Gen. Eric versus Col. HP
- 14 August, 2002 15:35
Kermit's Law" and growing competition from compatibles and remanufactured ink and toner cartridges are beginning to eat into printer manufacturers' lucrative consumables market.
IDC estimated 12 months ago that remanufacturers and compatibles suppliers now own about 25 per cent of the $1 billion Australian market for toners, ink cartridges, and SDM ribbon, and although those figures are hotly disputed in some circles, the fact is non-OEM suppliers are a growing force.
The Australian Cartridge Remanufacturers Association now boasts more than 100 members, which are helped by state and federal government departments that have adopted Kermit's "Keen to be Green" motto in their purchasing policies. That means recycled products are given first priority and have the added advantage of costing less.
OEMs are now being forced to add to the value proposition for both resellers and consumers by providing a recycling service, and in some cases a remanufacturing service. In doing so, they are also buying themselves environmental credits and ensuring they stay in contention for lucrative government supply contracts, in which recycling of products is not just a politically correct culture, but a key budgetary consideration.
The University of New South Wales and the Southern Sydney Waste Board have both had a big influence on setting purchasing principles for government and public bodies and institutions, which together make up one of the largest groups of printer consumables users.
In 1995, UNSW used around 2,000 toner cartridges, and prior to 1997 all printers at the university used non-remanufactured cartridges. But that has changed dramatically since the establishment of its Green Office Program.
According to university administrators, the use of remanufactured cartridges is economical and results in a substantial reduction in the production of toner cartridges (which are classified as hazardous waste) and subsequently disposed of into landfill every year. About 80 per cent of printers on campus now use remanufactured toner cartridges.
UNSW acknowledges that in the past remanufactured cartridges haven't performed very well and as a result there was a certain resistance to them. But standards have now been introduced and remanufactured cartridges perform no differently to new cartridges, the university says. The failure rate on its remanufactured toner cartridges, which are supplied by a third-party supplier, is less than 2 per cent.
Meanwhile, state governments are adopting A Guide to Purchasing Recycled Content Office Products developed by the Southern Sydney Waste Board, which offers advice on recycling a variety of products, including toner cartridges, and provides a list of a dozen suppliers - of which only Hewlett-Packard and Fuji Xerox are original equipment manufacturers.
HP runs an international recycling program and claims to have recycled 60,000 tons of print cartridge materials worldwide. It provides a free toner cartridge return service and recycles some of its LaserJet cartridges but, unlike Fuji Xerox, does not remanufacture cartridges.
Rebekah O'Flaherty, HP's imaging and printing group general manager, says the vendor's ink and toner products have extremely low failure rates of 0.8 per cent and 0.65 per cent for ink and toner, respectively, when used with an HP printer. On the other hand, remanufactured supplies have significantly higher failure rates of between 5 and 11 per cent for ink and 5.7 and 10.7 per cent for toner.
In an effort to stop its cartridges being remanufactured or counterfeited, HP now includes its new intelligent chip technology, part of the overall LaserJet print cartridge technology, which provides details of pages printed, toner and maintenance checks.
O'Flaherty says that 70 per cent of the technology from the printer hardware is supported by the HP LaserJet print cartridge. Therefore, when customers replace the cartridge they are not just replacing the toner, they are replacing 70 per cent of the componentry of the printer. "In other words, it's like removing the engine from a car."
But where is the value proposition in that? According to Alex Piccinini, of Queensland-based distributor Dynamic Supplies, it's in customer satisfaction, and that translates to dollars in the pocket.
Piccinini, who refuses to stock anything but genuine OEM product, says that while the margin may be higher in percentage terms on remanufactured and compatible products, in dollar terms it is about the same. However, the net return is higher on OEM product because it requires a lot less time and effort, both in terms of preparing the product for sale and in dealing with customer complaints and returns.
He says he is unlikely to ever sell anything but OEM product because he can make more money in the long run doing what he is doing. Dynamic Supplies catapulted nearly 200 places to 237th in the recently published Top 500 Private Companies in Australia. But more importantly, it was ranked as the eighth fastest growing company in Australia, with only grain exporters and insurers ahead of it, and even then, only because of increased insurance premiums after September 11 and record Australian grain exports this year, Piccinini says.
"Not counting these makes us the third fastest growing Australian private company but now's not a time to get picky. Not bad for a company that started out of the bedroom of a house eight years ago."
While Piccinini is doing a lot better than just alright' out of selling high-priced OEM consumables, one OEM is taking the price challenge to its competitors. Kyocera's David Finn says his company actually pursues the lowering of consumable prices rather than directly trying to make a profit out of them.
Kyocera has the advantage of not playing in the inkjet market where the cost of consumables is much more of an issue than in the laser space. "Our sales pitch is that we are cheaper to run. That's why some of our competitors are suffering. They sell their hardware cheaper and then try to make it up with the cost of their toner."
Finn denies that Kyocera's sales philosophy squeezes dealer margins. "We ensure they get a good margin. If a dealer is going to get screwed, he's not going to sell our products, so all of our dealers are happy."
Unlike most of its competitors, Kyocera has left most of its printer technology out of the toner cartridge, which has been left as little more than a refillable bottle. However, the toners themselves are unique in that they contain silicon and ceramic particles that polish the drum as it operates. Without these ingredients, the drum would seize up.
Finn says third-party operators have tried to mimic the product but don't have the sophistication to do it. "Black toner is as common as sand at Bondi, and will fit into most products; however, it won't fit into ours because of the ceramic technology we use.
"We are not in the clone war, but if a clone manufacturer wants to take us on, we are ready. We will just keep lowering the price until we wipe them out."
Fuji Xerox has a different philosophy again. Working on the basis that the consumer is more comfortable with a genuine OEM product, it remanufactures its toner cartridges. Fuji Xerox channel marketing manager Michael Byrne says that from a reseller's point of view there are some good compatibles on the market and some that are no so good. But from a service and customer satisfaction perspective, you're probably better off avoiding them.
If dealers are going to sell a compatible because they can make more money, they have to make sure it's a good one, otherwise it will cause problems for their customers down the track.
"In many cases the customer will demand an original product, but if the dealer can make more money from the compatible they should be taking the matter up with OEMs, who have to be competitive," Byrne says.
Fuji Xerox has been remanufacturing its own cartridges for some time and is finding acceptance from its customers. Rather than just being refilled, the cartridges are completely stripped down, reconditioned and where necessary given replacement parts. They then go back on the shelf with a price tag 25 to 30 per cent lower than a new cartridge. Byrne claims the remanufactured products are sometimes even better than the original.
No holds barred
Nevertheless, the toner market is almost gentlemanly compared to the inkjet consumables market, where a low-end printer can be bought for little more than the retail cost of the two ink cartridges it comes with.
It is a market where compatibles manufacturers such as Pelikan and Calidad have carved out a niche, albeit one that is not as large as some analysts and OEMs would have us believe.
Mention compatibles or refilled cartridges to any inkjet marketing manager and watch his or her eyes bulge and steam start to come from under their collar.
Michael Pleasants, Epson Australia's director of marketing communications and e-commerce, is quick to whip out numerous reasons why consumers shouldn't buy third-party cartridges and why resellers shouldn't sell them.
The key one for the consumer, he says, is that the lower prices represent a false economy because of problems with print quality, blocked ink nozzles and other ink delivery issues.
"The real test is the number of finished prints you get from your cartridge. Our tests found that genuine Epson cartridges produce the most finished prints, therefore genuine cartridges deliver the lowest cost per finished print."
Epson has spent considerable advertising dollars in recent months warning of the perils of using third-party products and non-genuine inks. However, its critics and even some of its competitors are quick to point out that some Epson inks have had problems with rapid fade and have not performed as well as some third-party products.
One thing Epson has managed to do is keep a lid on the counterfeit market, which is generally accepted to be small in Australia because of vigilant policing.
Canon, which is one of the top two players in the inkjet market, refuses to comment on the third-party issue, but Hewlett-Packard sides with Epson, and all of the inkjet manufacturers put a lot of R&D into print head and ink technology to make it harder for third-party competitors.
HP's O'Flaherty says many of the company's colour inks are patented and designed to work hand in hand with HP printers - the print heads in each of HP's genuine ink cartridges are key to the final product produced by the printer.
The irony, according to industry sources, is that most OEM ink cartridges are designed to be drilled and filled' to avoid breaching trade laws in key markets such as the United States.
While IDC last year suggested third-party consumables made up 25 per cent of the market and OEMs have done nothing to discourage that notion, the reality may be somewhat different. The problem is that, unlike the printer market, consumable sales are not tracked by most market analysts.
Paul Connelly, managing director of major consumables distributor Daisytek, doesn't understand the IDC figure. "I cannot see how the compatibles market is $250 million or 25 per cent. The compatibles market for ink is about $30 million or about 5 per cent of the total," he says.
"It is the paranoia of OEMs that is giving the third-party market a much higher profile."
Robin Kenyon of compatibles manufacturer Calidad also questions IDC's analysis. Calidad is one of Australia's foremost manufacturers of alternative cartridges and refiller kits and has managed to work around many of the technologies OEMs have relied on to stymie the third-party market.
Calidad claims to have an extremely low failure rate in its compatible (alternative) cartridges and offers to replace any printer that fails as a result of using one of its cartridges.
"That doesn't happen. If we do end up replacing a machine we usually do it as a favour to a dealer rather than getting into an argument. But it's so rare it's not a big deal.
"I don't have any problem with the OEMs making a hot issue out of the market, we have incredible respect for them. The machines they produce are just superb," says Kenyon. However, he admits he doesn't talk to them. "We are all just too busy."
Calidad claims its resellers get a better margin selling their products than if they sell OEM consumables, although that doesn't always equate to more dollars. "It is always higher in percentage terms and sometimes it's higher in dollar terms too," says Kenyon.
While the early horror stories of drill-and-fill disasters are subsiding as industry standards improve, and with companies such as Calidad providing alternative cartridges that are getting closer and closer in quality to the original, both consumers and resellers still have to weigh up the pros and cons.
For the consumer, the question is whether or not the lower cost outweighs the risk of hardware failure or lower output as a result of using non-genuine products. For the reseller, it is a matter of whether higher percentage margins equate to higher gross returns, and if they do, is it worth the extra work and potential customer dissatisfaction?
The decision is no longer as clear-cut as it used to be.
Digital photos built to last
HP is dangling a carrot to encourage amateur digital photographers to use its genuine printing products. The company is promising up to a 73-year life span for digital prints made using its new inks in combination with its Colourfast Photo Paper and its new six-colour deskjet 5550 printer.
That's three times the maximum life span of most of its competitors' top-of-the-range products and HP claims it's the first time digital prints will last longer than traditional photographic prints.
The six ink printing system requires three ink cartridges instead of the traditional two (one tricolour and the other black). The new HP58 print cartridge contains dye-based light magenta, light cyan and black inks and has a print head with 300 nozzles. Users can remove and store the third cartridge when they are doing normal printing and install it when they require photographic prints.
HP says the quality of the print head directly affects the quality of the printing and each print head is aligned to less than a hair's breadth.
In a statement designed to deter people from using third-party products, HP said: "The integrated printing system combines the print head and the ink supplies, so customers benefit from a fresh print head each time the ink supply is replaced."