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Wed 5 Nov 2008 04:00 AM

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Sitting pretty

Notebooks are the largest sector of the PC market, but some believe that market dynamics make it a precarious ledge on which to perch

Although statistics show that the notebook sector is now the largest category of the PC space by some distance, there are still those that believe the dynamics of the market make it a rather precarious ledge on which to perch. Channel Middle East brings together the region’s leading PC vendors to find out what they are doing to help their channel partners increase profitability and minimise the inevitable margin pressure associated with the sector.

We spoke to: Santosh Varghese (SV), regional general manager at Toshiba Computer Systems; Djillali Lahiani (DL), Middle East regional channel partner manager at Lenovo; George Su (GS), account manager for Asia Pacific, Middle East and Africa at Asus; John Coulston (JC), head of marketing at Dell Middle East; Anil Kumar (AK), general manager for the Personal Systems Group at HP Middle East; Mark Prosser (MP), product marketing manager for mobility products at Acer Middle East; and Yves Matta (YM), volume sales director for the UAE at Fujiitsu Siemens. Price points in the mobile PC market continue to decrease even though the overall size of the sector is growing. What are you doing to ensure this pressure doesn't impact your partners' profitability?

SV:The market in the Middle East region is growing at an average rate of about 60% and with ASPs falling by about 15% to 20% it is very difficult for the partner to maintain revenue growth.

That is the biggest challenge across the channel. What we are asking the channel to do is have a proper mix of products and to retain a focus on the entry and mid-range levels, as well as a vertical segment like gaming PCs. The channel must add value and encourage a culture of up-selling.

They must ask the customer what purpose and applications they are using it for in case they would be able to recommend a high-spec laptop with a better graphics card or more power, or even add on peripherals or options such as an extra hard disk or warranty.

JC:We work with our suppliers to make sure that we have the most cost-effective products possible. We have a continued focus on cost without impacting the quality of any components or the delivery of the total product in the final package.

We constantly scour the market for the right technology and have one of the most effective procurement organisations in the industry. That helps us pass those benefits onto our partners.

YM:It's true, ASPs are decreasing year-on-year, but don't forget that units shipments are increasing as well.The market in general is covered on the low price points. We try to position in the mid- and high-end. In many cases this is where we see more profitability.

AK:We sell everything through the channel and HP's channel programmes have been copied by the other vendors. Our channel programme is both centrally and locally developed across partners, whether they are tier-one distributors, tier-two resellers or retailers.

They are tweaked every quarter to take the market realities into consideration. The focus of every programme is profit across the board.

The 'netbook' or 'miniature mobile PC' category appears to be gaining traction in the Middle East market. Is this category an opportunity or threat for the regional mobile PC channel?

SV:If not positioned properly by vendors then it is a threat because the net PC is not actually a main notebook and it shouldn't be sold as a secondary notebook.

The keyboard, the power and the performance are all restrictions so if it is not positioned correctly you are going to have a lot of dissatisfied customers.

MP:It is a massive opportunity. The word ‘netbook' is key because people refer to them as ultra-mobile PCs and mini-notebooks - there is a lot of confusion.

Quite simply we see it as a secondary device and it offers a lot of value to customers who are looking for this kind of product. It targets a whole range of customers from entry-level consumers to high-level executives.

YM:It is a very niche product and in most cases the end-user is very well educated.For instance, if you get a college student shopping for a notebook, they will probably know that they want a multimedia laptop, and the advantage today is that we have promoters on the ground that are leading the end-user to the product about 70% to 80% of the time.

We look a lot upon the mini PCs as very niche. It is just additional business for us and we do not see it taking a lot of market share from the actual 14-inch and 15-inch models.

AK:It is actually an opportunity for a new market segment. The netbook is aimed at a different set of customers. We are not playing it in the price point game, it will be for the business user who can use the product over a two- or three-year lifecycle.

GS:This should be seen as an opportunity much more than it should be considered a threat. Asus is one of the earlier pioneers of the netbook with the EeePC. This kind of solution has really given great growth and potential to the mobile PC segment.

Through this approach we help to enlarge the size of the mobile PC market and this means more users can afford the netbook in emerging markets.

JC:I think it is an opportunity, especially if you look at the usage models of the netbook. You will find that the netbook will be used by households with a homehub. So the netbook uptake is going to have a positive impact on sales of desktop PCs to consumers.

DL:There is an opportunity for the channel in netbooks. Lenovo has been doing PDAs before, as Dell or HP have been doing. An opportunity exists between the very high-end mobile phones, PDAs and very small-style laptops. But this PC is limited by RAM, hard disk and usage.

In Europe it makes sense because they have positioned it as competition to products provided by network providers. Here it is not a real mobile PC where the performance is the key for consumers, it is just a niche. We have a netbook coming and we will definitely be there in this market as well. A box-shifting mentality largely exists in the mobile PC sector. Do you see many of your partners adding value to a notebook sale and if so what are the best examples of this?

SV:The best examples of value add would be bundling notebooks by up-selling - as you would see when you pop into McDonalds and the person behind the counter tries to up-sell you with a bigger fries or drink.

The same thing applies and it is time the channel sales guys started to think about this. If they just sell the notebook they may make US$20 for their company, but they could make another US$20 because a customer that has just bought a notebook does not go bargaining over options. They could make another US$20 if they sells a carry case, additional warranty or an external hard disk.

AK:What most of our resellers and retailers do rather well is add a lot of accessories with the notebooks. The incentive programmes that are run locally encourage our partners to sell accessories with the product. When you look at the overall profitability of the partner, they make more money once they start selling accessories in dollar terms.

DL:We have tried in the past to help the retailer change this mentality. They must consider where they are working and targeting, where the challenge is to grow and whether they are ready to move up from the pricing business to solutions.

To move to solutions selling they need really skilled sales executives. The Lenovo Partner Network Programme pushes them in terms of incentives and training so customers can grow and get more market share for us.

For instance, in Kuwait, where it was only about box-moving, we have been running a special offer that gives partners more support if they address new accounts. Our partner UVG in Kuwait used to traditionally address the customer with a model a little bit like a sub-distributor. The partnership has completely changed - we understand their needs and they have shown tremendous growth.

GS:We prefer not to have box-movers as channel partners, regardless of whether it's at distribution level or retail level. At Asus we value features more than price selection and our channel partners are in line with this strategy. Right now we are covered with many of the power retailers and they are doing more than the box-moving.The added value these retailers can give is intelligence and knowledge delivery, such as the kind of usage and value the user can get through the purchase. And the second value that they can offer is after-sales service.

What special incentives or support are you giving partners to encourage them to sell your products as opposed to those of your competitors?

SV:That is a very important question because the first thing you hear from the channel is that they don't make money from products. Sometimes they are creating their own problems, such as getting into price wars. We introduced a programme in the second quarter of this year giving partners a rebate based on their targeted achievement and year-on-year growth.

Slowly, we will be implementing a more revenue-based version. From the distributors' perspective, we have incentives around growth and channel breadth. It is very important for them to increase breadth as they cannot focus on five or 10 players in the market and break the back of the stock.

YM:We are getting more into the details of the business and overall P&L of the distributor. We just remove the focus from anything that is not profitable and move closer towards self-financed products and business.

AK:Other than centrally-developed programmes which are part of the Preferred Partner Programme, we also have a lot of local incentives that are specifically targeted to our retailers. We also have a retail channel health programme, which targets retail partners.

We help them from a marketing standpoint and are even taking them that one step higher to Gold Partner status, where they specialise in a particular segment. Whether it is in notebooks or other solutions, they are going to get more marketing incentives from us.

DL:The Lenovo Partner Programme is not based on 100% achievement, we start rewarding our resellers when they begin achieving 70%. We want to show them that we look not only in terms of numbers, but also in terms of potential.We give them rewards depending on the mix of products they are doing and if they reach more than 100% with mixed products then they can earn a rebate of more than 4%.

We are also going to implement a very important programme here in the Middle East called the Winner's Club because we want to reward our sales ambassadors in the channel. It works in a similar way to an airmiles scheme and channel sales staff can get vouchers and register sales to get points. What's the biggest mistake that channel partners make when it comes to marketing and selling notebooks?

SV:The biggest mistake they make is getting into panic mode. They always expect the monetary incentives we give them, drop the prices and then go about selling. Where do they make the money?

Money we give them for achieving targets should be used in a better fashion, not for price wars. With regards to marketing, the biggest mistake is that retailers really spoil the customer by having a lot of freebies and things like that. It is time that they created a brand value for their store.

MP:The lack of marketing is a big challenge. People come in and try to win the war purely on price. When it comes to selling mistakes, far too often people just don't understand what the customer is asking for.

Partners come to the point of cost rather than understanding the customer's wants and needs too easily. They need to understand those needs not just for now, but maybe six months down the line as well.

YM:The first mistake is pushing price points. Today's channel partners work a lot on price. The overall value functionality of the notebook is, in many cases, irrelevant to them and it is easier selling in and out to maintain as much cashflow as possible.

The greatest mistake that we see today is that they do not sell the overall functionality of the product.

JC:I actually have no idea. I honestly think that our partners do a very good job of marketing the Dell products and the communication about the Dell brand and the technology is pretty good.I think Dell could do a better job of communicating to our partners the distinctions between the model ranges.

AK:There is such a huge spread of products available from different vendors and I think it is now time for channel partners to specialise into a specific market segment.

Horizontally, the vendors spread the market into enterprise, SMB, SOHO, consumer and I think segmentation is going to happen by industry. Partners need to specialise. If you want to play in every market, in every price point, in every perspective, then you will just be one of the hundreds who does that.

DL:Focusing only on the price. Also, they neglect sales staff training. Today, we give partners the back-end rebate, which is not for them to put into their pricing. We want them to really invest in their product line. It is our job to do the pricing incentives and promotions.

How will the role and sales approach of your channel partners need to change as the mobile PC market in the Middle East becomes even more saturated?

AK:Partners need to think about accessories and provide shelf space for accessories. This pressure is being put on everybody and perhaps they need to start trimming a few notebooks from shelves and put in more accessories. That's where the money will actually come from.

YM:We will experience more distributors merging together and dropping brands. In this credit crunch atmosphere we will also see closedowns. We try to secure the partner to make sure that they are profitable and investing in a profitable brand.

JC:From the commercial perspective the mobile computing market is large and growing. Where you will see the market change is services.

Take ‘Software as a Service' (SaaS) for example, it's another channel that will provide huge opportunities for resellers and the Middle East is better positioned to take advantage of things like SaaS than markets such as the UK, Germany and the US.

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