How low can you go?

The bulk of global PC growth will come from emerging markets during the next five years, according to a recent report from Forrester. Vendors and assemblers able to come up with a low-cost PC recipe tailored to the needs of a new breed of consumer will look set to upset the PC pecking order.

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By  Stuart Wilson Published  January 26, 2005

The bulk of global PC growth will come from emerging markets during the next five years, according to a recent report from Forrester. There is no guarantee that the global A-brands will be able to replicate their dominance in these fast-growing markets.

Vendors and assemblers able to come up with a low-cost PC recipe tailored to the needs of a new breed of consumer will look to upset the PC pecking order.

Forrester’s research claims that the number of PCs in use worldwide will reach almost 1.3 billion by the end of 2010 — up from just 575 million today. The report, which looked in detail at 16 emerging markets (including Iran, Egypt, Turkey and Pakistan) representing 62% of the world’s population, estimated that these countries alone would account for 566 million new PCs in the next five years.

Will these be cutting-edge PCs at the forefront of technological innovation with premium price points? Don’t count on it. The massed ranks of new PC users will want a very different PC to the feature-packed, sleek machines that grace the shelves of retailers in countries with high spending power. The successful vendors in emerging markets will need to produce no-frills machines, stripped to the bare minimum, allowing users to access the internet and perform basic functions.

Forrester points to specific factors that will make it difficult for Western PC industry leaders to compete with local manufacturers in these emerging markets. In the first wave of growth in emerging markets Western vendors are able to sell higher-spec high-priced machines to a relatively small percentage of the population with substantial spending power. After that they will face a real struggle to compete with low cost vendors — often local assemblers — with an intimate understanding of the customer requirements.

Then there’s the perennial debate between Linux and Windows to consider. The Forrester report team, led by analyst Simon Yates, concluded: “Despite the introduction of Windows XP Starter Edition for the equivalent of US$99, establishing the Windows platform in these new markets will be an uphill battle for Microsoft.”

“With no Windows legacy to deal with, local manufacturers can drive down prices by installing Linux instead. But Microsoft could eliminate that advantage with the swipe of a pen and match the Linux vendors’ price point dollar for dollar. Also, turning a blind eye to the pirating of Windows may be better for Microsoft in the long-term than losing the early market to Linux,” the report added.

Weighing up the gist of Forrester’s findings in a global context, the evidence points to an increasing bifurcation of the PC market in terms of specification. In other words, the difference between an ultra low-end PC and a high-end ‘all-singing all-dancing’ unit is going to get wider. As this chasm expands, it will become increasingly difficult for a single vendor to straddle the entire expanse and cover both ends of the market effectively.

At the low-end, expect to see some specialist manufacturers really ramp up production of low-cost Linux-based PCs. In the Middle East, eSys ePC range now starts at just US$200 for a basic machine. At the high-end we’ve got A-brand vendors touting the prospect of the digital home offering high-spec machines retailing at a few thousand dollars if you decide to load it with all the extra options.

One of the real challenges facing the A-brand PC makers, Microsoft and even the processor vendors is where to focus their energies. Obviously, the margins on the ultra low-cost machines are minimal meaning that scale is the only way for those involved to achieve decent profits. A-brand vendors like to sell premium products with solid margins that cement their brand equity.

Transferring these skills into the emerging markets and coming up with a winning strategy will be a tough task. The real danger is that a failure to move early enough will give low-cost local assemblers the opportunity to build brand equity and raise the eventual barriers to entry as spending power increases.

There are myriad factors for A-brand vendors, local assemblers and low-cost PC builders to consider when deciding where to focus their business. For those looking at emerging markets, low cost PCs will mean volume but minimal margin. Not everyone has an appetite for this type of business. For the established A-brands, sacrificing profit margins to build market share in these emerging countries is a difficult decision to make.

How low can you go? More to the point, how low are you prepared to go?

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