with the Notebooks for Students initiative — and that is only gaining momentum,” said Michael Collins, general manager MEA at PC giant Dell.

“It started off a few years ago when some of the larger universities started piloting the concept of standardising on notebook technology in the classroom and then writing curriculums around it.

Now they have applications that give them all mediums - visual, text, voice, and students are able to learn outside the classroom with downloadable material.”

While consumer appetites are typically whetted by factors such as price and storage capacity, buyers in the commercial sector often have different priorities.

Khalil at Toshiba said: “If you look at the SMB sector it is about value for money.

Customers want high quality, a low failure rate, and certain security and manageability features that provide them with the best total cost of ownership.

But in the large enterprise sector, security, protection and connectivity are the three aspects that have been shaping up demand for the notebook PCs.

An IT manager no longer talks about the speed of the processor or the capacity of the hard disk.

They talk about how secure this notebook is, what it means if employees keep sensitive data on it and what the vendor can deliver in terms of security protection.”

Collins at Dell suggests there is also a shift in the specification of machines that enterprises are ordering as internal laptop usage increases.

“If I look at some of the recent tenders, corporate customers are looking at different types of notebooks now.

Whereas they used to buy the executive notebook, now they have a tender for ones that are a little bit more suitable for the guy that's going to work at the office and work at home, as opposed to the guy that is going to commute a lot and needs something lighter and thinner.

There are commercial customers that are looking to take mobile technology a little lower down into the organisation to allow people to take their work home.”

On top of the technical attributes that make a mobile PC attractive is the issue of the brand itself.

In the second quarter, just 12% of MEA notebook sales — roughly 84,000 pieces — were made by whitebox producers, emphasising just how dramatically the market has consolidated into the hands of a few global players.

“We firmly believe that brand is the biggest qualifier in the market,” said Thomas at Redington.

“Price does play an important role, mainly in the corporate sector where the large deals are being done.

But in the SMB sector, brand certainly plays a bigger role.”

Local assemblers also lack the big marketing budgets that are required to compete with the global notebook providers, argues Gandhi at HP.

“Marketing is a very expensive game and smaller companies, or local assemblers, can't really bring their message to the market as effectively or as pervasively as a company like HP can,” he said.

One company attempting to dispel the view that the whitebox model is becoming redundant is components distributor eSys, which is preparing to launch its own notebook range.

According to MEA director Pavan Gupta, eSys will attempt to exploit its purchasing power and reseller channel to provide a compelling and affordable notebook proposition for partners.

Its pricing strategy remains undisclosed, but the company insists it sees itself as more than a just low-cost alternative to more prominent notebook vendors.

“Frankly, we are not there to eat into HP's and Toshiba's market share.

What we are saying is that because the market price is increasing, the size of the cake is increasing and we have our eyes on a piece of that.

We are trying to add more value to our customers.

When they buy components from us, they sometimes want to buy systems from us.”

The role of the distribution channel remains a fundamental component for vendors reaching out to the retail and corporate segments.

Almasa claims its role incorporates a range of functions spanning from marketing assistance and stock inventory to product information and end-user awareness.

“We study what kind of end-users we are serving,” added Sheu. “Today’s end-users are more different than ever before.

They are more sophisticated and better informed, which means they no longer play by the rules of traditional distribution channels.”

In order to create the most efficient routes to market vendors must make their indirect proposition compelling to distribution partners.

Khalil at Toshiba said: “From a distributor point of view there are three challenges that we always take into consideration when we work with our direct partners: cash flow, gross margins and, most importantly, revenue growth.

Managing channel inventory in an efficient manner is also key.

A healthy inventory level for Toshiba is one month’s stock rotation — that’s what we always aim to achieve with our partners as it means better cashflow and growth margins.

Rotating stock faster in a short life-cycle industry like notebook PCs also means faster revenue growth.”

Lenovo has also made moves to increase its relationship with the channel by putting in place local reseller managers (LRMs) who carry out dedicated account management.

Wani explained: “The LRMs know the technical advancements that the product carries over the other vendors and they know the business propositions to offer the customer along with the resellers.”

Lenovo claims its offering in the Middle East has also been enhanced by the introduction of a spare parts and stocking hub in the UAE, meaning it is no longer dependent on an existing facility in Hungary.

“It has helped us to reduce the turnaround time drastically,” claimed Wani.

“The total turnaround from the date the order is placed to when you can have the notebook is now under six days.

It also works as a fulfillment medium to the business partners because on the basis of the forecasting we can ensure that we have products available within our stock and deliver it to them at a fast pace.”

Fujitsu Siemens is even considering going one step further by actually assembling notebooks in the region, as it does with some desktop PC models.

Haake maintains there are no immediate plans in the pipeline, but it is an issue that remains “under investigation”.

He explained: “We think that it could bring a speed-to-market advantage because some of the components are shipped from the Far East up to Germany.

Then the whole production starts and they are shipped all the way into Dubai or other markets,” he said.

“We clearly see that there could be a time-to-market advantage which would allow us to speed up the delivery times in general.”

Making decisions about issues such as inregion assembly and spare parts hubs could play a more important role than many can imagine while the mobile PC market is achieving such high growth.

With notebook vendors competing so closely on price and design, those able to offer the most attractive combination of margin, availability and usability will curry favour with the channel.

The challenge here is how to grow faster in a really fast growing market.

A smart reseller is able to sell the features of the notebook which

A healthy inventory level for us is one month’s stock rotation.

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