The whitebox industry has traditionally touted efficiency, flexibility and speed to market as key differentiators from tier-one competitors. But with the likes of Dell and HP adopting whitebox strategies, such as targeting the SMB market, the industry is under pressure.
IDC figures for the last quarter of 2004 credit whitebox builders with a 49.5 per cent share of the Australian desktop market - a slight fall from 50.3 per cent in Q3.
Other pressure has emerged from the mobility trend, according to analysts at IDC.
But with an estimated 8000 local whitebox builders accounting for almost half of the PC market - ranging from small shops to large national chains - there is a lot at stake.
So what can be done to ensure survival and growth?
Analysts and industry members agree times are changing and offerings must follow suit. New strategies adopted include services, specialisations, vertical market focus and offerings targeted at emerging markets.
Knowing the customer and market at an intimate level is an important strategy, PC analyst at IDC, Michael Sager, said.
"Build a really tailored vertical specialisation and this will create barriers to entry against the multinationals," Sager said.
ASI is one of Australia's largest whitebox builders and has cultivated key vertical opportunities for more than 20 years. Education is a strong focus for the company. Listening to customer needs and asking the right questions is essential, ASI director, Maree Lowe, said.
The company has representation in various education bodies including the NSW Computer Education Group and Technology Educators' Association of Australia.
Ingram Micro is a major supplier of components to the whitebox industry. Its senior product manager, Danny Kwoh, said the sector's traditional strengths of flexibility and local supply remaining relevant.
The market returning to trade on personal relationships was also a notable trend, he said.
Offering services around hardware is an important strategy for most builders.
"More than 50 per cent of our business is services now, whereas six years ago it was five per cent," ASI's Lowe said.
This could increase revenues by 25 per cent on a typical system, she said. Services offered by ASI include installation, standard operating system (SOE) installation, freight and extended warranty.
"There is a four-year refresh rate but standard warranty is only priced for three years, so a fourth year is additional revenue," Lowe said.
Additional services offered include a 24x7 helpdesk and decommissioning.
For 2005, IDC has identified education, consumer and SMB markets as offering particularly good opportunities for whitebox. But clearly understanding each sector was important, Sager said. For example, dealing with the various layers of government could be difficult with elongated tender processes. Reacting to changing government requirements was also paramount.
For example the move to centralised buying by the NSW Department of Education meant becoming an approved supplier to the new organisation was now necessary, he said.
Service support was a particularly good opportunity for the sector.
"Education wants local support, which suits whitebox suppliers," Sager said.
Ingram Micro's Kwoh concurred with this and urged whitebox vendors to capitalise on the government policy of buying locally made products that can compete on specification with multinational offerings.
"A greater level of professionalism, both in services and build quality, has allowed high-end whitebox builders to challenge multinational vendors," Kwoh said.
Another important revenue stream for the channel, Kwoh said, was component upgrades as a result of longer PC refresh rates.
"Typically, refresh rates are now four years," he said.
Focusing on specialist products such as small form factors and servers are some of the areas that can differentiate whitebox builders.
IBM's PartnerWorld conference in March identified the whitebox server as the biggest threat to its branded systems in the SMB market. IBM estimated that the SMB server market was growing at three times the size of the enterprise market, and this is obviously good news for whitebox vendors.
Queensland-based system builder, Whitebox, had recognised the server market as a good margin earner, director Gavid Ford, said. Building servers was now 70 per cent of its business.
The company's late entrance gave it an holistic market view, Ford said, based on his work experience with major vendors including HP and Compaq.
Quality is vital to achieving success, especially in the fault intolerant server area, Ford said. His company is a certified Intel builder.
Its servers only contain approved parts, feature 100-hour burn-ins and are validated by Intel on completion, he said.
"But these servers are still considerably cheaper than the offerings from multinationals," Ford said.
Another approach, taken by Ipex, was to focus on its core skills of research and development.
When Ipex merged with system integrator, Volante, it allowed the builder to focus on building innovative systems, Ipex technical director, Yaron Schwalb, said.
"Prior to the Volante merger, the majority of our business was services," he said.
Specialising in unique products, based on significant research and development, was its main strength, he said.
Ipex has released an ultra small form factor PC with integrated LCD screen in a design that is compact and minimises noise. The L-shaped machine uses non-proprietary components. Branded screens can be attached and a standard micro ATX motherboard is installed.
The design was targeted at low noise markets such as libraries and corporations, Schwalb said.
As a spin-off technology, in its efforts in minimise production costs, the company developed its own SOE deployment tool as well as audit software.
Both tools are marketed as rapid deployment multi-platform products.
IDC expects small form factor demand to be fuelled by the growth in the digital home market with drivers including strong broadband take-up and demand for the Microsoft Media Center.
Recognising changing channel needs and reacting to this was important, according to Impact Systems' senior channel manager, Peter Agamalis.
Traditionally a builder of customised machines, the company has just begun a new product line, he said.
"We are implementing a barebones product strategy for PC desktops and servers," Agamalis said. "As a just-in-time manufacturer, it gives the reseller flexibility to add market customisation," he said.
Impact developed an InteliServer ebook configuration tool, which its supplies with servers to allow resellers to build on the barebones. The basic system comes with a chassis, motherboard and hard disk. The ebook gives component lists and specifications to aid completion of the servers.
A similar tool was being developed for the desktop, Agamalis said.
Building systems that are tailored to the software layer continues to be a significant whitebox strategy and this can involve strategic partnerships.
Several builders highlighted point-of-sale (POS) software vendors and the emerging VoIP technologies as partner alliances.
Data-voice convergence recently saw ASI partner with 3Com to support its NBX device, ASI's Lowe said.
"There will be more software opportunities like this in the future," she said.
Other hardware related opportunity areas, Lowe said, included wireless, UPS power, network devices and imaging solutions.
Impact Systems is another builder that wants to gain revenues by partnering.
"We are currently seeking strategic alliances with VARs and system integrators on a national level," Agamalis said.
New alliances were sought to bolster existing business as well as another new product strategy that would be unveiled within the month, Agamalis said.
Expanding volumes of data has given the storage sector a boost and partnering in this area is a diversification strategy that Sydney builder, Compucon, is adopting.
"We are looking at new relationships with storage vendors such as Tandberg," Compucon marketing communications manager, Greg Schroeder, said.
The growing demand for mobility has given some traditional whitebox builders a new market. Year-end figures from IDC showed overall notebook growth of 41 per cent between Q4 2003 and Q4 2004 compared with 20 per cent for desktops.
Faced with a competitive whitebox market of rising component costs and falling margins, Pioneer Systems had begun building whitebooks, account sales manager, Leon Chen said.
Service earnings often can only be accrued by investing in new skill sets which in turn adds to overheads. This is a dilemma facing whitebox builder, Compucon. Changing a hardware-based business model to one led by services takes resources, Schroeder said. This is also a dilemma that Ingram Micro is aware off.
"Whitebox resellers must provide services but at no extra cost to the customer," Kwoh said.
Another traditional avenue for the sector has been supplying faster machines for a power hungry market. In the past, increased software functionality fuelled new demand for hardware but with 3GHz plus CPU speeds coping with requirements, this avenue is limited.
"There are no killer software applications to help sell whiteboxes," IDC's Sager said.
The fledgling whitebook sector is showing strong growth but faces the challenge of making inroads against not only the traditional tier-one branded bastions held by the likes of HP, Dell and Toshiba.
But growing competition from companies like LG, Asus, BenQ and Samsung is also increasingly fierce. Getting space on a distributor's shelf may not be easy, according to IDC.
Increased competition, combined with slower growth, would bring tougher market conditions this year, Sager said.
Expectations for 2005
Looking to the future, there is a consensus that the industry has, to some extent, come full circle in terms of strategy.
Growth will slow and value-adds such as services will be important. But the traditional whitebox strengths of innovation, flexibility and personal service will remain important.
Price will always be a major factor, but increasingly smarter users would also be more aware of solutions rather than looking primarily for hardware.
The 800-pound PC gorilla, Dell, might not have everything all its own way in this maturing market, according to Whitebox director, Gavin Ford.
"Some first generation disillusioned Dell buyers are now returning to whitebox," he said.