Motherboard margin

The Middle East motherboard market is a crowded place. The Taiwanese giants are making their presence felt in the top tier but there remains a constant stream of second and even third tier vendors pushing hard to grab a slice of the action.

  • E-Mail
By  Stuart Wilson Published  March 2, 2004

Crowded market|~|ASUSweb.gif|~|Yasir Alkaar, regional operations manager at ASUSTeK Middle East and North Africa|~|In the crowded motherboard market, it is a vendor's ability to build a strong channel that separates success from failure in a sector under constant pricing pressure. Some vendors need to realise that building a sustainable long-term business model is what really counts. Motherboard vendors choose very different methods of building up a channel in the Middle East with the approach often influenced by their market position. “There are more than 15 vendors competing for market share in the Middle East,” says Jose Augustine, Intel franchise manager at motherboard distributor Logicom. “These can be classified into three categories where competition between vendors is intense: A-brand, B-brand and C-brand…We see a number of different [distribution] strategies being employed [by motherboard vendors]. A-brand vendors give strong support to distributors and this is reflected all the way to the end user…B and C-brand manufacturers may employ distribution strategies that are more results-oriented rather than value-oriented.” The quartet of Taiwanese motherboard giants ASUSTeK, Gigabyte, MSI and ECS occupy the A-brand space in the market with Intel for company. A raft of tier two vendors including brands such as Abit and Biostar sit directly below with third tier 'no name' brands offering the cheapest option for customers looking to source motherboards. Premium brand Intel has to balance its motherboard business alongside its chipset offerings. “Other motherboard vendors are also our customers,” explains Sou Bennani, channel sales manager Gulf countries at Intel. “Intel is delivering quality high-end motherboards and it is up to the customer what they choose. We work with major motherboard vendors in the market and do not bundle Intel chipsets and motherboards together. We want to keep our approach fair and open. Some assemblers use low-end motherboard vendors and the market is actually very varied in the Middle East.” The market segmentation is not as clear-cut as it first appears with A-brand vendors increasingly dabbling in the B-brand space. ASUSTeK led the way with the formation of its B-brand subsidiary ASRock and ECS followed suit with the launch of PC Chips. Now Gigabyte has joined the party by announcing plans to launch its own B-brand range called Gigatrend. “ASUS has always positioned itself as a top player price wise,” says Yasir Alkaar, regional operations manager at ASUSTeK Middle East and North Africa. “But if you look at the mass channels in some markets, 60% of motherboards are at the medium to low end. Starting ASRock took us into the entry level segments and allowed us to fight other vendors.” ||**||Distributor's role|~|AlinSharifigsweb.gif|~|Ali Sharifi, managing director at Golden Systems|~|Golden Systems Electronics, exclusive distributor for Gigabyte in the GCC, plans to add B-brand Gigatrend to its portfolio once the brand is up and running. “We can help Gigabyte engage the second tier market and build its share through Gigatrend. We can offer valuable services to the second tier market,” says Ali Sharifi, managing director at Golden Systems. The company is adamant that, despite its existing distribution agreement with ASRock, it is capable of distributing Gigatrend as a complementary product line. “For Golden Systems it is not about Gigatrend competing against ASRock,” says Masoud Jalilian, general manager at Golden Systems. "It is about us doing our job. As a distributor we do not pull up or push down the reputation of the vendors we work with - that is for the vendors to do.” Motherboard distributors will often align themselves with several vendors across the product tiers. “Empa is a regional distributor for Intel in the Middle East and North Africa,” says Savas Yucedag, sales and marketing manager at Empa. “We also work closely with MSI to develop its distribution channels in the Middle East as well as holding exclusive distribution rights with Biostar across 26 countries. These vendor lines correspond to the tiers that exist in the market: Intel is a premium brand, MSI is tier one and Biostar is tier two.” Appointing an exclusive distributor remains the favoured channel model for motherboard vendors in the Middle East. Golden Systems sells the Gigabyte product lines through a network of 70 master resellers, which in turn sell on to dealers. “The relationship with resellers has to be strong,” says Sharifi. “That means talking face-to-face and on the phone on a regular basis and holding meetings. We are friends with our resellers and aim to educate them in a way that promotes and develops the brand." Even with exclusive distributors taking on the role of virtual subsidiary for their motherboard partners, there is still value in setting up a direct local presence according to Alkaar: “We're one step ahead of the competition with our local office and distribution channel. Now we will begin to back this up with local infrastructure. Many of our competitors are trying to run the Middle East operations from overseas.” Exclusive distributors do still provide a valuable service though. “Empa keeps Biostar happy with the volumes we sell,” says Nafiset Mami, Biostar product leader at Empa. “The overall market is growing at 15% per annum but if we keep doubling Biostar sales year-on-year, the vendor remains happy. We also have local representatives that understand the intricacies of each local market.” The desire to open a local office is still alive and kicking with some vendors. “I'm expecting MSI to build an operation in the Middle East," says Alkaar. "I feel them making efforts to hire people. The market opportunity is here for everyone with the Middle East and Africa the second fastest growing market after China.” Without doubt demand across the region is growing fast, but vendors need to pay attention to overall market size figures and not get seduced by growth rates alone. Jalilian at Golden Systems explains: “Because of the overall market size, it is difficult for it to be shared out amongst the number of vendors who want to work here. Many look for a quality distributor and fail to find one so they look for a dealer instead. These relationships can mean margins drop because dealers do not necessarily think about the long-term development of the vendor in the market.” Slim margins have been coupled with downward pricing pressure in the motherboard market. “A tier two motherboard costs between US$42 and $US45, whilst a tier one costs $US60,” says Yucedag. “Tier one vendors have started moving into tier two because the price difference is shrinking. Many are looking to offset reduced margins by volume growth.” ||**||Quality counts|~|Intelweb.gif|~|Sou Bennani, channel sales manager Gulf Countries at Intel|~|Even in such a price sensitive market, the quality and reliability of product remains a major factor. The golden measure for vendors is their Return Merchandise Authorisation (RMA) figure - a measure of the percentage of faulty motherboards. “Low cost brands are capable of penetrating the market faster on the basis of better prices,” says Augustine. “The RMA rates, however, may be unduly high resulting in lower bottom line compared with higher priced but better quality motherboards…With Dubai being an IT re-export hub, a big part of the motherboards sold are being traded and margins on these sales are thin. Opportunities for slightly higher margins exist where motherboards are being sold to local assemblers.” “At the very low-end, quality remains an issue,” adds Mami at Empa. “The cheapest suppliers keep switching [production] from factory to factory meaning no consistency in quality. Biostar has a fault rate of just 0.46% according to Empa figures. For the cheapest vendors, this can be as high as 5%.” Motherboard vendors also have to contend with low-quality fakes damaging their brand in the Middle East market. Golden System has run campaigns showing how partners and customers can make sure the goods they are buying are authentic. Other vendors have suffered serious consequences because of fakes in the market. “Two years ago we had a strong position in the Middle East motherboard market,” says Tim Chiu, sales manager motherboard business unit at tier two Taiwanese vendor Acorp. “At the time, we were selling 40,000 motherboards a month in the OEM space. Then 'fake' Acorp boards from China destroyed our reputation… The most important issue in the Middle East is product quality followed by an attractive price.” To describe the Taiwanese A-brand names as motherboard vendors is an injustice. In recent years, diversification has been the name of the game as their product portfolios have expanded to include a wider range of components, barebone systems and even notebooks. “When I joined ASUS two years ago, the motherboard business was 70% of sales,” says Alkaar. “Today it is only a third as five new product lines have been added.” Gigabyte offers a complete range of components and systems too. This extended range of products means that vendors - and their distributors - need to build on the basic motherboard channel structure. “A notebook cannot be sold through the same channel as a motherboard,” says Jalilian. “You have to build a new channel to reflect the product's position.” Alkaar agrees: “In the components market, the vendor is a long way from the end user. The product goes through a distributor, a master dealer, a local dealer, an assembler and eventually reaches the end user with the component hidden inside a system. As a vendor selling a notebook, your brand is in front of the customer and the channel is much shorter.” Vast swathes of motherboard manufacturing activity have switched to China. For A-brands establishing B-brands, the benefits are twofold: it provides them with a product to attack the lower end segments of the market and it gives them a cheap manufacturing facility to produce their A-brand in once quality is assured. “Average sales price for ASUS motherboards was US$83 in 2002,” says Alkaar. “This dropped to US$71 in 2003 and we believe it will stop at between US$60 and US$65 this year. Intel's new Prescott CPUs could help raise the average sales price through demand for high-end boards…The price dumping war is something [we deal with] daily but it has to stop. Price dumping could destroy everyone.” Whilst the average motherboard price has declined, the price range has expanded. “There’s still strong demand for high-end product above US$100,” says Jalilian. “High-end prices have risen and the low-end prices have dropped at the same time.” Motherboard vendors operating in the Middle East need to show restraint in their channel plans. With more and more vendors looking to enter the market, the temptation to grab market share by dumping product at prices where margins are virtually nil is a temptation too strong for some to resist. Vendors with brand equity and an A-brand position are isolated from the intense price battle to an extent by virtue of the quality of their products and high-end target markets. Further down the motherboard pecking order, it remains a very different story. Margins are difficult to find and many B-brand and C-brand vendors appear intent on locking horns in a pricing battle where it is difficult to see how anyone can truly emerge a winner. ||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code