The brand without a name

The brand without a name

While the local PC market as a whole has recorded strong growth in volume sales over the past 12 months, the whitebox PC segment is outstripping the brand name PC sector in terms of growth and continues to win an even greater slice of the market.

The overall PC market grew in volume 16.2 per cent from Q2 2002 to Q2 2003, according to Gartner analyst, Andy Woo. Mobile PC shipments increased 42 per cent year-on-year and desktop replacement units increased 10.9 per cent.

Whitebox PC and server units increased in volume sales 17 per cent year-on-year, increasing its PC market share from 45.6 per cent in Q2 2002 to 47 per cent in Q2 2003.

The whitebox market has clearly benefited from the growth in the home user market where whitebox sales dominate and the growing awareness of consumers about the value proposition of whitebox PCs. Even major retailers such as Harvey Norman and Dick Smith are now stocking whitebox PCs as an alternative to the brand name PCs.

Traditionally, whitebox has been a dominant force in the Australia, usually representing about 45 per cent of the total PC market. The perception that the whitebox assembler is a viable PC supplier has been well established in the consumer market. So as the consumer PC market continues to expand, so too does the whitebox market, and as consumers become increasingly savvy about PC environments and their specific requirements, they are increasingly being drawn to whitebox PCs that offer them greater flexibility when it comes to customisation.

Market research company IDC reports 20 per cent growth in total PC shipments year-on-year. But managing director of whitebox components distributor and assembler Synnex, Frank Sheu, estimated that from January to July, Synnex’s whitebox sales had increased 20 per cent.

“As technology becomes more mature, the whitebox PC offers very good value for money,” Sheu said. “All these motherboards, hard drives and graphics technologies are very mature so consumers are less concerned about seeking the security of a brand name product and the pricepoints are more appealing to consumers.

“Whitebox vendors can offer them far greater flexibility when it comes to selecting components you want to use in your PC — a far wider variety of specs and configurations. They also have a far shorter supply chain so they can offer faster delivery.”

While PC pricepoints have become more attractive to consumers, ultimately they are looking for the kind of value for money that whitebox vendors and resellers offer and that they simply cannot attain from brand name vendors.

Most consumers are now second and third-time PC buyers so most of them have some fundamental knowledge about PCs and what constitutes good value. When it comes to purchasing preconfigured brand name PCs, you only get what you pay for.

All the brand name vendors in the consumer market are fighting on pricepoint, therefore consumers have a very limited choice in terms of specifications. In the brand name space, home users are practically forced into buying entry-level systems that increasingly do not satisfy their PC requirements.

This lack of choice and flexibility for consumers is also the result of tier-one vendors’ marketing strategies and the categorisation of PCs as either consumer products or commercial products.

“Brand name vendors believe that the consumer market is all about pricepoint,” Sheu said. “That’s wrong. I believe the sweetspot is not $1499. Consumers start to get bored and want to buy something more sophisticated. The ASP (average selling price) of a desktop in the gamer’s market is over $3000. This market is becoming huge.

“The gamers market really is a whitebox market. Gamers will not buy brand name PCs because they don’t offer good enough graphics.”

Overhauling their go-to-market strategy would prove far too costly for tier-one vendors so they have little choice other than to compete with the whitebox market on pricepoint, and as long as whitebox PCs are still cheaper than brand name PCs, there will be demand for whiteboxes.

Dell recently dropped its prices as it moved beyond its traditional enterprise playing field and into the consumer space. Yet not all tier-one vendors compete head on with the whitebox market. Vendors such as IBM — that primarily focus on the enterprise market — do not compete with whitebox prices. “Vendors like HP and IBM aren’t so much losing market share to whitebox vendors, but more to Dell and Acer,” Sheu said. “The whitebox market is still strong but Dell and Acer are taking away a lot of the local deals.”

Smaller whitebox vendors have realised they need to slap on the added revenue stream as hardware margins alone are not viable for the business over the long term. In order to compete successfully with brand name vendors, assemblers need to move beyond the box-pushing or hardware mentality.

“You have to bear in mind that while there is strong demand for PC hardware, the margins on hardware are very low,” Woo said. “For whitebox assemblers to remain viable, they have to offer value added services to their overall business; be it ‘break and fix’, delivery, hardware maintenance or network maintenance services. The hardware should just be the enticer that lures customers towards the services business.”

Synnex assembles its own whiteboxes that carry the Mitac brand or the Lemel brand. Its Mitac and Lemel customers are mostly SOHOs, home users and educational bodies. But pushing its own brand of whitebox PC is not Synnex’s primary focus.

“Our focus is reselling components and selling our assembly services to local resellers,” Sheu said. “Our assembly service business makes up the bulk of our whitebox business. Eighty per cent of the whitebox PCs, notebooks and servers we assemble are customer branded. A lot of our customers order components from us then we assemble the desktop or server system for them. We charge an assembly fee and we team up with Commander to offer 24/7 onsite service warranties for whitebox servers. So we’re not just pushing sales, we offer an integration service and an end-user warranty service as well. It’s a complete assembly and support service solution.”

Most whitebox assemblers offer warranties on parts rather than the PC system as a whole, which adds to the whitebox PC’s value proposition and the increasingly savvy consumer market who’ve been hit for repairs with their last PC are now seeking out more competitive warranties. While many brand name desktops are covered by one-year warranties, assemblers such as Synnex offer three-year warranties on the hard drives and two- or three-year warranties on their motherboards.

Woo said that the personalised service that whitebox assemblers and resellers offered to customers was also winning over the SOHO market.

“There is a lot of growth happening in the SOHO space,” Woo said. “If you’re a Ma and Pa operation, they can walk around the corner and speak to their local assembler who can give them that personalised touch that the whitebox can provide. Brand name vendors cannot compete from a personalised service perspective.

“The opportunities for whitebox vendors are in the SME and enterprise space, so they need to skill themselves up and allocate the right resources. Moving up the food chain, you need to provide the whole service.”

There are significant opportunities for the whitebox market in the education sector particularly in WA and Queensland. A lot of the resellers that sell into the education vertical bundle installation and integration services, as well as network maintenance contracts with the hardware.

The government sector is also loaded with potential as the government’s preference is to support local industry and employ Australian companies.

This is where large whitebox vendors like Optima and Ipex have gained significant ground.

Woo said that to achieve strong growth, whitebox vendors should focus on niche market areas rather than try to win over the consumer market or crack the mass merchant channel.

“The mass merchant market in Australia is highly competitive,” he said. “If you can crack in to Harvey Norman for example, it’s not easy to maintain that position. Ipex has penetrated Harris Technology and Optima has cracked into Dick Smith, but you need the resources, finance and support to be able to support the business until it becomes profitable, which may take the first five years.”

By playing in a niche market, whitebox vendors can turn a profit in a much shorter time frame.

There’s been a lot of talk about the enormous potential of the whitebox notebook market, but according to Woo the acceptance of whitebox has always been in the desktop space.

“It’s taking whitebox vendors a long time to crack the notebook market, not so much because of the perception but the reality that the quality of whitebox notebooks is not as high as brand name notebooks,” he said.

Customers still pay a premium for a notebook and the price gap between whitebox and brand name notebooks (about 10 per cent) is not significant enough to lure customers towards whitebox notebooks. Most customers are willing to pay an extra 10 per cent for peace of mind and choose the security of a brand name product.

“Mobility is just not hot right now for whitebox vendors, portability is,” he said. “Mobility is about services as a whole — a wireless environment, a whole productivity story, a whole ROI story — and that is where whitebox assemblers are lacking.

“If you look at the whole mobility concept, hardware is a small piece of the puzzle. What else does the customer need — which WLAN provider do you partner with, what applications do you provide, what security do you provide, how do you integrate the customer’s various mobile devices, should you bundle some wireless hardware with it — these are all the kinds of questions they need to address. It’s about selling a whole concept, a whole service that wraps around the benefits of being mobile.”

Statistics from Gartner indicate that whitebox vendors are experiencing growth from desktop replacements and that it is a key growth area. Woo suggests whitebox vendors that are looking to expand their hardware offerings should focus on developing portability solutions such as desktop replacement systems before delving in to the notebook space.

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