The future of white box
System builders are facing challenging times with major decline in the share of white-brand PCs. What does the future hold for them?
By K R Nambiar
 Recent times have been challenging for system builders. A combination of factors ranging from aggressive strategies by MNC PC manufacturers to a shift in buying patterns toward mobile computers have eroded the overall market share of system builders from the high 70 percent at the turn of the millennium to just over 30 percent in 2008. While absolute volumes have grown—thanks largely to healthy growth rates in the IT industry—it is estimated that one out of two partners who used to assemble computers has either stopped building white box PCs or has moved to selling MNC brands as the main focus.
“We were an active Intel Premier Partner for many years. However, a few years back, we realized that we had limited growth opportunities as a system builder, while [the other] work we were doing was much appreciated. That’s when we aligned with HP, and it has been a roller-coaster ride ever since,” recalls Anirudh Shrotriya, CEO of Pune-based Shro Systems, an HP Inner Circle partner. “We have also seen several other partners who were earlier building systems going out of that business and aligning with an MNC PC maker.”
The list of system builders enrolled in the Genuine Intel Dealer program in 1997 includes the names of some of the biggest systems integrators and solutions providers—who are all currently aligned with a major brand such as HP, IBM, Lenovo, Acer, Dell or Sun.
The drop in the market share of assemblers is largely attributed to the moves of MNC PC manufacturers who see India as a high growth opportunity in the decades ahead. “If you compare the prices of the models from leading brands with their prices in matured economies, you will see that prices in India are much more aggressive, especially when there are deals to be cracked,” says Ramesh S, Chennai Branch Head, Ralco Synergy.
Till the late nineties, most of the MNCs had stayed away from setting up manufacturing plants in India because of high import duties, also because the volumes projected were quite small. However, by 1998, as the Indian PC market started approaching the million mark, HP, Compaq and IBM started their manufacturing operations in the country. This resulted in better availability of products at reduced prices. Since then, a series of duty cuts have made manufacturing in the local market a viable business proposition, and further reduced the price advantage that system builders enjoyed.
“Today, the difference between a similarly configured PC built by an assembler and one from Dell (or Acer) is hardly a few thousand rupees. Hence, a customer whose aspiration levels are higher will be willing to cough up the extra thousands to own an MNC brand,” points out G Jayamuni Rao, Managing Director of Sogo Computers, a sub-distributor and system builder.
Shifting preferences
It is not just the prices which are hurting the system builders—the biggest threat is the drop in the market share of desktops in the overall PC market. The desktop PC market has been witnessing single-digit growth rates for the past two years. According to an IDC report, while notebooks grew by 81 percent year-on-year, desktops registered just 7 percent growth.
Analysts from IDC also say that in the United States, laptop shipments rose by 21 percent to a total of 31.6 million units, while desktop sales dropped by 4 percent to a total of 35 million units. The company believes that 2008 will be the first year when notebook sales there will exceed desktop sales, and by 2011 it expects laptops to represent 66 percent of corporate purchases, with 71 percent of consumers picking a notebook instead of a desktop.
Then there’s this forecast from Dataquest-Gartner which predicts that globally, notebooks will outship desktops by 2010. According to the projections for the Indian market, by 2011, one would see more notebooks selling than desktops.
While the white box desktop was a huge success, the white box notebook in India and most other parts of the world has been a huge failure. This is despite sincere efforts by Intel and many of the BTO (built-to-order) vendors. “Unlike desktop PCs, almost 70 percent of the cost of a laptop will be that of the bare-bone system. There is a high design cost for an original design manufacturer (ODM) to come up with a model. The volumes offered by local system builders are never enough to match the expectations of an ODM,” explains Sandip Naik, Channel Sales Head, AMD India.
Adds Chetan Shah, CEO of Mumbai-based Xpress Computers, “MNCs were extremely aggressive with both their product models and prices. This meant that the price offered by any of the assemblers was never good enough to attract buyers.”
The biggest challenge which system builders across the country are facing today is that the business has become a bottleneck for expansion plans. “We understood this very early, and figured that it is difficult to cater to the aspiration levels of a larger clientele who prefer to associate with a bigger brand. Moreover, when it came to solutions, a vendor such as HP could handhold us to bigger deals. If we had continued being a system builder, it might have been difficult to address similar customer bases,” analyses Shrotriya.
Says Ajay Maitin, CEO of Graphic Trades, “If you observe partners who are in the league of Rs 50 crore and above, who are not in any kind of distribution or sub-distribution business, and focused on end-users, you will hardly find one or two system builders.”
Against the tide
However, despite the fact that the odds are not in favor of smooth business ahead, many existing assemblers exude confidence that nothing can go wrong with their business.
Take the case of the Bangalore-based Connoisseur Computers. The Rs 25 crore company has been one of the most dedicated and respected system builders in the country. Connoisseur builds not only desktops, servers and storage boxes, but also high-end notebooks and low-form factor PCs which are sold under the brand name Connoi. “Though several vendors have invited us to sell their products, we are focused on selling our own products, and we cater only to the SMB and enterprise space. We have seen that customers stick to you despite competition from world’s largest companies if your product offering matches their expectations. In March 2008, one of our laptop models was acknowledged as world’s fastest mobile computer. Our customers recognize our legacy, and the fact that we have been building great products for many years,” explains Harish Kumar, CEO, Connoisseur P K Harikrishnan, of Kochi-based All Time Power Systems, is in the same corner. “At least in Kerala, and I believe it applies to many emerging markets, we see that only a few assemblers have quit the business and moved to branded PC reselling. As of today, in mobile computers, there seems to be no choice for an assembler but to resell a brand. But the desktop market is still large, and there are both margins and numbers in the assembled PC business if you know how to play the game,” says Harikrishnan.Concurs Maitin of Graphic Trades, “In Bihar and Jharkhand, we see that many assemblers have started reselling products, especially notebooks, from vendors. But few have abandoned system building.”
OEM advantage
Nevertheless, some of the smaller assemblers are concerned, and are considering quitting the business altogether. “Personally, I see that my margins have dipped, and my cost of operations have certainly gone up. But the problem is that with just a little capital it is difficult to run a sales operation for an MNC brand. This is because most of the MNC companies are over-distributed, so unless you have a niche or can fund large deals it is difficult to survive in a highly competitive marketplace. On large deals, we have seen MNC brands matching our prices. They are obviously able to source components much better and so can beat us on large deals,”opines Rajan Gad of Immersion Technologies, Bangalore, who says he averages around 30 PCs a month with a three-man operation.
Sharad Srivastava begs to differ. Says Western Digital’s Director of Sales for India & South Asia, “It is a myth that OEMs get a great deal on products compared to the channels. If you ask me, on an entry-level hard drive, it could be as little as 1 percent, though on some of the high-end products OEMs can bargain slightly better. They do benefit however from consistent prices and supplies, considering the longer relationship which most vendors have. To the best of my knowledge, whatever sourcing benefits they enjoy is often negated by their operations, infrastructure and management costs.”
Global scenario
“You consider any matured economy, from the US to Japan to Australia, and you’ll see that at least 25 percent of the market share there is controlled by system builders. Hence, we see no reason why in a price-conscious economy like India assemblers can’t continue with a market share of around 30 percent,” states Naik of AMD. He insists that it’s unfair to compare the PC industry to the television industry, where white box manufacturers do not exist. “I think it is fairer to compare the PC industry to the air-conditioner market. Here you have some of the biggest names, yet a significant percentage of the market belongs to assemblers,” he adds.
While this is true as far as desktops are concerned, the notebook market in the US is also seeing a trend which is similar to that seen in India. According to a study conducted by Display Research during 2007, 85 percent of the US notebook market was shared between the world’s top nine notebook manufacturers: HP, Dell, Acer, Toshiba, Lenovo, Fujitsu Siemens, Apple, Asus and Sony. The remaining 15 percent of the pie has many tier-2 Taiwanese and Chinese players, the majority playing the role of an OEM supplier to large retailers in the US.
Comments Maitin, “I am not surprised [by the current trends], but I still feel that the white notebook story can be revived if some of the bare-bone system manufacturers can work closely with the local system builders. In India, there is always a market if the right price combinations can be achieved.”
Vendor support
Despite the impression that many system component players are losing interest in the assembling market, most assemblers feel that their support has been as good as in the past decade. “We have been an Intel Premier Partner for 10 years, and Intel’s support has been great over the years. In terms of pre-sales, marketing and post-sales support, they have helped us in many aspects of our business.
In fact, lately, Intel has started special training for our sales team. Further, they have improved their post-sales support by making it quicker and more convenient for us,” says Shah.
Intel India has been working with the assembler market for over 13 years now and, through its different programs, has helped system builders to also sell complex server and storage technologies. However, according to IDC India, the market share of such products is negligible.
Many assemblers and even industry leaders feel that OEM component vendors find channel and system builders indispensable. D S Nagendra, Country Manager of Nexans India, and a channel veteran, makes a smart observation. “Consider all the PC brands, and all the brands that make a PC. You will see that there are significant brands that build a PC, such as Intel, AMD, Seagate, Microsoft and Nvidia. Ideally, all these brands would prefer to have a balance between assemblers and MNC manufacturers in every territory. I would imagine that no one would like being an OEM supplier to a marketplace dictated by just a few customers, a scenario that could become a reality if assemblers drop out. I am therefore sure that they will do their best to keep the system builder channel alive and kicking.”
On the other hand, Srivastava believes that it is difficult for vendors to dictate terms. “It is customers who finally decide the market dynamics. And I do not see the assembler market getting killed anytime in the near future. There are too many advantages an assembler offers. Value addition and service support are just two of them.”
Naik agrees, “A customer who needs perfect customization will continue choosing an assembler, and computer enthusiasts like gamers, developers and IT professionals will continue choosing an assembled product.”
From surviving to thriving
Most of the partners of MNC vendors agree that on a PC-to-PC basis, an assembler still makes more money. “I will not argue against that. A system builder can make more profit on the PC he assembles,” agrees Shrotriya of Shro Systems.
Assemblers need to look at selling value for themselves, to gain more profit. “Assemblers must stop selling what the customer wants and start selling what the customer needs, and play according to their business strengths. I feel that most of the dropouts from the assembler business lacked the courage to upsell the technology and value additions that would give them better margins,” feels Harikrishnan.
The fact that an assembler can actually take a call and even attend to it if needed at 7 in the evening is one of the biggest value additions. “System builders need to focus on their core strengths, which are value for money, personalized support and quality of service. An assembler can attend to the most sensitive support calls of the customer, and provide support which a call center cannot provide,” points out Srivastava.
Shah of Xpress Computers sums up the solution neatly, “System builders need to ensure the best quality products through in-house quality control, effective branding efforts and product differentiation. Lastly, they have to offer the best possible service to draw and retain customers.” |