Form Factors

Lay your laptop aside and take a look at the stats. Desktops remain the dominant form factor in the Middle East IT channel.

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By  Andy Tillett Published  September 19, 2005

Driving Demand|~|farid200.gif|~|Farid Sabbagh, director SME and Channel at Fujitsu-Siemens computers|~|The desktop PC is alive and kicking. With IDC figures recording 664,000 units shipped in the Middle East during 2004, it remains the dominant form factor across the region. From local assemblers to the top worldwide vendors, the desktop PC is a staple sale to both corporate and consumer customers alike. Channel Middle East sets out to gets to grips with the dynamics of the desktop PC market in the region. The desktop PC sector remains a vital segment of the overall Middle East IT market with attractive price points continuing to drive demand from first time users. The region still boasts markets dominated almost entirely by local assembly, where entry-level machines continue to hold premium price A-brands at bay. Simultaneously, some Middle East markets are now comparable to those in Western Europe, dominated by the global A-brands in both the home and corporate sector. Between these two extremes lie the transitional markets, where there is a more balanced presence between global vendors and local assemblers competing head on — a battle that is often decided by the specific nature of government initiatives in these countries to stimulate IT growth. “A big sale in Jordan would be 100 PCs, but in the UAE you wouldn’t really consider a sale like that. You’d look at 500 to 700 units as a good figure. The desktop market varies a lot from country to country in terms of that market’s development and its size,” explains Farid Sabbagh, director SME and Channel at Fujitsu-Siemens computers. In the most developed markets of the region such as the UAE and Saudi Arabia, some vendors now claim there is almost a 50/50 split in sales of notebooks to desktops, though desktops still have the edge. IDC figures for desktop unit shipments in these two countries in the second quarter of 2005 show strong market demand. HP leads the pack, selling 57,000 units, and one of its main distributors in the GCC, Emitac, claims that most months it outsells notebooks with desktops by three to one. Second placed Acer sold 22,000 desktops in the UAE and Saudi Arabia and Dell and Lenovo sold 18,000 and 11,000 units respectively, according to the figures. The desktop is far from dead; it is evolving and adapting to the environments it is to be deployed in. This further defines the PC market’s split between two segments: corporate and consumer. ||**||On top form|~|odonahueacer200.gif|~|Kevin O’Donahue, EMEA business unit director commercial desktops at Acer|~|Home PCs are moving towards consumer devices, becoming digital lifestyle accessories to control a home’s media. Corporate desktops are evolving into workstations, PCs that only have the functionality needed for the applications they will be used for. In this corporate sector, companies are more willing to look at their IT investment, as Kevin O’Donahue, EMEA business unit director commercial desktops at Acer explains: “Most companies lease their buildings and cars and in a lot of cases, the largest capital investment they are making is their IT.” Where the big vendors play, margins erode, and in the high volume orders of the corporate sector, vendors work extra hard to outstrip each other. “We will go down to almost nothing to win every deal, the order is the most important thing. Large tenders are important for market share. It is not about making money, it is a market share and marketing exercise,” says Sabbagh at Fujitsu-Siemens. Low margins are not good news for anyone in the channel, distributors can have difficulty competing without selling phenomenal volumes and rely on the offerings vendors are prepared to give through rebates. “If you fulfil your quota and do a good job, you will always make money. There is no room for weak distributors. There is very thin or even no upfront margin on some deals. There are rebates given for selling as much as you buy and following the guidelines of the compensation programme, but without vendor support no distributor would be able to survive,” says Anil Warang, business manager HP personal systems group (PSG) at Emitac distribution. Resellers have to look for the value-add properties that they can bring to a sale in order to survive. This primarily comes in the form of service contracts or bundling software or peripherals. Again, vendors can lend a hand with their partner programmes. “For resellers, making the money comes from three main factors — upfront margin and stock rotation alongside support and demand creation from their vendors,” says Salim Ziade, category and marketing manager PSG at HP. “As the industry has evolved, margins have been squeezed for everybody in the supply chain, but the partners have developed too and dependence on hardware margin has phased out. The channel now makes profit through value addition in the form of complementary products, services, and balanced business — some products they will make less money but lead to complementary sales on better margin products,” says Michael Collins, general manager Middle East at Dell. ||**||Cutting into consumer |~|sharaf200.gif|~|Mohamed Sharaf, marketing manager Middle East, Egypt and Pakistan at Lenovo|~|Even though the desktop market is a cutthroat area, vendors still see the consumer space as ripe with potential for investment. Two major vendors have announced that they are to bring offerings into this area: Packard Bell, part of the Japanese vendor NEC, and one of the top three consumer desktop manufacturers in Europe, and Chinese vendor Lenovo, which recently acquired IBM’s corporate PC division. “We are currently studying the markets and will target the consumer products at each market suitably. In the last two to three years people have realised that they need to focus on functionality and not being so price sensitive, people see branded products as the right way to do investment,” says Mohamed Sharaf, marketing manager Middle East, Egypt and Pakistan at Lenovo. Lenovo’s home desktops will hit the shelves in early 2006. Packard Bell, on the other hand has signed an exclusive distribution agreement for the UAE with retailer Grand Stores, to test the market and assess what moves to make for wider expansion later. “We are going to concentrate on the mainstream midrange and high-end desktops. Grand stores will work with us building the brand and getting the products into the market. Its about finding the right partner, then looking to expand in the region,” says Vakis Chimonides, director product marketing at Interfrontiers, the regional business development team for Packard Bell in the Middle East. The decision by Packard Bell to sell its products entirely through the rapidly expanding retail channel in the region is indicative of the way business in the more developed markets is moving. Particularly in the home space, as desktops move closer to lifestyle products and digital devices more closely associated with consumer electronics, the channel is being squeezed out by chain stores and retailers, which have the economies of scale to sell products at a price which leaves a bitter taste in many a reseller’s mouth. In direct contrast and seemingly a million miles away are the smaller markets, untainted by the giant, forceful hand of globalisation. Here hypermarkets and A-brand vendors have little influence. All major vendors admit that they concentrate heavily on the large markets of the GCC and Egypt, where there is the potential for the most sales. ||**||Fledgling markets|~|chopra200.gif|~|Ashok Chopra, general manager Middle East operations at Sahara Computers|~|In countries such as Jordan, Oman, Yemen and Lebanon the IT business is still fledgling and very price sensitive. Here, some local assemblers will typically carry A-brand products, but find that they can sell the systems they assemble themselves cheaper and make more profit on them. John Raj is the owner of local assembler Computer Xpress in Oman: “We sell more of our own brand than the Dell PCs we stock. People tend to prefer what they can afford and go for our PCs which is good for us. We can make a 10% to 15% margin on our computers, but we only make 5% on Dell desktops. Local assembly accounts for at least 60% of the market in Oman.” This pattern is a familiar one in the region, and Elie Boujaroude, manager at assembler Teledata in Beiruit, Lebanon echoes Raj in his picture of the local scene: “Competing against A-brands is not really a problem, we are more up to date than the top vendors’ offerings and we can also beat them on price. The whole channel is living on very low margins, nobody is making any real money out of desktops. I sell around 300 of our brand desktops a month. Conservatively I’d estimate local assembly at 70% of the market in Lebanon.” Keen to take advantage of these markets, regional brand Sahara, originating from South Africa, but keenly eyeing the Middle East’s potential, has set up an assembly line in Dubai’s Jebel Ali Free Zone, with a view to gain a foothold in the region’s markets, targeting Oman as a key area. “The best way of establishing our brand is through an assembly line. People like locally produced products. At present we are making around 3,000 units a month, but we are still new in the region. Our workforce is expanding from 16 to 40 people,” says Ashok Chopra, general manager Middle East operations at Sahara Computers. Sahara will concentrate resources on entry-level products, though it breaks down its current assembly as 40% entry-level, 30% midrange and 30% high-end desktops. “I still see a lot of the Middle East as an entry-level region, because of countries like Iraq and Jordan where the GDP isn’t very high. Here, basic machines can do wonders. Even if you take a country like Saudi Arabia, education and government still buy a lot of entry-level PCs,” adds Chopra. ||**||Government spending |~|ziadeHP200.gif|~|Salim Ziade, category and marketing manager PSG at HP|~|Governments account for a lot of spending on IT across the Middle East. Certain schemes by governments to develop the IT business at a local level have been very successful. These markets are now attracting a lot of attention from major vendors. The most prominent example of this is Egypt. Here the third largest vendor is a local assembler called Centra. Egypt has two desktop schemes called ‘a PC for every home’ and ‘a PC for every student’. These both offer easy payment terms for buyers and only allow local assemblers to join them. The government in Saudi Arabia runs a similar programme, and schemes in Lebanon and Jordan are expected to come to fruition soon. This is a positive move for large vendors such as HP too. “Most of the purchases in the smaller markets are first time buyers who look for the easiest way of buying and the cheapest product, which is usually a locally assembled PC. The more repeat buyers you have, the more A-brand sales there are, as the consumers realise the benefit of spending a little more on a quality PC,” says Ziade at HP. Despite this emphasis on local assembly, HP is still the biggest selling brand overall in Egypt. “We have been doubling our business with HP each year for the last two years. All of the corporate sales are now to large vendors such as HP. The tenders go to local brands, but those that have positioned themselves to win on price. Because local brands are trying to outdo each other on price, it leads to a drop in the quality of the product,” says Ayman El Baz, managing director at Raya Distribution. ||**||Here to stay |~|El-Baz200.gif|~|Ayman El Baz, managing director at Raya Distribution|~|Desktops are still very much a key sale in the Middle East, although their production will slowly change hands in the developing markets from the local assemblers to A-brands, and the shift will move from entry-level products to those with higher specifications. “I can see local assembly almost totally phased out of the GCC markets in the next five years. Local assemblers are actually now aligning with global vendors, and in some cases swapping their assembly lines to make global A-brand’s products,” says Sharaf at Lenovo. Desktops still account for just over half of computer unit sales worldwide. Although mobile technology is becoming more widespread, the desktop is far from showing signs of wilting, and the Middle East in particular still has a very strong channel for desktop computers. As the models evolve to become smaller and more application specific, the desktop may change its face but is sure to be a firm fixture in many homes and offices for years to come ||**||

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