The ‘Others’

Trade

At first sight, the PC market appears to be dominated by a select number of brands, specifically Dell and HP, with Fujitsu-Siemens and IBM tagging along behind. It’s easy when looking at market figures from research firms like IDC and Gartner Group to ignore the presence of a significant category just because it isn’t a brand, but is typically referred to as ‘others’.

On one level, this is easy to understand because the ‘others’ encompass a diverse range of vendors many of which, on their own, are responsible for barely significant shipment numbers. However, lump them together and you end up with a very healthy chunk of market share.

It is estimated that the ‘others’ – which includes white box vendors and system builders – account for as much as 25 per cent of the US market and 12.5 per cent in Western Europe. Furthermore, a recent survey by US publication, Information Week, found that white box vendors came out top in terms of customer satisfaction – equal with Dell for price and performance.

The diversity of companies defined as white box vendors or system builders make it a difficult market about which to make generalisations. For example, a small dealership in a small town in Donegal might make the classification alongside iQon Technologies, one of the largest PC companies in Ireland. They employ different means to get to market, target different markets, have different product and branding strategies, but the one thing they have in common is that they seek to reach the parts that Dell and other PC vendors can’t reach or dominate.

For the small computer shop in Donegal, that means selling unbranded PCs at a competitive price to local people who don’t want to wait a week or more for delivery of a computer system from a big vendor. It means being ‘on the doorstep’ if anything goes wrong, rather than having to send a machine down the country to be repaired. However, it also means being established enough that people can trust you to stick around for a while.
Companies like iQon, by contrast, are almost as well established as Dell. The Dundalk-based business claims to be Ireland’s number one indigenous PC manufacturer, number one PC exporter and third largest supplier of laptops and PCs to the business and consumer markets.
It has three major markets. Domestic business to business is fulfilled through the channel (particularly to SMB and local and central government), domestic retail (ESB and independent retailers) and export retail (supply of PCs to UK catalogue operators Argos, GUS, Littlewoods and OTTO).
Customer mix is an interesting phenomenon in the system builder market. Computer City, for example, is trade only, with 1,450 resellers on its books. PC Pro’s resellers mainly target the SME and educational markets and the same can be said for Encom, although 80 per cent of its business is direct over the Web or by phone, and 20 per cent goes through dealers. Elara Systems’ business is split between the trade and retail (through its website), while Jaguar Computer Systems focuses on resellers and has a strong presence in the public sector and small and medium sized businesses. PC Peripherals is strong in the public sector, education and SME.

Building a niche
Finding the right niche is important because none of the indigenous companies would try to cover as many parts of the market as Dell or HP. Instead, they target areas where they believe they can make an impact.
Mind you, it doesn’t stop PC Peripherals sales director, Martin Byrne, from claiming: ‘We do not compete around the peripheries of the major multinationals, we compete for the same business they do on a day-to-day basis. Some of the contracts awarded to us have certainly ruffled some feathers among our peers.’
Few consider other system builders as their main competitors. Nearly all of them name Dell as the main rival. Greg Geoghegan, managing director at Computer City, is emphatic when asked to name its main competitors. ‘Dell, Dell and Dell,’ he replies.

John Morgan, managing director at Encom, says Dell and Fujitsu-Siemens are the main rivals in the PC market, while the same two companies and Hewlett-Packard provide the competition at the server level. As for indigenous companies, he says: ‘There aren’t enough of them out there. We rarely come across them.’

Geraldine Keogan, managing director at Jaguar Computer Systems, names Dell and iQon as her big competitors, but adds: ‘The only way Dell will beat me on pricing would be on software.’ She claims this is because the direct manufacturer gets a better OEM price on products like Windows XP and Office than Jaguar can obtain. That may account for the fact that 70 per cent of Jaguar PCs are sold without software.

Loyal to local
So why would customers choose a company like Jaguar or any of the other smaller manufacturers over traditional PC players like Dell and HP? Keogan puts this down to the service. ‘People come to us and they’re happy with the service. They’re spoken to straightaway when they ring up – we have three technicians on site.’
Geoghegan says Computer City’s weapons against companies like Dell and HP are ‘price, fast delivery, reliable and attractive PCs, and problems immediately rectified by people with the ability to make immediate decisions – not a call centre in India’.
Kin Mak, product manager at Elara Systems, agrees. ‘A lot of customers would have bought Dell or Gateway and come back to us afterwards. People feel more confident talking to someone here than at a big organisation.’ Most of our sales staff are enthusiasts and can talk on the same wavelength. The Dell people are reading off a screen. It’s a personal thing. You get the personal touch from us. If something goes wrong, you can come to our office and shout at people.’
Flexibility, especially in areas like build to order and the ability to customise orders, are also big pluses. Morgan at Encom says it can give more time to the customer and it has strong customer relations. ‘Smaller customers are big fish to us,’ he says.

O’Donoghue at iQon adds further support to this view, claiming that iQon has ‘built a reputation for a much more responsive and personal level of post-sales care, which the larger more impersonal OEMs cannot offer’. He argues iQon has ‘more personal relationships with customers, shorter lead-times, better specification flexibility, better warranty options, along with more personal and responsive after-sales service’.
Taking the SME market as an example, Byrne at PC Peripherals says: ‘Hands on technical support and service is in demand and we find that we are signing up a lot of SMEs for annual service contracts, covering existing hardware, new technology advice and preventative maintenance.’
PC Pro’s O’Donovan adds: ‘It must come down to service – PC Pro offers an advance replacement policy which means if a fault is reported, a part can be sent straightaway without any red tape. Also, equipment can be handed back over the counter and replaced.’

Reliable sources
Reliability is an important issue, especially in competition against brand leaders and part of this must be down to sources of supply. HP and Dell typically have direct OEM contracts with many of their suppliers, which, in theory, should give them more control over component quality. iQon’s O’Donoghue agrees it should.
‘We are on direct OEM contracts with every vendor,’ he says. ‘This is not only important in terms of pricing, it is even more important in terms of compatibility testing, product roadmaps, driver updates and also service levels when there is a problem at the component level.’
Very few indigenous PC suppliers have the volume capacity to reach OEM status and most source product through distribution. Nevertheless, few believe it is a disadvantage. PC Pro’s O’Donovan says it addresses any concerns over component quality by operating to ISO 9002. ‘PC Pro has rigorous procedures in place to maintain high quality. Every component must go through a pre-qualification procedure before it is introduced to our production.’

Byrne at PC Peripherals believes the establishment of several component distributors in Ireland over the past two years has greatly improved any returns issues. In the past, it would have sourced product ‘in the UK or the States, but you were never in control of quality or supply. The introduction of Irish distributors to the market has certainly had a positive impact on our business’.
Jaguar’s Keogan also makes a virtue of buying from distributors based in Ireland. ‘We buy all our components in Ireland – we don’t buy anything from the UK or Taiwan. I believe in buying Irish because you’re keeping jobs [here] and you don’t have to ship things back to Taiwan.’
Geoghegan at Computer City turns being small (compared to the multinationals) into a virtue. ‘We will immediately drop a component if there are any significant number of returns. We will also pay more for a reliable component. We don’t buy based on price. Because we don’t give or take credit, it is also easy for us to move from one manufacturer to another.’
Component quality is an issue the branded vendors have to address as well, points out Geoghegan. ‘I believe Dell is currently making mistakes. It is using certain lower price components I would not choose to use. I believe this could cause maintenance problems. This is something Gateway did. I reckon this will create an excellent opportunity for Irish assembly operations to grow.’

Mention of Gateway introduces an issue that has done a lot to improve the perception of local assemblers in Ireland. ‘When Gateway left, it frightened an awful lot of Irish people,’ says Jaguar’s Keogan. ‘In 1997, it employed 1,600 people – two years later, it was gone. I’ve got three ex-Gateway people working for me.’
Gateway’s departure only serves to illustrate that even the biggest companies aren’t invulnerable and calls into question the wholeheartedness of their commitment to the Irish market compared to local business. Keogan questions whether there might come a point where Dell could be tempted to move production elsewhere because of rising costs in Ireland. ‘It has the capacity to do that.’
Geoghegan at Computer City agrees. ‘Since Gateway had to pull out of Ireland, with massive losses and leaving thousands of Irish customers unhappy, I think Irish builders have done a lot better.’

Buying Irish
Which brings us to the Irish question: do local businesses get an advantage from being ‘Irish’ compared to their multinational rivals?
Keogan at Jaguar believes they do. ‘People are reassured if they’re buying Irish. They know who you are and where you are. The personal touch is better.’
The same applies to PC Peripherals – which isn’t surprising given that it markets Celtic branded machines. ‘We are an Irish-based system builder,’ says Byrne. ‘There is still a lot of awareness in “buying Irish” and it is a policy we use.’
O’Donoghue at iQon holds a similar view. ‘Anybody in the PC business is in assembly, not really manufacturing. The fact of the matter is that any local assembler is employing people to source, manufacture and support locally assembled products. That is a hell of a lot more Irish than PCs assembled in Germany and shipped in to us.’

Computer City’s Geoghegan agrees. ‘The final part of the assembly is as important as that of each component part. This is as Irish as it is going to get in the near future.’ But he adds: ‘It probably should read: ‘CCity PCs – made in this world.’
A number of local suppliers claim not to try to exploit the ‘Irish’ tag. ‘We at PC Pro don’t put an emphasis on being ‘Irish’, claims O’Donovan. ‘We do however put emphasis on local support.’ Morgan at Encom says it has considered emphasising its Irishness, but adds: ‘It’s something we haven’t promoted very strongly – I’m not sure if it would have any impact.’ Instead, Encom tends ‘to promote the fact we’re a very strong partner with Intel. That’s the main feather in our cap.’
As for what the future holds for the system builder market, Paul McGrath, business development director at distributor Asbis, which specialises in supplying system builders, says: ‘I think it’s growing and will continue to grow.’

He points to the growing willingness of government bodies to buy product from such companies. ‘I’m delighted to see it happen.’
Although Dell and HP account for 50 per cent of the Irish market between them, ‘there are still a lot of PCs to be shipped out there’ and, according to Ian Gibbs, research analyst at IDC’s European Personal Computing team, there will be a place for local vendors ‘for a long time’ to come.

The power of the ‘others’

According to IDC, Irish white box vendors/system builders (frequently listed as ‘others’ in market share breakdowns) accounted for 13.1 per cent of the 102,400 total units shipped in the third quarter of 2003.
The figure is higher than the total Western European figure of 12.5 per cent and the UK total of 11.5 per cent. Ian Gibbs, research analyst at IDC’s European Personal Computing team, says the size of market share enjoyed by ‘others’ is linked to how saturated a market is.
White box vendors play a smaller role in the UK because it is a more saturated market, he claims, while they account for 19.4 per cent of PC shipments in Greece because the country is less developed than other European PC markets and far more fragmented.
According to IDC, the three largest Irish local vendors in the third quarter of 2003 were iQon Technologies, Computer City and PC Pro. Between them, they accounted for nearly eight per cent of the Irish market.

Are notebooks the next big thing for system builders?

Very few local PC suppliers offer their own notebooks. Most carry brands such as Toshiba and Acer. iQon Technologies is one of the few to have its own range. Asked why there has been so little enthusiasm among local system builders for notebooks, Ciaran O’Donoghue, sales and marketing director at iQon, says the problem is volume. ‘You have to get to certain volume levels before you can get a good price deal on the casing and also secure exclusivity rights for the design for your markets.’
Notebooks also have a higher failure rate than desktops, ‘so the warranty/back end operations have to be capable of handling the additional hassle factor of notebooks’.
He claims the notebook market ‘has been an absolute bloodbath in 2003 – there’s been great volume growth, but the price erosion has been incredible. Not many players, OEMs or system builders are making money in this area at the moment.’
Greg Geoghegan at Computer City holds a similar view: ‘We do brand our notebooks, but we only do around 12 per week. I don’t think there are any other Irish assembly companies doing enough volume to make it worthwhile branding them.’
Nevertheless, a number of local players appear to be considering a move into the notebook market. Kin Mak, product manager at Elara Systems, reveals it is looking into entering the notebook market in the near future, but admits that to date ‘the reason for not doing notebooks is the cost involved and the warranty issues. It is much easier to fix a PC than a notebook. There is also only a small amount of people making cases for notebooks.’
Jaguar Computer Systems currently offers Toshiba, Acer and iQon laptops, but managing director Geraldine Keogan says launching a Jaguar range of notebooks ‘is something I hope to look at in the next 12 months’.
Paul McGrath, business development director at distributor Asbis, believes the issue of mobile products, including notebooks ‘is an area that a lot of builders will look at this year’.

Adventures in the white box trade

A number of companies have tried to get into the business of supplying white box PCs – machines which can be resold under their own label by resellers.
For example, distribution giant Ingram Micro acquired the Tulip Computers manufacturing plant in the Netherlands in 1997 and set up its Frameworks initiative to supply white box PCs to the industry. However, the distributor pulled the plug on Frameworks in August 2002, claiming a fall in demand had led to insufficient volumes to sustain the plant.
It now confines itself to providing components to the system builder community through its Ingram Micro Components Europe division, launched in September 1999.
Bizarrely, in the same month that Ingram announced the closure of Frameworks, the channel’s arch-enemy, Dell, was launched its own scheme in the US aimed at using resellers to sell its white box 510D PC to small businesses. However, six months later, CEO Michael Dell admitted in a conference call: ‘We have not been super impressed with what we’ve seen. I’d still put it in the experiment phase.’
Last month, when asked for a progress report on the scheme, a Dell spokeswoman replied: ‘There has been no change in the programme – it’s still a US-only initiative for solution providers who service businesses with 100 employees or less. The only form factor we offer is a desktop mini tower.’

09/02/04

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