Desktop destiny

There is mounting statistical evidence that indicates the desktop PC sector is coming under intense fire.
Desktop destiny
By Andrew Seymour
Tue 22 May 2007 01:16 PM

In an industry where mobility has changed the face of the computer market forever, lingering doubts over the durability of the desktop market have begun to surface in recent times. IBM's decision to exit the market two years ago - coupled with analyst predictions that further consolidation of desktop PC suppliers is imminent - underscores the predicament of a sector synonymous with falling margins.

Figures just published by IDC show that while notebook shipments in EMEA rocketed 34% in the first quarter, desktop PC sales remained staid. In most parts of Europe, notebook volumes are now outstripping desktop sales. Evidence of this trend reaching the Middle East is compelling. "Notebooks are also growing at fast rates in the Middle East, representing twice the volume of desktops in Saudi Arabia, for example," confirmed Eszter Morvay, senior analyst at IDC.

There is a large market of people at which the cost saving from purchasing a desktop is greater, while desktops are preferred in the corporate environment because they can’t be taken from the office.

Saudi isn't the only market in the region to exhibit this pattern. Notebook volumes have also overtaken desktops in the UAE, contributing to mobile PCs emerging as the largest form factor in the Gulf region for the first time last year. 2006 also marked the year when laptops dominated the PC market in Kuwait. Qatar is touted as the next Middle East country to succumb to this trend.

Yet while data implies that certain markets in the region are becoming increasingly driven by a desire for mobility, PC vendors are at pains to point out that desktops remain very much in vogue. After all, the size of the desktop market is not shrinking.

"By no means is the desktop PC market dead," asserted Andrew Lamb, Middle East manager for volume products at Fujitsu Siemens Computers, one of several tier-one vendors that builds systems locally to reduce delivery times and minimise cost. "There is a large market of people at which the cost saving from purchasing a desktop is greater, while desktops are preferred in the corporate environment because there is not the associated risk that they can be brought away from the office. The growth may be flat, but the demand is still there."

This is a point emphasised by other PC vendors, which stress that there are market sectors where for functionality and security reasons notebooks can never replace desk-bound machines. Dave Brooke, Middle East marketing manager at Dell, says the region is still showing a huge appetite for desktops.

"Desktop is still larger by volume than the mobile market, but just as importantly it is a different market with different requirements," he said. "The desktop market in certain industries is significant and it will continue to be so by virtue of the end-user base. You'll find that mobile technology is not that important in departments where a high amount of data processing and data capture takes place."

Krishna Murthy, general manager at rival Acer Middle East, adds to those sentiments: "The GCC has shown a stronger adoption of notebooks, but if you look at the rest of the countries - like Pakistan, Nigeria and Egypt - laptop adoption is a lot slower. Desktops still account for 60% of the market in Egypt so there is more of an opportunity to grow."

Market research supports the argument that the Middle East desktop PC channel still has a lot going in its favour. In the UAE, for instance, desktop volumes expanded 24% year-on-year during the first three months of 2007.

"We saw replacement cycles in some of the main verticals in oil and gas, banking and government in addition to a pull from small and medium businesses," explained Omar Shihab, research manager for PCs and systems at IDC MEA. "Saudi Arabia was a bit more modest - desktops grew at 6% in the first quarter, but then again that's mainly because of the large projects we saw last year during the same time. We are still seeing healthy growth though. Markets such as Kuwait are growing 10% on desktops whereas if you look at Western Europe, the desktop market is declining by 12% a year."

One point that is abundantly clear is that the commercial sector has become the main stage for the desktop PC battle. Sameh El-Deeb, category manager for commercial desktops and displays at HP's Personal Systems Group, acknowledges that enterprise customers are the major buyers of desktops: "In this region, the trend is mainly driven by the public sector where you are talking about education, defence and healthcare. We are also seeing a lot of desktop demand in oil and gas."

AbdulQader Rahmany, executive manager at Zai Computer - the PC subsidiary of Saudi IT and distribution group ICC - believes the emphasis on corporate sales is down to the fierce shift in buying preferences occurring at retail level. "The consumer share of the notebook market is 60% to 70%," he said. "In the corporate sector the demand for desktops is much higher. Customers want these models because there are applications installed on a desktop that are still unique."

For local system builders like Zai, the desktop still offers an opportunity to differentiate from the international providers. "The value that we can add to a desktop is much higher than we can add to a notebook, particularly when the target is the corporate market," admitted Rahmany, who says that in 2007 the firm expects to improve on the 40,000 desktops and workstations it built last year.

The most important things are the early adoption of new technology in our desktop PCs, a flexible way of doing business and local customisation for each customer in terms of SKU.

"In the desktop space we have more room to work and can offer true customisation of the desktop. If you commit to being a technology leader you can always guarantee a good margin," he added.

Dubai-based Sky Electronics, producer of the eXPression and eXPeditor desktop range, says the ability to offer cutting-edge technology and choice - such as the option to select an AMD or Intel platform - holds the key to making progress in the desktop PC sector. "The most important things are the early adoption of new technology in our PCs, a flexible way of doing business and local customisation for each customer in terms of SKU," said managing director Manoj Thacker. Vendors that do spy a rosy future for the consumer desktop sector admit they are most enthused by the opportunities available in niche areas of the market, where end-prices and margins are invariably more attractive.

"There is a market for much higher-end consumer PCs and on the gaming side it is becoming very popular," acknowledged Murthy at Acer. "This sector is really developing and we want to get into it," he said, adding that retailers such as CompuMe and EON provide ideal channels for PCs with higher CPUs, huge hard drives and the latest graphic cards. Desktops represent 20% to 25% of the overall PC sales that Acer makes in the Middle East, with the corporate sector the primary recipient of those. Deals with Mashreqbank, Etisalat and Abu Dhabi Commercial Bank have boosted Acer's credibility in this market, while a three-year contract it landed with Emirates Airlines last year commands the delivery of between 7,000 and 10,000 machines per annum. Murthy admits the company is now trying to replicate that success in Saudi where massive firms such as Aramco and Saudi Arabian Airlines continue to invest heavily in infrastructure.

Total sales of desktops in the Gulf region soared to almost 900,000 units last year, although the share of desktops in the PC market dwindled to just 40% following the consumption of more than 1.25 million notebooks. IDC forecasts desktop growth of around 10% or 11% in 2007, but with laptop growth expanding three or four times as fast, it is clear why desktop PC suppliers are finding it increasingly important to cut costs and differentiate wherever possible.

Zai in Saudi intends to launch a web-based service later this year that allows customers to pre-configure their PC, while hardware brand DTK has plans to enhance its after-sales service and build on initiatives that have seen the launch of models such as the Cruiser 5015, a competitively priced, low-budget PC that promises high functionality. "We have worked hard with our channel partners to improve the availability of DTK PCs in the respective markets and improve delivery lead time," said Nimer Al Attal, Middle East managing director at DTK.

Thacker at Sky Electronics claims a commitment to performance, output and new technology is imperative for any company that regards PC production as their core activity. He said: "Profit comes from differentiation, not duplication. You need to deliver what a customer needs today and what it could be able to use tomorrow." Developing features and specs that are not just attractive, but stand out from the crowd, is the challenge confronting PC manufacturers of all backgrounds. Lenovo cites custom migration systems, embedded motherboard-based security and ‘rescue and recovery' technology that restores virus-hit data as elements of its offering that it uses to distinguish its desktop models from competitors.

"For us we have to address what we used to address at IBM, which is how to add value to our PCs," said Mohamed Sharaf, marketing manager for the Middle East, Egypt and Pakistan at Lenovo. "What do we bring to the table? Is it only a box? Definitely not - especially if you are addressing an enterprise customer. We are selling them more of a small solution built into that box, otherwise all it comes down to is a price issue."

That said, there are several other ways for vendors to differentiate their brand beyond the actual specification of the desktop. Service and repair levels, warranty offerings and in-region spare-parts availability are all factors that can determine a customer's choice and brand loyalty, particularly at channel level.

Yet while desktop PC vendors are naturally eager to play up the prospects of the market, several concede that resellers can only really make money - and more importantly profit - by combining desktop resell with additional activities. Al Attal at DTK has this advice: "We believe the desktop PC is the backbone of the computing environment. However, resellers need to gain expertise in other IT fields or align with other companies to be able to offer their customers the needed solution. Specialising in certain vertical markets can also give them some niche."

Despite the perceived margin squeeze, desktop PC sales have a massive role to play in determining a reseller's fortunes, according to Brooke at Dell. He insists resellers can improve their bottom line by being less aggressive to secure profitable business, or by developing a service capability: "It could be about providing an overall offering encompassing more than just a physical unit - installation or bundling around a platform. What the reseller has to ask themselves is if they didn't sell the desktop PC, would they still be able to sell the associated piece of services with it?"

The main challenge in the desktop PC market is to continue competing when the price is dropping at a rate of 15% year after year. This puts pressure on us to shift more units.

El-Deeb at HP continues this theme: "In order to increase profitability, you need to work on your sell-out capabilities and how close you are to your customers," he counseled. "Specifically in commercial desktops we are pushing more focus on accessories and attach. It's not a big secret, but it drives more incremental dollar profit to both the channel and HP, and it is a business enabler, especially for SMB resellers, to up-sell more of their services. They make more money on the HP desktop by attaching HP branded accessories and on top they attach their services, customisation and installation."

One offshoot of thinning margins and intense competition is the tendency for resellers to become dependent on vendor rebate programmes for their income. This could become a more prominent trend as the market matures. Lenovo claims the recent overhaul of its rebate structure in the Middle East is designed to make it more attractive for resellers to be part of its programme.

"What we used to do was set plans for resellers and give them incentives for reaching a specific target," said Sharaf. "What we have come to learn is that this is not right. So now we are segmenting the channel into the financial and operational capabilities of each partner and setting these targets accordingly."

As desktop vendors peer optimistically into their crystal balls, one hope is that the Vista operating system will give the market a real lift over the next 12 months. Amer Khreino, managing director at Acer and HP specialist Emitac Distribution, is confident that the power requirements needed to run Vista will prolong the lifecycle of the desktop and relieve some of the pressure in the market.

"The main challenge in the desktop market is to continue competing when the price is dropping at a rate of 15% year after year," he said. "This puts pressure on us to shift more units at a time when the commercial market is flattening versus what is happening with consumer electronics in the retail market."

There is still the scope to make strong gains from the desktop market, but clearly the future health of this sector depends on a buoyant commercial market. "We are going to see replacements and there is still a lot of opportunity among SMBs," predicted Shihab at IDC. "These companies are huge in number across the Middle East and they are still largely under penetrated in terms of IT infrastructure, such as small servers and desktops. There is still a long way to go."

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