White hot market

White hot market

Since Melbourne-based PC builder, QD Innovative (QDI) Computer, diversified its business from parts and components to notebook distribution in 1999 it has recorded steady growth of about 20 per cent a year. That was until last year.

In the past 12 months the manufacturer has recorded 120 per cent growth, making it the best year the company has ever seen, according to business development director, Danny Wang.

QDI’s success is mirrored throughout the whitebox sector, where the popularity of whitebooks in particular has contributed generously to hikes in sales and revenue.

IDC analyst, Michael Sager, said the whitebook space grew 65 per cent between Q4 2002 and the same period in 2003. This was faster than the notebook market, which only grew 38 per cent.

Whitebooks currently made up eight per cent of all notebooks sold in Australia.

National distributor, Ingram Micro, claims to have increased its whitebook market by about 400 per cent in the past year. It first began selling the ASUS brand two years ago, believing it offered good potential in a new market, but is now planning to expand its whitebook portfolio, according to its business manager of components, Danny Kwoh.

Other companies, such as Pioneer Computers, come from a more mature market position and have registered stable expansion of about 10 per cent. But even in these circumstances, Pioneer managing director, Jeff Li, suggested the whitebook was destined to overtake the volume of locally-built desktops, based on the example of the US market.

“Back in the old days, notebook technology wasn’t as reliable as it is today and not many people would spend money on a brand they had never heard of,” QDI’s Wang said.

Over time these concerns had dissipated while prices had come down.

Ingram’s Kwoh said the Australian market had increasingly accepted whitebox products over the years, particularly as people warmed to the idea of built-to-order PCs.

“The market has also changed as more whitebox vendors emerge that are choosing to focus on the channel rather than the traditional OEM business model,” he said.

Sales figures from Microsoft appear to support this argument.

Windows product manager at Microsoft Australia, Danny Beck, said more than 50 per cent of OEM sales in Australia were through local whitebox manufacturers. What’s more, it was a market that Microsoft and Intel were actively encouraging.

“The relative PC market share in Australia of tier-one to whitebox is about 50/50, and component vendors are following this trend in order to maintain a similar market share,” Beck said. “This continues to be an important channel. We’re investing a significant amount of money in sales training, merchandising and promotion of the whitebox channel and will continue to do so.”

In relation to whitebooks, Pioneer’s Li highlighted another factor at play. He claimed notebooks were slightly different from desktop products because they all came from the same five factories in Taiwan, regardless of whether they were branded or not.

“Dell, Compaq, Sony – they put their own label on and the rest are called whitebook,” Li said. “That is marketing, but the quality will be similar.”

Service and warranty hurdle

Quality assurance has always been a major hurdle in the whitebox space. While consumers are attracted by lower prices and enjoyed access to specialised, more tailor-made gear, they are equally cautious over the lack of parts, support and services. It has been a major challenge for local PC builders to quell these concerns and establish credibility. But it appears that at least some brands have made the leap.

Li claimed that after eight years in the Australian market, Pioneer’s onsite one- to three-year warranty was better than that of its archrival Dell.

“There’s a four-hour response, engineer onsite, and we are not going to send a courier to pick [the unit] up,” he said. “Our local dealers can do the service as well.”

From the distributor perspective, Ingram did a thorough count of ASUS’ national service capabilities before agreeing to take on the brand.

“The cost involved in maintaining a service program is still a major issue for most whitebox vendors,” Kwoh said. “Ingram Micro was confident in taking on ASUS because it had its own national service centre capable of providing proper service to resellers.”

Indeed the Ingram/ASUS duo has turned the service argument to its advantage, claiming the reason whitebooks had proved so popular in Australia was a combination of its geographical expanse and having to support numerous groups of people with disparate needs.

Kwoh suggested the whitebox model, which involved building products locally, meant they were better equipped to meet those needs.

“In other countries, particularly in Asia where there are concentrated populations, this model isn’t always as effective,” he said. “This is where larger vendors with standardised product ranges and marketing campaigns are more successful.”

IDC’s Sager said the support argument was a double-edged sword.

“Some would say whitebox manufacturers carry a comfort factor for small businesses because they feel more at ease taking their PC on a Saturday to their local reseller, where trying to negotiate the maze through Dell or HP can be more difficult,” he said.

For this reason, perhaps, whitebox products have been particularly popular with small to medium-sized businesses in Australia, which benefit from the range of features these products offer at an affordable price. Still the strongest value proposition of whitebooks, and whiteboxes for that matter, remains flexibility.

Product manager for ASI Solutions, Craig Quinn, said build-to-order capability had been a key factor in drawing consumers away from branded notebooks.

“Brand names have excellent products providing you choose this one, this one or this one,” he said. “And it’s not just the product but the way the business is done, the way the sale is conducted and the service delivered. Local builders have the flexibility to respond to customers’ specific needs.”

Quinn said ASI was witnessing the recovery of the upgrade cycle while making tentative inroads with large enterprise through its resellers.

“We have examples of some of our channel partners succeeding in large institutions purely through relationships,” he said. “Banks and financial institutions at the big end of town tend to be more closed to the whitebox concept. You have to investigate whether the client is at all receptive and, if they are, then we would discuss the quality of components, our design and product rollout philosophy.”

Declining margins

The progress of whitebook brands has not gone unnoticed by their branded cousins. And, in response, they have become uncharacteristically aggressive in forcing resellers to drop their prices.

“Dell, IBM and Acer are currently fighting for market share in the entry-level [notebook space], which has really turned the screws,” Wang said. “For example, IBM has a notebook in Officeworks retailing for about $1499.”

Li said Dell’s supply chain efficiency allowed for rapid and dramatic specials that — when coupled with expensive marketing initiatives in print, radio and television — made it a powerful competitor.

He also claimed [Dell] it received better discounts from OEM partners, Microsoft and Intel that helped it to sell cheaper.

“Our dealers used to find it difficult to match them [Dell] so we now offer a facility to match any Dell special and we’ll give them [resellers] a rebate,” he said. “It’s been working very well this last year.”

Pioneer also offers an upgrade program allowing customers to trade in their existing notebook, regardless of brand, for a Pioneer model with better specifications at a competitive price. The company then guts the trade-in unit for useful components.

These reactionary tactics have strong critics in the industry. Among them is Wang, who sees them as a form of panic.

He said rather than join the fray, QDI had chosen to differentiate by being the first to market with an AMD 64-bit notebook and by including accidental damage — water spillage, drops and knocks — in its warranty policy.

QDI claimed it was also upstaging the likes of Dell on speed, with the capacity to deliver up to 120 custom-built units overnight.

But shrinking margins and competition from multinational vendors is just the beginning of the challenges facing the local whitebox market. Other pressures include the fluctuation of foreign exchange rates (larger global vendors have margin built into product prices to help them cope with changes in the exchange rate), finding suitable distributors, battling the high costs involved in setting up national service coverage to provide parts and support, and launching effective marketing campaigns.

Ingram’s Kwoh said distributors had played a key role in progressing whitebox products because they have a comprehensive understanding of the local market. However, to continue this growth it was important that distributors and resellers worked together in order to deliver the right combination of products, support and strategy to educate the end-user about whitebox products and what they had to offer.

“Dealers accelerate the growth of this market by personalising the service offered to the end-user and by educating them on the benefits of whitebox products,” he said.

Meanwhile, ASI’s Quinn suggested there were hardware challenges on the horizon with a major progression to new technologies due later this year. The current PCI bus would move to the new PCI-EXPRESS bus format, while the current AGP video cards would be replaced by the improved PCI-EXPRESS x16 protocol.

In the midst of all this, Intel is tipped to introduce a new naming convention for its processors, the premise of which is to move the focus away from GHz to emphasise various characteristics of the processors using family names. This will involve a new education process from Intel to the end-user, as well as educating the channel. However, Quinn said it would alleviate the current confusion by making it clear that you don’t try to compare Pentium M or Centrino 1.4GHz with a Pentium 4 2.8GHz.

Key points

Whitebook sales are growing quicker than whitebox desktops and the branded notebook market.

Key drivers include build-to-order capabilities, fast delivery and responsive service.

The definition of whitebox is shifting from low-cost units to feature-rich machines.

Margin pressure from branded PC manufacturers will hurt builders who continue to focus on developing low-cost units.

Dealers should focus on adding value through new technologies.

Dealer relationships will be vital in progressing whitebooks into large enterprise.

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