White box overload

Local assemblers have been operating in an overcrowded market for years, but although there are some players that are making a profit, the future looks gloomy for many more

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By  Mark Sutton Published  September 29, 2003

Servers|~||~||~|White box builders have not had it easy for quite some time. Competition with multinational brands has cut into margins in recent years, and there is no sign of let up—in fact the past six months has seen new second tier vendors moving into the market and consumer electronics players launching PC ranges too. Add to this the threat of local production of PCs by HP, and the market is looking troublesome. Local assemblers may still account for around 60% of all the PCs sold in this region, but the profits to be made in the process are getting leaner than ever.

But if the white box market is tougher than ever, it is also showing much more diversity in terms of products. Whereas most local assemblers in the past were purely focused on desktop PCs, now you are as likely to find them talking about multi-processor servers or Centrino notebooks. New technologies and improvements in training are bringing high-end products, which previously would not have been an option for most local assemblers, into the business plans of many system integrators. But will it be enough to keep them in business?

Probably the most attractive segment for local assemblers this year has been server assembly. Intel has been aggressively promoting server products, and backing it up with local training. With margins on servers still easily into double digits, it is not surprising that so many companies have turned to server assembly, and yet the segment may not be as safe a harbour as it seems. The companies that have had the most success with server lines are those that are either already operating as solution providers in their own right, or are able to team up with solution providers. A lower cost server can provide an attractive incentive to some customers, but more often it is a question of selling the solution rather than going just on cost.

Walid Saab, general manager of solution provider CAD Gulf said that the company has had quite a few wins with white box servers that the company assembled itself, and sold as part of a wider solution. “For us it is not primarily the price difference that allows us to sell white boxes, although price does play a role,” Saab said. “White boxes give us the ability to offer the client a flexible platform in terms of upgrade-ability, availability of components, ease of support and service.”

Although customers such as United Arab Bank have opted for solutions using white box servers from CAD Gulf, the solution provider still works with HP server lines, to be able to offer customers choice. At the end of the day, Saab said, the customer makes the final decision. The question of whether or not the customers will buy into white box servers is likely to be a sticking point for developing the local assembly market for servers. Jyoti Lalchandai, regional director of IDC Middle East & North Africa commented: “We have seen a reluctance on the side of end users to invest in non-branded servers. They are more willing to invest in non-branded desktops or notebooks than servers. With a server, it is the backbone of many businesses, so there is a trust issue.”

Another issue for the server market is growing competition from multinational brands. Many vendors are going into the segment quite aggressively, and while Intel believes that assemblers can continue to maintain advantages in price, flexibility and speed of delivery, the pressure is on.

||**||Notebooks|~||~||~|Another area that is seeing a lot of interest is notebooks. While local assembly of notebooks might have been regarded as a technically problematic business a couple of years ago, more and more companies are looking to build as assembly has become easier. Local assemblers are using barebone systems to build notebooks, and are even bringing the latest mobile technologies to market. Everex launched a tablet PC in the Middle East at the same time as the multinational companies (MNCs) launched their tablet models, and at this year’s Termium exhibition in Lebanon last month, ten Intel partners exhibited Centrino-based machines.

Maan Ahmadie, regional channel manager for Intel says he sees a lot of potential in the mobile sector. “Centrino is not a difficult platform to assemble, we are doing some training, and we are getting a lot of positive feedback. We are adding some players from all over the region to our programmes for mobility, and I think these people will take a good place in the market,” he said.

Direct Computer Systems (DCS) began producing notebooks eight months ago, and has recently launched Centrino models under its Digital brand. Samer Bayrakdar, general manager of DCS said that the company is now looking to make notebooks 20% of its business by the year end, and to double this figure in 2004. One of the most important factors for DCS for notebooks is sourcing the components from the same OEMs as the MNCs, to ensure that they are on a par with them. “We have got to make a distinction between the MNCs and us, so we have to make the same product or better, with a better price,” Bayrakdar explained.

For FIC, which produces the Everex brand, and only does final configuration of PC lines in Jebel Ali, the concerns are the same with its tablet PC range. Ashraf Jarad, sales manager for Everex Systems Division of FIC Group /C&C commented: “We had a noticeable success in the GCC region with our tablet PC, because we compete not only prices, but with features too. Having those two major factors enables us to get a better market share.”

While the larger local players report success with white box notebooks however, the segment is not as accessible for the smaller players. In part this is due to the fact that the larger assemblers are already on the way to establishing themselves as brand names, while smaller companies do not have that comfort level to sway the buyer. This leaves the white box assembler to compete much more on price, according to Omar Shihab, research analyst for IDC Middle East & North Africa. “This market is purely based on price—it is only very, very price sensitive users who will buy those machines,” he said.

The problem for the smaller notebook assemblers is that the cost of parts to build systems is higher than for desktops, and they are not doing the same volumes. This makes it difficult to stock parts. Intel is aware of the problem, said Ahmadie, and is looking at creating links between distributors and barebone vendors. These distributors would act as mobile value added distributors (MVADs), and would hold stock of barebones from vendors, enabling the assembler to buy much smaller quantities of barebones than they could directly. The system is in place in more mature markets, and Intel has some distributors here who are likely to be brought into the programme.

It is not just the chassis cost that is problematic however. Khalid AbuAyyash, division manager for ASUS products at Almasa Distribution said that components cost, specifically the processor and hard drive were still too high for assemblers who were only making small quantities of notebooks.

“For hard drives, almost all laptops take the same hard drive, that is readily available, but [vendors] still try to make big margins on these, they don’t consider them a fast moving item,” AbuAyyash said.
“For CPUs, there are two kinds—either you go for a mobile or a desktop. A desktop is the right choice for assemblers in our area, because it gives them an advantage against brands and it is readily available. A mobile is what Intel wants to push, but these assemblers cannot buy a whole box of mobile CPUs,” he added.

The higher cost of mobile CPUs, and the fact that notebook buyers are generally more aware of technology, and therefore want the most up-to-date processor make it difficult for assemblers to be able to buy mobile CPUs in great enough quantities to be cost effective.

One answer is barebone systems that can take desktop processors and memory, cutting the cost and ensuring availability of components for assemblers. AbuAyyash said that Almasa has been successful in this segment with the ASUS D1, a very simple to build barebone that can take these common components. In terms of true mobile processors however, the market may have to wait for prices to come down.

||**||Tenders|~||~||~|The other area of strong performance in white box is from assemblers that have established themselves as brand names selling into tender business. Bayrakdar estimates that some 60% of DCS’s business comes from tenders, from corporate, government and education sectors around the Middle East as well as in Africa and the CIS. One of the main advantages the local brands have in competing for tenders is their flexibility and their speed to market with new technologies. DCS was one of the very first companies to make 3GHz systems available in the Middle East, and is now offering 3.2GHz systems when many MNCs are still lagging behind.

“Sometimes the customer has his requirements, you go according to his specs, and we can customise a PC much faster than an MNC. We can adapt much quicker than the big names,” he said.

Brand is very important to the local assemblers to access tender business, said Lalchandani. Even then, corporate and government customers in the region tend to prefer big brands, plus the financial weight of the MNCs allows them to be more aggressive on pricing. For the smaller assemblers who can’t compete in tenders, Lalchandani believes, the future does not look bright.

“We are going to see a consolidation in the market. The fact that there are hundreds of companies selling PCs in almost every segment—we are talking about how it was in Western Europe five years ago—margins are dropping, companies are not able to sustain themselves, costs are getting higher,” he said. “There has to be consolidation in the market, the big fish are going to eat the smaller ones.”

For Intel, the answer lies in improving the expertise of regional partners, to help them exploit new technologies and to move faster than MNCs. The vendor is aiming to raise the number of Intel Product Integrators (IPIs) in the Middle East and Africa region by 50% this year, to 3,000, and to also push some of the IPIs to Intel Premier Provider (IPP) status, raising numbers to about 65.

“We are expanding our smaller players,” said Ahmadie. “We are doing technical solutions training, we are preparing the channel to deliver machines at a certain level, to fulfil demand and win the big projects.”

Even with increased levels of expertise, there is another cloud on the horizon for local assemblers. In November, HP will begin PC production in Saudi Arabia. By locating within the GCC, HP gains benefits for the cost of import and distribution and gains the goodwill of regional governments by locating in the Middle East. The plant is intended to address two segments—tender business and the SMB market. The company has already received orders for 35,000 PCs for education tenders in Saudi Arabia and Kuwait, and expect to be able to address the SMB segment in the new year.

With HP consolidating its channel under the PartnerOne model, the vendor will not only have a better priced PC available, but it will also have the means to deliver. “In the past there was no distribution channels for branded PCs,” said Abu Ayyash. “HP already has a very well established printer network—when HP starts applying its distribution model to PCs that will hit this area.”

Lalchandani is even more emphatic about the potential impact of HP’s local assembly business: “The whole intention of getting into [assembly] is to kill local assembly business in Saudi, and local assemblers will be affected for sure, because US brands are still very popular in Saudi, and HP can leverage the fact that it is a US brand PC with a commitment to the region by producing locally.”||**||

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