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.
The producers
By Andrew Seymour
Thu 08 Nov 2007 04:00 AM

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."
While there is clearly logic to Chopra's assertions, it simply isn't practical for most local assemblers to carry out the channel development activities required to achieve such coverage. Naming just 10 prominent local system builders in the Gulf remains a tricky task. Excluding Saudi Arabia, Microsoft has just five named accounts in the Gulf - DTK, Quality Computers, Sky Electronics, CCS and PC International - underscoring the intimate nature of the market.

"It is a highly fragmented market - we are not seeing the market being consolidated among two large players," said IDC's Shihab. "What we are talking about is tens of these companies doing around 50 to 100 PCs a month. And that would be some of the larger ones - the others are making one PC a day."

We started retailing last August. In little more than one year we are able to have seven or eight good accounts with us. If there was no place for us they would never have taken our product.

Clearly, the days of PC assembly being a volume game for local system builders are a thing of the past. The largest producers are typically building between 1,000 and 1,500 PC units per month, but even this can vary depending on project business. Sky admits it is more focused on maintaining an ASP of AED5,000 (US$1,350) than building huge volumes these days. "With something like the Annihilator, selling 10 units is equal to more than 100 units of normal PCs," said Thacker. Chopra at Sahara holds a similar view. "If a brand like us is able to sell 600 to 700 laptops in a month, I think it is reasonable," he said. "The volume game is always a very dicey game. If you are able to hit the volume then fine, but if not then you risk your profitability."

Even Microsoft admits that it doesn't envisage granting ‘named account' status to any more Gulf assemblers in the near future, simply because they wouldn't meet the volume criteria. "At the moment we are concentrating on developing the unique focus areas of our existing accounts," confessed Altinordu. "It is better for us to scale these companies because they are very dynamic partners. Microsoft values the local assembly business and it is important for us to have these companies because they are very agile and can be first to the market with new form factors."

The emphasis for whitebox producers in the current environment is less about economies of scale and more about customised PCs or machines built for specific sectors such as education, hospitality or retail. While this plays into the hands of many local assemblers, it is also a sign that - with the occasional exception - it is no longer possible to operate a pure assembly model anymore.

"I think the advice we can give them is to differentiate themselves from international brands because international brands come with standard configurations," commented Western Digital's Khawaja. "Differentiating themselves may mean offering a higher configuration at a similar price or the same configuration at a lower price."

When it comes to the Gulf market, the export of barebone machines into the African markets remains as prominent as ever and adds further confusion to any attempts to judge the size of the total market.

Many assemblers are also supplementing their PC production expertise with a components or finished goods distribution business, while others have turned to the very international brands they have been fighting against by reselling their products to boost scale and cashflow.

"One advantage we have is that we do re-export and wholesale so we don't keep ready PCs most of the time," explained Vasant Menghani, managing director at Quality Group-owned Touchmate, which claims to be churning out anything between 3,000 and 4,000 units a month at its PC factory in the UAE. "The advantage of this is that we can sell the keyboard separately or the mouse separately because that is already in our range. If we suddenly get a big PC order we can immediately take from the running stocks and deliver to the customer. But the MNCs buy the products especially for desktops with the intention to sell them off together. We don't have that problem. If the dekstop does not sell, the mouse and other different accessories can go separate. We don't have a problem with the retention of inventory over a longer period."

Sky, meanwhile, reckons it has observed a spike in the volume of business originating from local resellers who formerly bought components from them to manufacture their own PCs but now find it more economical to pay Sky to do it for them.

"When we sell components we are selling them to DIY stores by definition," admitted Thacker. "Distribution is basically a buffer stock of the mainstream OEM, and high-end components complement any local OEM business you are doing. When people who buy components from you see that you can integrate them too then they rely on you."

One popular strategy for assemblers seeking more security in the market has been to expand their portfolio, most notably in terms of PC accessories and consumer electronics lines. Quality Computers now offers more than 850 products - many of which are manufactured under its own Touchmate brand - and intends to enlarge its offering further.

"Next year our major plan is to bring a broader range of IT-based electronics - that means all items which directly or indirectly comes into contact with the PC," explained Menghani. "We also intend to develop a better range of mobiles because we have tested our mobile phone products in the market this year and found that they have been accepted."

Yet for all their qualities, the local assembly community seems to have missed a glorious opportunity by failing to secure a meaningful foothold in the notebook space. That could dramatically jeopardise their position as Gulf PC buyers show their appetite for the mobile form factor. Shihab at IDC admits it is an area of concern given many A-brands have made significant investments in establishing operations and building channels to serve brand-conscious users in the Middle East during the past few years. "The notebook segment is a very weak area for local assemblers," he asserted. "They have not tapped into it entirely. We see very few local brands that have notebook products in the market at the moment so it is definitely a big challenge for these guys."

Saqqa at AMD is less anxious, however, and believes the demographics of the market throughout the wider Middle East and Africa region still suit local assemblers that remain focused on desktop production.

"In the long term, everyone is probably questioning the future of the desktop and we have seen the mix change in developed regions where mobile shipments have out-performed desktop shipments," he said. "We have started seeing this trend in some parts of the Middle East and Africa, but it is still going to be a while before the desktop market becomes insignificant. Local players are vital to the balance of the PC ecosystem and I don't see them disappearing in the near future."

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