Local heroes

Local PC assemblers are adamant they have the right credentials to take on the A-brand giants as the PC sector evolves

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By  Alex Malouf Published  July 26, 2004

Regional assemblers|~|Saadi,-Adnan-----HiCom-COMP.gif|~|Adnan Saadi, business development manager at HiCom Computers|~|Middle East assemblers are finally realising the power of branding and rising to the challenge of producing high quality locally built PCs. But there is so much more to launching a PC brand than just having assembly capacity. Issues abound for local assemblers, from ensuring that the product is priced competitively and with the right features, to putting an effective pre and post-sales service in place. Channels must be committed to the brand, selling at every opportunity to customers who are considering A-brands. There is also the challenge of exporting and catering to populations with entirely different needs. For those who succeed in establishing a brand, volumes and margins are the potential rewards. Local brands are a common sight in Europe, the US and Asia, and finally they are emerging in the Middle East and Africa. With a total addressable market of 5 million PCs per annum and double-digit growth rates, the region looks ready for local assemblers to establish their own PC brand. A-brand players may appear to dominate the scene, but according to IDC the top five PC vendors only accounted for half of sales in Europe, the Middle East and Africa during 2003. It is no surprise that over the past few years local PC brands have proliferated as distributors and resellers have seen the potential of moving into assembly. Local assembly has emerged as existing players have grown large enough to consider the benefits of PC production combined with becoming a brand vendor. As they soon discover upon moving up the channel, margins are higher and there is more channel control. Dubai-based HiCom Computers was involved in contract assembly for several years before launching its Cactus brand last year and it has been seeing the benefits of the move. Adnan Saadi, business development manager at HiCom Computers, explains: “We decided to have our own brand name after working for other brand names, where we do all the work and then get nothing in return. It is better to have your own branding through which you can control the market. You can give partners price protection and a host of other benefits for a healthier relationship.” Channel control appeals to established IT resellers who have been in the market for some time and have seen margins and protection erode in sectors such as components. It is the value-add opportunity that draws in companies active in other sectors where margins are negligible. New PC assembly outfit ART has emerged from a Dubai-based components distributor and has begun taking steps in local assembly after being asked by customers for extra services. “Initially it was our clients who asked us to assemble PCs for them,” says Yasser Shaheen, ART’s PC and notebook division manager. “This gave us the idea to look at assembly on a large scale and creating a brand, as we were charging assembly fees for a solution. We investigated further and we found that there are margins to be made, unlike with components, so then the project developed to build a range of PCs under our brand name, the ART label, with an initial capacity of 2,500 PCs a month.” ||**||Local knowledge|~|Mokbel-Fayyad,-CEO-Centra.gif|~|Mokbel Fayyad, CEO at Centra|~|That large scale production comes not from consumers making single purchases but from corporates — a sector coveted by PC builders. “Our focus is on large tenders from businesses and governments, as this is the sector where we can really get the volume,” adds Shaheen. But for assemblers who do not have the capacity to produce for large tenders, the answer is the consumer market. “For any local medium to small size assembler, the best segment will be end-users and SOHO customers,” explains Hazem El Zorkany, VP for product management at Metra Computer, a major Egyptian assembler which produces around 200,000 PCs and motherboard kits. To achieve success, local heroes have to use their local knowledge and experience. A-brands hold the brand equity and marketing cards, but local brands priced wisely will find that there is still market demand for their products. With a population of 70 million cost conscious customers, Egypt is a paradise for local brands and assemblers. “Egypt can be the largest market for local brand PCs if assemblers find the right price,” says Mokbel Fayyad, CEO at Centra, another Egyptian assembler with annual volumes of just under 40,000 branded PCs. “We price according to the needs of the market, and this is a major difference between us and international brands — up to 25% in price. In Egypt this is the major reason customers choose local brands.” Such a pricing disparity either makes customers marvel at the value for money they are getting or ask how local assemblers can afford to build such cheap machines. Mohammed El Cohen, president of Moroccan assembler PC-Tech, boasting 20,000 unit sales in 2003, explains: “Labour costs in Morocco are low. I can guarantee you it is even cheaper than the Far East. It can take up to three weeks to supply finished products from the Far East while we can get products to market in a few days.” Customers want quality specifications to accompany local brand’s lower prices. For a local brand to compete with international competition quality has to be on a par with A-brand names. Metra Computer’s biggest seller is a Pentium 4 PC with impressive high-range specifications. But according to El Zorkany, customers do not want the latest features and while assemblers are proud of the fact that they beat A-brand vendors to market with the latest technology, price sensitivity is still of huge importance to customers. New products cost big money and for customers buying a machine the cost of high-tech may be a big deterrent to going local. Local assemblers should slowly increase specifications and wait for the market to mature and customer purchasing power to rise before beating A-brands to market with the latest offerings. “As you move towards higher specification, there you have room to increase margin and be competitive on pricing,” explains Sankar Kiruba, general manager at Emachine Middle East, a Dubai-based assembler with unit sales of 30,000 so far this year. “At lower specification, it is difficult to differentiate your offering in the eyes of the customer. Low-end PCs are not economical to produce, and there is fierce competition — margin levels are thin” ||**||Selling the brand|~|SamerDCS.gif|~|Samer Bayrakdar, director of Dubai-based Direct Computer Systems |~|Price and quality count for nothing if there is no service back up for customers. Before any IT player can move into PC assembly and build a local brand an effective RMA service has to be in place to avoid customers’ previous horror stories with local assemblers. “Before the birth of brands such as Centra, the service end-users received was lousy,” adds Fayyad. “When they bought a PC they would be lucky to have any support for it because the traders didn’t know what was inside. They would sell any configuration and use any components. We and others now offer organised service to end-users.” For local brands to succeed customers have to trust in the service and the returns policy. Customers still think that A-brand service is better and until this changes local brands will face an uphill struggle. Players have seized on opportunities in exploiting time delays end-users face when their A-brand PC develops a fault. Samer Bayrakdar, director of Dubai-based Direct Computer Systems which assembles 80,000 PCs a year, explains: “Consumers prefer A-brand computers as they believe the quality is better. But with some of those international products, when it comes to repairs, vendors drag it out for ten days before the product is returned. With our brand it is 24 hours before the PC is back and this is of huge importance for the client, giving him confidence.” Local brands benefit from many advantages — in pricing, RMA servicing and local experience — but these positives can pale in comparison to the pull power of A-brands. “Their name is strong and their support. The resources at the disposal of multinational vendors are enormous, they have years of advantage over the local brands, and they also get support from players in the market — Microsoft and others — who give them favourable rates,” adds Bayrakdar. Multinationals also enjoy support from governments in the region, it is claimed. “When governments ask for a brand, they opt for A-brands rather than locally assembled PCs,” adds Bayrakdar. “The UAE government supports international companies, as is evident when you go into any government agency, and I don’t know why. We have locally assembled PCs, UAE made, which are good quality. Somebody should look into this.” Where there is government support for local assemblers, the industry has flourished. “Our industry has greatly benefited from the Egyptian IT ministry launching projects to encourage the take-up of computing,” comments El Zorkany. “That coupled with the tax breaks we are given, where we have a advantage of 15% against imported products of the same specs, is giving a great push and boost to the local assembly industry when competing with internationals.” Customers can be convinced to pull away from A-brands and this is where channels-to-market play their part. Local brand vendors choose their partners — both distributors and resellers — with an unflinching eye for detail because they need channels as dedicated to the brand as they are to push the name to customers. “Our partner has to believe in the concept of our brand,” says Rashwan Arabi, general manager at Computec IT, a prominent assembler with monthly unit sales of 4,000 in Syria. “They have to drive this concept of the local brand to resellers and sell it to them.” ||**||Retail channels|~|Arabi,-RashwanCOMPUTER--IT.gif|~|Rashwan Arabi, general manager at Computec IT|~|Assemblers who have spent most of their business lives down the IT ladder put to good use the lessons they learnt as a reseller or distributor to support their own channel. “I give the best prices to my best customers, my channel partners, the people who do continuous business with me and invest in the brand,” adds Arabi. “I protect my channel, give price protection, and the facility to exchange products which don’t sell for different products. I will not support traders who knock on my door asking for pricing by quantity.” Some assemblers even bypass the channel by moving into retail and opening up showrooms to promote their own brands. The advantages are obvious — direct consumer sales and a rapid outlet to the market — but there are added costs involved when moving into retail. Computec IT opted for this route after it found resellers unconvinced that its brand would enjoy success in Syria. “We decided to go into retail by ourselves, to promote the brand in-house as we know the product better than anybody else,” says Arabi. “The customer comes into our showrooms intending to buy an A-brand. We convince him to go for our PC and seven times out of ten we are successful.” As demand grows in the PC market local assemblers are extending their product ranges to include notebooks. But players thinking of moving into laptop production should be aware of the risks. Assemblers lose the advantage of sourcing their own components and have to order barebones notebooks from the same factories that A-brands get their products made. “A-brand prices have come so close to OEM brands that there was no room for us to continue in the laptop business,” admits Arabi. “You can easily have a Compaq notebook with very good specs at a low price. We could not compete as our brand was not known and there was no way we could offer a seductive price.” Assemblers are also expanding their geographical reach and beginning to export to other countries. Such a move can prove to be extremely challenging owing to differences in each country’s market and may necessitate a re-think of brand imaging. Arabi explains: “We faced issues when we began as we were selling into two different markets. The Syrian market demands good quality at a low price, while in the UAE you can sell high-end products. We had to differentiate and create more than one line and brand to satisfy all the needs of our customers.” Local assembly is on the rise but there is a growing debate as to whether more will appear or whether the assemblers currently in the market will consolidate. “If any companies reach the point where we are at now in terms of business, then they have to think about assembly and creating a brand,” argues Adnaan Saadi at HiCom Computers. Metra Computer’s El Zorkany disagrees: “Local assemblers will maintain the same number or shrink as a result of consolidation of smaller ones. Large assemblers are better placed to fight off A-brands, win government contracts and build profitability through economies of scale. Four or five major companies or major suppliers will emerge and this process has already started.” ||**||Regional powerhouses|~|sankaremachines.gif|~|Sankar Kiruba, general manager at Emachine Middle East|~|The creation of large players would suggest the emergence of pan-Middle East powerhouses exporting across the region. Such a vision requires a critical volume of production most achievable in markets such as Egypt but there are still hurdles to overcome. “Going pan-Arab is difficult as such a venture needs investment at every turn, in production, distribution, support and after sales service as well,” explains El Zorkany. There are efforts underway in Egypt to create a local giant. The most notable is the ‘Arabian PC’ project, an Egyptian-Kuwaiti collaboration to supply the Middle East and Africa and in initial production stages. But pan-Middle East assembly is still a pipe dream and years from becoming a reality. As more channel movers and shakers are tempted to go into the local brand market local assemblers will increase their own volumes as those launching their own brands opt for contract assembly to save on their own costs. “A customer will come to us and ask for contract assembly,” explains Kiruba at Emachine. “He buys the product from his distributor, supplies the components to us and we assemble them for him. The contract customer pays us just for the assembly costs.” Local brands imitating A-brands by using contract assemblers is a savvy move but they should veer away from pretending to be an assembler while in reality re-exporting components. “For us the situation is very clear,” adds Kiruba. “We are a systems integrator and we carry our own brand. But for some components vendors it is a concern whether assemblers are really using the products for assembly or re-exporting.” Such pretence has had a negative impact on the local assembly industry and created an image of uncertainty. Companies after a quick buck is part and parcel of the IT scene but until these practises end local assemblers will always be asked what numbers they actually produce. “In order to be a local brand player you need to have all the knowledge and the know how,” notes Bayrakdar of Direct Computer Systems. “You cannot just lump together a few components and say that it is a brand. This is not what the market is looking for. Customers want something unique, a product which they can rely on. You see companies coming and going in this market and customers don’t know which one will be around long-term. What we need is stability, which is so important to local brands in the region.” ||**||

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