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Wed 24 Oct 2007 03:57 PM

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HP ends local PC assembly in Middle East

EXCLUSIVE: Vendor to phase out Saudi desktop production by end of year.

HP will no longer assemble desktop PCs at its plant in Saudi Arabia from the end of December following a review of its supply chain arrangements in the Middle East.

The move means desk-based products will now be supplied into the region from Eastern Europe and the Far East using HP's standard distribution set-up.

The vendor says its decision to stop PC assembly in the Kingdom has been taken on the basis of a shift in market demand from desktops to mobiles, and revisions in GCC customs rules which reduce the economic benefits of assembling locally.

HP opened the Riyadh-based Advanced Local Configuration (ALC) facility in 2003 after signing an agreement with SNAS Trading & Contracting, a holding company that enables multinational companies to bid for contracts in conjunction with a Saudi joint venture partner.

At the time, HP said the plant would produce in excess of 80,000 desktop PCs a year and give it the ideal platform from which to address the Kingdom's SMB market.

However, the vendor believes the factory has lost the "additional value" it previously offered customers and argues that it can now meet the demands of end-users in a more cost-effective way without the need to assemble in-region.

Serdar Urcar, general manager of HP's Personal Systems Group (PSG) in the Middle East, cites the rapid growth of the notebook market as one of the primary reasons for the redundancy of the plant.

"The most important thing is that we have seen a big shift in the market for the demand for clients," he explained.

"When we said ‘client' in the past we meant desktops and notebooks. Today, we mean desktops, notebooks, workstations, thin clients and handhelds. In the past it was very much a desk-based market, but it is increasingly becoming a mobile market."

Although there is still a prominent desktop sector in the Middle East region, Urcar concedes that the platforms produced at the factory have "certain limitations", which also played a part in its decision.

Due to its global components supply chain arrangements, HP's assembly activities in Saudi have largely been focused on entry-level desktop models, which cater to vertical segments such as education, but no longer reflect the platform needs of midmarket customers, corporate enterprises and certain consumer categories.

Saudi Arabia boasts one of the highest notebook penetration rates in the Middle East with mobile PCs accounting for 60% of total PC sales during the second quarter of this year, according to IDC data.

Urcar says HP bosses had mooted the idea of manufacturing laptops at the plant, but concluded that the production model for such a form factor was not viable.

Recent changes to customs duty regulations have also had a major influence on HP's decision to bring the curtains down on the plant. Earlier this year, Saudi Arabia rendered certain computer products exempt from import tax as part of the unified customs tariff reported to be adopted by other GCC states, thereby eradicating the tax-advantage that companies such as HP gain from assembling in-country.

"There are certain different custom clearance regulations which have changed and which are changing and they have a short term cost impact on finished goods importations," explained Urcar.

"When you do the cost analysis of such a local assembly programme, you perform a calculation of everything which includes the custom clearance, duties and charges, and complexities.

"And since the region is going more towards free trade and moving out customs clearance duties, it is changing the feasibility of the study that we made and removing some of the costs from the normal standard supply chain versus local assembly. That is making the standard supply chain initiatives more cost effective than local assembly."

Between 50% and 60% of desktops manufactured at HP's Riyadh hub are destined for the Saudi channel with the remainder intended for surrounding Middle East markets and parts of East Africa.

One of HP's main justifications for launching the factory four years ago was that it could halve order-to-delivery time from 30 days to 15 days. Under the new structure, the turnaround time could be longer or shorter than what customers are currently used to depending on the configuration and manufacturing location.

However, Urcar believes that customers have more requirements than just the timeframe in which they take delivery of the product.

"In project deployment schedules we are seeing that turnaround time is becoming very important and configuration flexibility is very important," he said.

"When the customer is a small business or mid-sized company, the cost and configuration balance is much more important than the turnaround time. There are different needs for different customer segments and we are trying to tailor-make our offerings to each segment and their expectations."

Urcar also moved to quell any suggestions that the closure of the plant has anything to do with the capabilities of assembly partner SCSC or Middle East wholesalers that carry its desktop portfolio.

"Just to make one thing very clear, this decision has nothing to do with the performance of our distribution partners for the local assembly product or the performance of our local assembly partner in the production of these products," he said. "This decision is purely based on market trends and economical facts, nothing else."

One local partner impacted by HP's decision is distribution house Redington, which presently serves as the vendor's sole logistics service provider (LSP) for the assembly facility and is measured on its logistics efficiency.

It also delivers components to the factory that HP has purchased to build the PCs. Nahil and Jeraisey had originally been named as the two distributors responsible for distributing PCs from the plant within the Kingdom, but Nahil was relieved of those duties last year and Jeraisy had since reduced its focus on the role, according to Urcar.

Desk-based products in future will be shipped to authorised HP wholesalers for distribution in the region in the same way that they are for other exhibits in the PSG portfolio.

"We will continue to use our existing partner network and our existing distribution network," promised Urcar.

"We already have distributors for our desk-based products and we will continue to utilise them. Redington, for example, is one of them, as is AIM and Nahil, and there are other distributors in other countries."

Mathew Thomas, vertical head for IT distribution at Redington, insists the distributor is prepared for the new set-up and will be able to cope without its status of sole LSP for the plant.

"Redington had two kinds of relationship with HP anyway. One was the standard distribution LSP-CDP relationship, and the other was for the ALC factory, which we treated like a separate project," he said.

"When the distribution part of Redington wanted to buy ALC products for distribution they would actually buy from the ALC part of the business. So our distribution part will continue to buy from the European supply chain and we are now just finishing off the last bit of production with the ALC facility."

HP is now embarking on a phase-out plan that will see desktop production in Saudi scaled down by the end of December.

By mid-January it expects to have begun the adoption of a new standard supply chain methodology for the region based on its internally-named ‘Burst' programme for desk-based products and ‘TFT' initiative for display lines.

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