Boxing Clever

White Box builders here in the Middle East are facing a tougher time than ever before, with increasing competition from each other and from the big name brands that are ruthessly cutting prices. But local assemblers are no longer just looking to price to help them sell.

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By  Guy Mathew Published  March 10, 2002

Competition|~||~||~|Locally assembled PCs, otherwise known as white boxes, have long been a feature of the PC market in the Middle East. The players in the sector are varied in the products they offer, their approaches to the market and the size of their businesses but they are all facing competition both from the international PC brands and from within the market. Margins are low in the PC business as hardware has become commoditised so the business is very hard fought. International brands have the financial muscle to put a squeeze on the white box builders. However, there are factors in favour of local assemblers and they are coming up with strategies to maximise those and retain market share.

The international vendors might have hoped to make further gains in the Middle East as they grow their presence and expand their channels but the truth is there is a long way to go before PC penetration rates are anything like the US or Europe. With that situation there is plenty of room for manouever for local players. That is how Rahul Gupta, general manager at Servex, Acer's own distributor, sees it: "There is possibly a decline in the locally assembled PCs right now and I believe the reason is that the slowdown in the US and Europe means the international branded PC-makers are under tremendous pressure. So the they are cutting down on prices, bundling a lot of goodies, thus making the local assembled market more difficult."

Bassam Abu Baker, factory manager for Alfaisaliah's Zai brand PCs in Saudi, says that international brands are trying to muscle in: "Recently the international brand PCs dropped their prices dramatically to gain market share, but Zai is still in the middle with prices 10-12% lower than international brands."

That price differential though, is in a large part due to import tariffs that are imposed in some markets. Those tariffs were reduced to five per cent only six months ago so it does beg the question if the tariffs were to be abolished, or the international brands drop their prices a further five per cent where companies like Zai would find their price advantage.

The key factor for most buyers is price. When big name brands were rare and expensive white boxes were a cheaper option, but that usually meant lower quality as well. Now that international brands are cheap, local assemblers have to find other ways to add value. The differential between white boxes and brands is being eroded to the point where it is not enough to swing a buying decision.

Many players in the market now believe that for most people buying a PC, or a notebook or server for that matter, that is locally assembled, the system's components is a more important factor than the actual price. Sukant Mishra, component sales manager at Aptec, says: "Although it is a price sensitive market, once the quality is right customers look for the best price within the shell of that quality."

The quality of components available to assemblers has improved in recent years so now local assemblers can compete on specification with the international brands. Branded components offer quality that generic ones often found in parts of branded PCs, do not, and this is attracting custom.

International brands have their various model line ups, but they often do not import their complete range. But by their very size they are hamstrung when it comes to building a system to a customer's exact requirements. That is a key way local assemblers can find an advantage. A customer can come to them and order exactly the components he needs for his system so he does not pay for items he does not require and gets the best deal on those he does. Samer Bayrakdar, general manager of Direct Computer Systems (DCS) that sells its own machines under the name Digital, believes that this flexibility of systems is one of the assembler's biggest assets. "If a customer requires something, whether they are an SMB or just a single person, we can meet their requirements because we can mix and match components."

Vendors have helped to drive the improvement in quality of locally built systems through training. "The aim of our program (Intel Product Integrator (IPI)) is to get the smallest integrator in the market into our programme so that we can train them to build to the preferable level of quality," says Ferruh Gurtas, Intel channel programmes manager, Middle East and North Africa.

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"We are training people on how to optimise their systems with the latest technology and we also have component lists so they can see which have been tested by Intel," he continues. The programme is linked with marketing funds as well. "If a customer is trying to register a brand presence in the market then we can put them into our Channel Corporate Advertising Programme (CCAP). It is the channel version of the Intel Inside programme we run with the big OEMs and if the ad is eligible they can get 66% of the cost back from us," Gurtas says.

PCs are not the only target market of the more ambitious assemblers. There is a growing trend towards locally assembled notebooks and servers, both CCS and DCS are in those markets. At present Intel's Gurtas thinks that local servers have only five per cent of the market but he sees that growing rapidly: "It is ramping up and with the number of choices they have from Intel local assemblers can build up to 30 different server configurations."

Service is a key aspect in the market today. Consumers and businesses are better informed than in the past and have higher expectations. Old attitudes are starting to be forced out of the market according to Boudi Ghandour, vice president, products and procurement, at CompuMe. "The market is only interested in price so people go and cut corners. They put bad quality boards, memory and drives in to cut a few hundred dirhams here and there and then something goes wrong. You can go back and stick the guy with a knife in his heart and he won't help, he won't give you any service. So anyone who has been burned before understands that," he explains.

Being able to deal with problems quickly and efficiently is a major aspect of offering better service. That's why CompuMe has four engineers at its showroom so that most problems can be dealt with on the spot. "Other people send it back to the supplier or the vendor but we troubleshoot it here first, saving time."

A lot of brands claim to be able to sort problems in 24 hours or less and they have introduced call centres in the past two years but now local assemblers are aiming to match or even better the levels of after sales service. DCS aims to turn around simple problems within twelve hours but says that if it is more complicated, the system must be fully tested before it gets back to the customer to make sure the problem does not reoccur.

Syed Parvez-Ahmad, sales and marketing director at Almasa Distribution, suggests that the nature of the buyer is an important factor in the success of local assemblers. He says: "Here in the Middle East the PC is still seen as something very sensitive and the buyer likes to go and see a professional and have someone do any upgrades for him. Six months later if he wants something else done he can call the guy at home or whatever and the personalised touch is still there."

Distributors are also doing their part to improve service to assemblers and resellers. Gupta suggests RMA policies and a more generous attitude to offering credit as a way to attract resellers but there are too many fly-by-night operators. Thaer Sartawi, sales and marketing manager of Gulf Global Business (GGB), distributors of AOne PCs, is familiar with the problem of bad debtors. "We are will to give credit but it is a problem because the government does not protect you. We say, okay we'll work together [with a dealer] and make the first shipment for 10,000 Dhs. Then he comes and wants another 10,000. But we were suspicious and enquired and the next day we found him selling the PCs in the market for a knockdown price.

One way to offer more than the brands is to beat the brands on spec. Sky Electronics is one company that has taken this approach. Manoj Thacker, managing director at Sky says: "The aim is to create a PC that will provide the customer with a lasting solution, which will prove you don't need big brand names to get performance. We want to educate the market before people buy."

Sky's AOpen Expression 1800+ series has a top specification including an Athlon XP 1800 processor, 1GB DDR RAM memory, 60GB Maxtor hard drive and a Labtec 4 channel speaker system. It does cost over $2000 though but the fact that it is being produced shows the confidence local assemblers have. DCS's 4000 series Ultimate is even more highly specced with an Intel P4 2.2GHz, 80GB hard drive from Seagate, 16x Toshiba DVD and 18.1" lcd monitor. It also has an improbably high price at $3550. These systems represent the top of the line in components and integration that you will not get the international brands at any price.

||**||The Outlook|~||~||~|

There are other ways that assemblers can improve their business prospects according to Gupta. He explains: "Every consumer will have some special need, for example speakers or a graphics card, so what the assembler has to do is find out what it is and then provide and charge for it. The charge will probably be more than the margin on the PC and he will still give a good quality service. I would be surprised if many of the brands would do this because it would be a non-standard special order."

While some assemblers are happy with just assembly, others are trying to build a brand. Judging the success of such a strategy depends on the question of what can be considered a brand. The bigger assemblers will claim to be a brand but the existence of a brand must depend on there being market awareness and recognition of it and in that case there are few qualifiers according to Raul Gupta, general manager Servex, Acer's own distribution operation: "I feel that as far as the UAE is concerned and even the whole Middle East, there are very few true local brands except for Saudi which has PCNet and Zai."

Branded components add value to the assemblers product by the name so the systems are not selling entirely on their own merits. To build the system brand it has to be looked after it very carefully, believes Al-Falah. This might mean through quality advertising, being perfectionist about the quality of service and the models they launch so as not to detract from it for example by doing a low-end model that might not be up to quality standards.

"The assemblers are using branded components and at the moment a lot of what they are doing is based on that but they manage their price points very well. To fully establish their own brands they need to sustain their investment and add-value," claims Adnan Al-Falah, sales director at Tech Data.

The challenge for assemblers who are actually marketing on their own brand is to build it to the point that it can become a selling point. With more than 20 offices worldwide and 20 years of experience, DTK feels it is in a position to take a strong market share. It builds high-end products such as servers with up to eight processors and all its products are business focused. To cater for business, DTK has changed its strategy from hardware to a solutions approach based on its hardware platform. Inam Hussein, marketing manager, DTK computers, says: "We have the strength in hardware so what we have done is go through a third party for the software and put it together with the hardware and make a complete e-solution. This offers something local assemblers cannot."

Another approach is that of Computer and Communication Systems (CCS). It is a pure OEM with clients like retailers and distributors, including CompuMe. The company does not then face some of the difficulties of going to market. "Most guys do both retail and distribution but ourselves, no. We concentrate on distributors because otherwise we are becoming a competitor [with our customers] but as an OEM we gain the trust of dealers," explains Raymond Ghanem, general manager.

Despite the occasionally difficult market conditions and fluctuating demand, the PC market in the Middle East still has a lot of room for expansion so it is not surprising that most market players are confident of having a good year in 2002. As Al-Falah says: "The future is rosy in the medium term for local assemblers, but the question in the long term is: will they get their strategies right?"

Gupta's predicts that only some local assembly companies will survive market consolidation: "Most local assemblers have come to the wall in terms of cost reduction. Those who are buying quality components will survive because they have strengthened their product rather than just the price."

However, there is no danger of the local assemblers disappearing according to Gupta: "Whatever the condition of the economy there will always be branded PCs and there will always be locally assembled PCs, its just the ratios that change from market to market and time to time."
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