The producers

Channel Middle East explores the ways in which system builders in the Gulf can prosper from an activity that has ruthlessly defeated many of their counterparts around the world.

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By  Andrew Seymour Published  November 7, 2007

I t has to be said that the prospects for local assemblers don't look particularly bright. Data released by IDC reveals that the combined market share of companies outside the top five brands dwindled to just 44% in the EMEA region during the third quarter of this year. For those whitebox proponents who haven't yet come to terms with the situation, the stark reality is that fewer than one in every two PCs is now manufactured locally. Indigenous producers, as a unified category, are simply struggling to keep up with the rate at which the overall market is expanding.

The state of play in the Gulf market is equally as brutal. Large multinational brands continue to consume all before them, sewing up a larger portion of the field with each quarter that passes and putting local players on the backfoot. A range of local assembly names, from Wansa Computers and Al-Wazzan Computers in Kuwait to Future Power and PC-Net in Saudi Arabia, have been synonymous with the GCC market over the years, but the advantage seems to be firmly with the multinationals. "The total Gulf desktop and laptop market was worth 2.1 million units in 2006 and if you look at the share of local assemblers - avoiding ones like Zai and DTK which we report separately - then we are only talking about 12% of the market," revealed Omar Shihab, research manager at IDC MEA.

They have local knowledge and by definition of having that know-how, assemblers are able to bring solutions to market, particularly with SKUs that resonate with the clients they address.

Sweeping predictions that the local PC assembly market is heading for a complete meltdown are not met favourably by stakeholders in the business. Tolga Altinordu, OEM director at Microsoft Gulf, insists the growing influence of multinationals is a trend that has already taken place and argues those who have weathered the storm should not have anything to fear. "The transition in more mature markets has already happened so we don't see it as a big threat going forward," he remarked. "There is always a need for a niche and so local assemblers will continue to survive. Perhaps they will face some pressure on the margin side, but the transition has already taken place in my view."

That said, in a local PC assembly market worth around 250,000 units a year - 300,000 at best - the importance of a focused strategy for anybody with ambitions to build more than just a handful of PCs a week cannot be underestimated. This is a sector for which the meaning of the phrase ‘survival of the fittest' can be taken literally and those who are veterans of what was once a very profitable game acknowledge that only the leanest organisations prevail these days.

"You have to be flexible, first to market, and able to serve every user by definition of its segment or unique requirements," declared Manoj Thacker, managing director at UAE-based Sky Electronics, which recently grabbed the headlines after launching its AED27,000 (US$7,300) Annihilator PC, a desktop that it labels the fastest in the world. "The reason we are surviving today is because we work with vendors who build components for local assembly as well as multinationals. The whole business of how to be a good player in this market is not about competing with the MNCs," he argued.

Sky epitomises the very spirit of local assembly by harnessing the relationships it has developed with key application and platform vendors such as Microsoft, Nvidia, Intel and AMD to build machines with components that avoid pitching it directly into competition with multinationals. "I know a lot of vendors who are competing with the MNCs by trying to build PCs on a similar apples-to-apples to spec and charging US$10 or US$50 cheaper. That is something which I don't believe is my speciality," said Thacker.

Nass Nauthoa, reseller channel manager for the GCC at chip vendor Intel, believes that MNC brand strength and economies of scale represent the primary constraints for local assembly firms. "We are working in a very fragmented market here," he observed. "To get the benefit of scale local integrators need to be able to have a pan-Middle East brand and that is one of the challenges they face. Their solutions tend to be very country-centric. They can offset that through providing tailored solutions and they obviously buy a lot of complementary products from distributors, which means they can negotiate on other add-ons to build into their solutions."

Speed to market still ranks highly on the list of assets that local assemblers need to demonstrate in the face of challenging market conditions. Abdallah Saqqa, regional distribution and sales manager at AMD, acknowledges that the trend of multinationals stealing market share from local producers is irreversible, but believes the indigenous channel still has a role to play. "It is not something that we are concerned about because we will continue to work with these guys as much as we can," he claimed. "We will continue to empower local brands and work with them on certain initiatives which might take a while for MNCs to bring to this region."

Intel also regards local integrators as the ideal foil when it comes to the early introduction of new technologies into the market. "The primary advantage they have is local knowledge and by definition of having that know-how they are able to bring solutions to market, particularly with SKUs that resonate with the kind of customers they are addressing," explained Nauthoa. "Where we fit into this is that the channel typically gets access to all the latest products from Intel as we launch them. The speed, local know-how and ability to offer customised configuration and local support are some of the key advantages that local assemblers offer."

The technical expertise that PC assemblers cite as one of their strongest weapons has to be balanced with a certain degree of discipline when it comes to deciding which markets to serve, however. One criticism levelled at local PC builders which have bitten the dust is that they were guilty of spreading themselves too thinly, leaving them over-exposed to the international brands and their global marketing engines and economies of scale.

Whitebox builder Sahara Computers, the South Africa brand that houses a PC assembly facility in the UAE, is one of the few system builders that has branched into own-brand laptop production and insists its strategy of focusing on the price-conscious low end of the market has handed it an advantage over competitors which have deliberately stayed away from that category.

"We initially started operating in this segment by introducing Celeron-based laptops and Pentium mobile-based laptops - rather than going for Core-Duo or Core 2 Duo and technology like that - and we have been successful," explained Ashok Chopra, group general manager at Sahara Computers. "Now, after introducing this in the lower segment, customers recognise there is a brand like Sahara which they have seen in the various outlets. If you look at the market, you see the top brands but after that you don't see any established second-tier brands as far as laptops are concerned, whereas our product is in Carrefour, Lulu, Emax and Geant Saudi Arabia among others. A lot of outlets are selling Sahara products and the idea is to grow more into retail, where the visibility is very important. That makes all the difference when it comes to entering into other segments."

One trend that has become apparent is the growing role that the retail sector has to play in the direction that local system builders take, especially in the UAE. Sky, which builds the Intel-based eXPeditor desktop brand and its AMD-based equivalent, the eXPression, is now supplying PCs to a number of large retail accounts following a concerted focus on retail earlier this year. It believes power retailers are motivated by the opportunity to select individual specs and cases that differentiate them from their competitors - an option that can't be matched by A-brands which carry a more refined set of SKUs.

Sahara returns a similar verdict, adding that partners which focus on moving its products can enjoy a margin in excess of 10% compared to the 2% to 5% typically earned from selling multinational products. "Often when you sell a higher number you go into a trading mode and keep on offering more credit even if it risks your principles," said Chopra. "We tell people to be selective, go for a certain segment, a particular brand or model from our side, and just focus on a few numbers but with a higher margin. We started retailing last August. In little more than one year we have been able to work with seven or eight good accounts. If there was no place for us they would never have taken our product."

Hafeez Khawaja, senior regional director for the Middle East and South Asia at Western Digital, insists it is this kind of service which assemblers must provide to safeguard their future. "I have worked with integrators from all over Europe and many emerging markets and I think that their value add is the knowledge of local customers and their relationships," said Khawaja. "Additional initiatives such as delivery and after-sales services, combined with the capability of immediate intervention, is something which gives them an edge on multinationals."

Sahara's Chopra also claims his firm has profited from its policy of nurturing partnerships in markets where rival companies fail to put enough emphasis. "Who goes to Ras Al Khaimah, Fujairah, Al Ain?" questioned Chopra. "Not many brands like to be physically present there or even try to cover that market. Even in Oman, who is going to Salalah, Nizwa, Sur or Sohar rather than just Muscat? These are the places where nobody goes, but there are partners there who can influence the decision of the customer and so we are focusing on those territories."

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