Component Parts

The motherboard market is booming with some vendors claiming to sell 50,000 units a month. Channel Middle East delves into the high pressure, high reward motherboard market for a closer look.

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By  Andy Tillett Published  September 19, 2005

Growing through 2005 |~|golden200.gif|~|Ehsan Hashemi, director sales and distribution department at Golden Systems Electronics|~|The motherboard space has come out of a period of low market growth and entered positive territory in 2005. In an increasingly tough market where prices fall fast and product lifecycles have halved, the motherboard business offers rewards to those shifting large volumes. The stakes have been raised higher by aggressive marketing and promotion tactics from the largest vendors. With most of these vendors handling their operations in this region from the Far East, partner strategies and channel loyalty have become vital in a market where missing a beat can mean losing millions of dollars in sales The motherboard market went through a period of low market growth in the first half of this decade, resulting in five main vendors emerging to scrap it out for the largest market share. Industry analyst Market Intelligence Centre, based in Taiwan, shows that motherboard growth has picked up in 2005 and predicts continuing strong growth rates for the rest of the year. The five remaining contenders in this arena, battling for market share are Asus, Foxconn, MSI, Gigabyte and Intel. The motherboard market is a tough space for vendors. It has consolidated to the point where even mid-sized players have left the marketplace. To compete, the economies of scale needed are massive, as is the investment needed in production costs — and most importantly research and development to keep at the cutting edge — making it near impossible for a new vendor to break into this space. CPU technology has evolved and both AMD and Intel have released dual core processors, leading to the introduction of a number of new motherboards to take advantage of this technology. At the entry level there has been changes too, Intel has stopped production of its standard 845 chipsets and AMD has discontinued its low-end K7 CPU series, signifying that this technology has been outdated. Vendors such as Via, Sis and Uli are expected fill the gap in the entry-level chipset space. The motherboard market moves fast. Product lifecycles have reduced from an average of a year to six months. Margins are very small and distributors have actually lost money just to keep market share. Ehsan Hashemi, director sales and distribution department at Golden Systems Electronics, sums the motherboard market up with one simple equation: margin versus market share. ||**||Price driven markets |~|jessicaalmasa200.gif|~|Jessica Chen, product manager, Foxconn, 3C group at Almasa Distribution|~|With prices falling quickly and wafer thin margins — approximated by vendors to be as low as US$1 a unit — motherboards are sold entirely on a volume basis: “The margins are kept down by fierce market competition, and prices fall so fast. We’ve seen a 915 chipset motherboard go down from US$150 to US$90 in five months,” says Najib Nesrini, sales manager at Foxconn Middle East. Almasa Distribution says it sells 20,000 to 30,000 motherboards from vendor Asus a month across the Middle East, excluding Saudi Arabia and Syria while Golden Systems claims to move approximately 50,000 Gigabyte motherboards a month in the region, excluding Egypt, Saudi Arabia and Syria. Newcomer Foxconn is targeting unit sales of 2.5 million in 2005 for the Middle East. “The markets here are driven almost 100% by price. This makes it hard for vendors in this region. There are different expectations a lot of the time between the vendors and the channel. The market can be a little immature, and we have to be careful to balance between these two things,” says Jessica Chen, product manager, Foxconn, 3C group at Almasa Distribution. Gauging a price sensitive market and working with large volumes of product is no simple task, and for vendors such as MSI and Gigabyte, which have no direct presence on the ground in the region, distribution is key. Vendors opt for a distribution model that doesn’t flood the market, by appointing only one or two distributors in each country or for a particular group of countries, typically taking the Middle East as one area excluding Saudi Arabia or Egypt. This prevents distributors from having to compete against each other in the same markets. ||**||The right partners|~|tsai200.gif|~|Marvin Tsai, marketing supervisor at MSI|~|Vendors choose distributors that can handle a lot of stock, have reach into the channel on a country-by-country basis and are willing to work very closely to develop a strategy and be the vendor’s eyes and ears in the marketplace. “It is essential to have the right partners to support us and fight our corner. The region’s markets are very different from others, making a distribution and marketing plan the key points to developing business here,” says Marvin Tsai, marketing supervisor at MSI. “Since we have been distributing Gigabyte we have broken new territories. We moved from just distributing in the UAE and Iran to most of the Middle East,” says Hashemi at Golden Systems Electronics. Newcomer to the market, Foxconn, has switched from being an OEM manufacturer to developing its own brand. The vendor has employed a very aggressive marketing strategy, and has also set up an office in Dubai, UAE. Foxconn claims that in the ten months it has been present in this region, it has managed to capture over 10% of the market share for motherboards, and is presently rated fourth for sales in the Middle East. “Three factors have led us to the market share we presently have: first having the right distribution; secondly, we are local, here inside the market; our third advantage is that we have put a lot of money into the marketing. Creating the right branding is more than good quality and service, but spreading your name in the market,” says David Shih, managing director at Foxconn Middle East. Marketing tactics, coupled with a strong offering to the channel, is how the motherboard space is being fought out. Price points are too tight for distributors to differentiate themselves so they have to do it through complementary sales, warranties and services. They also entice resellers through bundling, such as packaging a motherboard, graphics card and sound card together. “Although margins for distributors are small, at the very most 4% to 5%, by selling 1,000 motherboards you have the opportunity to sell 1,000 memory modules, CPUs or hard drives, and these complementary sales can build up. If you can bundle them, then its even more attractive to the channel,” says Shibu John Mathew, marketing manager at Empa Middle East. Vendors also differentiate themselves through offering products targeted at different market sectors. Because of this, distributors can carry more than one brand without overlap. Distributor Empa carries four different motherboard vendors in various territories across the Middle East: Intel, MSI, Asus and Biostar. Almasa Distribution carries Asus and Foxconn motherboards — Asus for the high-end and Foxconn at the entry level. “Almasa distributes motherboards because the components business will never die. As long as there is a PC market, there will have to be a market for components. We are presently putting a lot of emphasis on being a one-stop shop, bundling products together and selling them as a solution,” says Jill Chung, business unit manger, 3C Group at Almasa Distribution. ||**||Smart marketing versus grey|~|jillalmasa200.gif|~|Jill Chung, business unit manger, 3C Group at Almasa Distribution|~|Smart marketing and the offers vendors and distributors have are also increasingly important as a tool for combating against grey product flow, a big problem in the components market of the Middle East. Other tools that vendors can utilise are extended warranties and service contracts to encourage resellers to buy from the correct channels. “We know that grey imports are harmful to our branding and service chain; therefore we obligate our partners to focus only on their target market. We also encourage them by providing local service and marketing support,” says Tsai at MSI. Unfortunately, the grey channel is difficult to quell. In a region like the Middle East where the infrastructure of many of its composite counties is still in its infancy, it is very difficult to control the flow of product. Once distributors have sold a consignment, they have to trust that resellers are selling into the markets they say they are. Components are easier to remove serial numbers from or integrate into an otherwise legitimate PC. This affects everyone, from local resellers loosing out on sales upwards. “It is very difficult to control the grey markets and you can’t put a stop to it, we’ve faced grey from everywhere from Turkey to America. A lot of it comes down to how strict vendors are. Gigabyte has been very supportive of us and vendors can try and stifle it, but there’s only so much they are capable of doing. If somebody wants to do it they will always find a way,” says Hashemi at Golden Systems. Controlling the flow of product is a difficult task, especially as major distributors such as Almasa and Golden Systems have reseller or integrator partner numbers running into the hundreds in their territory. Distributors also appoint in-country partners as the main distributor for a country on their behalf. Components can only go to three sources: resellers, local assemblers or A-brand vendors. Only a small number of motherboards are sold to end-users by resellers or retailers. Local assembly is a prominent force in the largely developing Middle East region. Empa claims that 60% of the motherboards it sells are direct sales to local assemblers and Intel claims to sell 100% of its motherboards in the Middle East through its distributors to assemblers. The chip vendor has three levels of partnership to encourage and promote local assembly. These are Intel Product Integrator, Intel Inside Partner and Intel Premier Provider (IPP). “Premier providers are the companies that are selling solutions and have a high level of in- house network integration and a level of expertise. These are our top customers in that they are specifically selling solutions into corporate accounts. Across the GCC we have around 20 IPPs,” says Nass Nauthoa channel manager GCC at Intel Middle East. Another market stimulant in some countries of the region such as Egypt and Saudi Arabia is the government, which provides tenders to bulk buy product to be used in their local partner schemes. “When we win a government tender it is for thousands of boards. We sell most of our motherboards in countries with local assembly schemes and government initiatives. Most of this tender business is for low-end specification boards,” says Mathew at Empa. Other vendors are targeting the local assembly market more, to get a better direct line of sales, such as Foxconn, which sees the cornering of this market as integral to its growth in the region. ||**||The CPU factor|~|foxconn200.gif|~|David Shih, managing director at Foxconn Middle East|~|Components have to be integrated into a computer at some point, which draws a big question mark over one of the largest markets in the region, Iran. Of the major vendors, Gigabyte, Foxconn, Asus and MSI claim Iran as a large market for them. This may be so, for their motherboards, but because the country has an embargo on American products being shipped into it, they can only be sold without a processor from Intel or AMD. This hints at a massive market for assembled PCs in Iran, but begs the question of where the CPUs come from to power these machines? Aside from missing CPUs, processors are a major factor in the motherboard market. Once a CPU socket is put onto a board its destiny is set, and it is either an AMD or an Intel board. The entire region is currently Intel dominated, but the major motherboard manufacturers (excluding Intel) have all started offering AMD processor based boards. “We are doing very well at getting our products into the market. Our market share in this region isn’t as much as it is in other areas, but we have plans to increase it and to capitalise on the agreements we have with our OEMs and expose the customers to the best technology that we have. Our focus has been growing for some time now. We have established an office, have staff in the region and are planning to grow in line with the other countries we work in,” says Tarek Heiba, regional manager Middle East and Africa at AMD. Despite the aggressive tactics from AMD, it is still a relatively new vendor in the region, establishing an office midway through last year and it has a lot of work to do in raising awareness of itself as a brand, more than improving its products from a technical point of view. The first signs of AMD’s penetration into the region are starting to pay off, and vendor Asus now has two distributors, one carrying AMD and the other Intel. This differentiation between the two brands shows that Asus is pursuing and marketing the two products individually. The relationship between motherboard manufacturers and CPU vendors is hard to gauge, as to how much influence one has on the other. Shih at Foxconn, which claims it works very closely with Intel, says that the vendor’s influence is a force to be reckoned with: “Chipsets have only one word: Intel, all the motherboard makers know there is no second choice. For example, if Intel wants to launch a 915 chipset, everybody has to follow.” ||**||Hard work pays off|~|nasssintel200.gif|~|Nass Nauthoa channel manager GCC at Intel Middle East|~|The motherboard market is a very hard space for vendors and distributors alike. Margins are small the whole way through the channel and distributors have to constantly keep innovating to keep their offers attractive. Some of the large manufacturers have been in the region for a long time and have a loyal and developed base of resellers. This doesn’t mean that they can sit back and relax. If another vendor is prepared to dedicate the time, effort and resources to the region, then they have potential to gain market share, as Foxconn has demonstrated with its rise in the Middle East. “The number of vendors has reduced, the top five will survive and the small and mid sized vendors are losing out and having to exit the market. The dreams of high margins are a long way behind us but there is a great sense of achievement when we find resellers coming back to work with us,” says Chung at Almasa. Motherboard channel strategy needs to be very carefully planned by both vendors and distributors, as small changes in prices or one wrong reseller appointment can have a much wider impact on the channel. Though the market is unlikely to see many changes to the vendor landscape, there is always space for new, dedicated resellers. Margins will continue to be tight, but the emphasis with motherboard sales is in the potential for value-add. The channel needs to work to an agreed goal and communication is the key to success, in order for vendors, distributors and resellers alike to keep the market lean and efficient. ||**||

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