Eastern Promise

Channel Middle East charts the rise and the re-branding of powerhouse vendors from the Far East and their continued investment in the Middle East.

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By  Andy Tillett Published  April 2, 2006

Rise of the Tigers|~|georgeng2.gif|~|George Ng, general manager at Creative Labs Middle East.|~|Far East vendors are the largest worldwide suppliers of IT components. This role has subtly been changing as the giants behind the inside workings of PCs have embarked upon a mission to re-position themselves as brands in their own right, outside of the boxes and their domestic markets. Many are now breaking through onto the worldwide stage. With the developing markets of the Middle East seen as less susceptible to the mighty hand of American corporate dominance, they are ripe ground for investment. Many of the Eastern powerhouses are putting huge capital into markets in this region as a result. Rising to prominence in the 90s the ‘tiger’ economies of the Far East produce components for integration into the majority of the world’s PCs. When the dot com bubble burst and global IT recession kicked in during 2001, these economies were hit hard. This sobered many companies, making them reassess their position in the market and their long-term goals. Over the last five years, production has largely moved to China, to take advantage of cheaper labour and production costs. This has helped Far East companies such as BenQ, Asus and Foxconn to produce greater volumes and diversify their product ranges. “Between 2002 and 2004 we have shifted manufacturing to more cost effective countries, such as China, Malaysia and Thailand and we kept some in Taiwan. Moving manufacturing to China has really helped us to recoup our competitive edge in the area of cost. Our issue was that the cost of each unit was way too high. Moving production to China gave us competitive advantage,” says George Ng, general manager at Creative Labs Middle East. The scale of production that these vendors have is phenomenal. Taiwanese vendor Gigabyte has two factories in China and two in Taiwan, with 10,000 employees producing approximately 1.2 million motherboards a month. Asus has a manufacturing plant in Suzhou, China, that houses 50,000 employees and runs 24 hours a day. Foxconn claims it is the largest Taiwan-headquartered manufacturer and now boasts 15 sites across China housing more than 3,300 employees in each, and also has its second largest base of manufacturing operations in the Czech Republic, Europe. “The Far East never stops. Korea and China are picking up; Japan is rebounding. The economic development is still dynamic but more diversified. Japan and Korea take the high-end technology development and production. China is doing the basic level production. Taiwan is an expert on IT and value added production,” explains Max Chiu, sales manager channel business at Gigabyte technology.||**||Building a brand name|~|davidShih.gif|~|David Shih, managing director at Foxconn Middle East.|~|Manufacturing in the Far East is changing and many vendors are now switching production from solely components to include finished goods. Digital cameras, MP3 players and flash memory products have been added to the product offering of many vendors. This mirrors moves by American powerhouses such as HP and Dell, which have introduced more consumer based products to their portfolios. Contract assemblers are trying to build up brand equity in the own right, but in most cases the majority of their income comes from their OEM business. This presents a conflict of interest and as component manufacturer's brands grow in popularity it becomes necessary to separate the brand and OEM business. This has lead to companies splitting into units, or even different companies to look after components and sales and marketing separately. “We grew into the number one OEM company in the worldwide market. But then we needed to keep building on this growth, so in 2004 we created our channel sales division (CSD) to focus on branding. The aim of this was to increase revenue and visibility for the Foxconn group,” says David Shih, managing director at Foxconn Middle East. “There is a trend of contract manufacturers trying to establish their brand name, but at the same time, we can see many focusing more on the OEM and establish a clear line between branding and OEM business,” says Susan Shu, channel sales director at MSI. Acer is also an example of this, dividing into two companies: Acer to take a purely sales and marketing role and Wistron becoming one of several contract assemblers that the worldwide brand now uses. OEM relationships still count for over 50% of business for many Eastern companies. Asus breaks its business down as 60% OEM to 40% own brand goods, but says as its brand gains worldwide recognition it will be increasing focus on its own goods. Storage vendor Ritek splits its business 70% OEM to 30% branded goods, and says that if this balance will change, it will be towards its own brand.||**||Ramping up investment|~|maxgigabyte.gif|~|Max Chiu, sales manager channel business at Gigabyte technology.|~|The creation of sales and marketing arms in businesses has lead to more focus and investment to develop markets in different regions. The Middle East is an attractive area, not least because of the embargo of American products in Iran, leaving a huge market for the taking, but also the fact that it is at a stage of development where it is very receptive to new brands. “I said to my manager that in the Middle East there are cities, metropolises appearing, and there is a huge sustainable consumer group, a massive opportunity we could not afford to miss,” said George Ng at Creative. Creative Labs has had a hub based in Jebel Ali since 1997, from which it ships its soundcards into the region. The vendor only managed to get a full office officially set up in 2005. Creative more than doubled its product offering between 2003 and 2004, pushing its worldwide revenues up by 35% to over US$1bn last year. The product portfolio now includes a multitude of digital devices, MP3 players, portable speakers and other technologies. Creative’s Middle East operation has been very successful and according to Ng, who doubles as regional manager for the Asia Pacific region, profits are above the company’s expectations. Foxconn is another success story. In 2004 the components vendor split into two different companies and has set up over 35 sales and marketing offices across the world since. The aggressive tactics that it uses have helped it to quickly leverage itself into the marketplace and gain share. “We launched Foxconn in the Middle East at the beginning of 2005. We started in the market at 0% share and at the end of year 2005 we had made up 12% of the market in the region. We have become a contender in a very short space of time, and we are now a major competitor to Asus, Gigabyte and MSI and to companies that have been in the market for ten or twelve years,” says Shih at Foxconn. An investment such as this comes at a price. Foxconn has significant weight behind it that it can leverage to get products to the market, and it has been able to afford to position itself aggressively. “We have had great success, but we have also had to pay for it. We have had to allocate a huge budget for marketing. Also there are too many competitors. We are selling even without any profits, just to gain market share. Obviously this can lead to profits bleeding, sometimes even losing, but we want to be in the market,” adds Shih. For vendors without the economies of scale that a global giant like Foxconn has, the process of finding the right channel and running it in the Middle East can be very difficult, and these vendors rely entirely on partners to be their face in the marketplace. “It is not easy for a newcomer to find the right channel. The first step, building brand visibility, is difficult in the Middle East. Even for a powerhouse vendor it takes a great deal to introduce products, and finding and visiting markets to keep track of current developments is essential,” says Shen Wu, sales manager at optical storage media vendor Ritek. “It’s not easy for any newcomer to enter a market, especially an emerging market. The markets have more potential but it can also be risky. The difficulty is the competition and finding the right partners to develop the business with. Also logistics management is critical when building up business here,” says Shu at MSI.||**||Sustaining a channel |~|shenwu.gif|~|Shen Wu, sales manager at Ritek.|~|The product routes into the Middle East from Asia are complicated, with sea shipments being too slow for fast-moving products and a complicated system of taxes for moving goods between countries. Even the GCC has no unified tax system, which leads most vendors to cover the region from the UAE. From here Eastern vendors will typically serve the Middle East and the CIS. This is a daunting task for what will typically be a small operation, especially as each of these countries has a very different business culture. This is where local knowledge becomes of prime importance, and for vendors looking to set up, this can only come from being tied with the right distributors. Vendors have to pick a distribution channel that reflects the portfolio that it carries. Creative says that this is an issue that has not been easy to deal with, since it carries retail products as well as components. “You want to stay competitive, because of consumer demands, so vendors change, and distributors also have to change to reflect this. Some [distributors] have done extremely well, switching their business from 100% IT to 20% or 30% in the consumer electronics sector. Others have not wanted to change, and I have had to respect that. Some want to change, but there is a limit that they can, due to their resources, capital or culture. We don’t believe in dropping partners, but there becomes a limit to the amount of business we can do together,” says Ng at Creative. Creating and sustaining a channel in the Middle East is a difficult and costly process and only the strongest are able to differentiate themselves from the masses of OEM offerings in the market. IT vendors such as Asus, Acer, BenQ and Foxconn have positioned themselves very well and managed to make a name that has been accepted and in the case of Acer, is not really seen from a consumer perspective as a Far East brand anymore. With their expanded product offerings, the competitive landscape that these vendors are looking at is also different. Traditional digital device vendors have reacted aggressively to IT vendors moving in on their market, in particular Sony, which has introduced a huge marketing drive on its Walkman MP3 players and digital devices. Also the battle of the brands looks set to hot up even closer to home after recent developments in China. “China is becoming a giant in the IT market. It has the labour cost advantage, it has the strength to take on other countries like Japan, Taiwan and Korea. The country is ripe for IT investment. China has several huge IT companies but they are focused on their domestic market. In the international marketplace they need more knowledge and more experience. This is the Taiwanese strong point,” says Shih at Foxconn. The markets of the Far East are back to a healthy position on the world stage, and China has the potential to reshape the vendor landscape at a global level. The purchase of IBM’s PC division by Lenovo is the first step by a Chinese IT company looking to develop outside of its domestic market. This could open the floodgates to further investment from Chinese powerhouses giving everyone, from both East and West, tough competition to consider.||**||

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