Building a new niche

Global microship sales rose one percent in March, reversing three straight months of declines, but coming up short of expectations for the year so far due to falling prices. March sales were US$20.3 billion, compared to US$20.1 billion in February and 3.2 percent higher than the US$19.7 billion a year earlier, the Semiconductor Industry Association said.

However, rising unit shipments of memory chips, mobile telephone processors and other semiconductors were more than offset by falling prices, the SIA said.“An abundant supply of chips for these applications resulted in declining average selling prices as manufacturers sought to hold onto market share,” SIA president George Scalise said in a statement. “Sales for the year to date are running slightly ahead of last year’s record level, but well short of the 10 percent growth projected in the forecast issued by the SIA last November,” Scalise said.

The SIA expects sales for all of 2007 to hit nearly US$274 billion after growing nine percent to US$248 billion in 2006.

However the SIA figures cover all kinds of chips, such as computer processors made by Intel, memory chips made by Samsung Electronics and mobile telephone chips produced by Texas Instruments.

Before local white-box builders can throw themselves a party, global analyst Gartner believes worldwide PC shipments increased nine percent in the first quarter of 2007.

Worldwide PC shipments totalled 62.7 million units in the first quarter of 2007, an 8.9 percent increase from the same period last year, according to preliminary results from the analysts. The worldwide total is in line with Gartner’s earlier projections; however the geographic regions showed mixed results.

In Asia Pacific, PC shipments reached 15.7 million units, a 10.3 percent increase from the first quarter of last year. The overall market performance was slightly less than projected due to weaker desk-based PC growth. In China, the first quarter is traditionally the weakest shipment quarter of the year due to the Lunar New Year celebrations. However, the PC market in China grew 15.2 percent in the first quarter, with desk-based PC growth of 10.1 percent and mobile PC growth of 38.3 percent.

Chips, chips and more chips
In the face of increasing competition from Intel’s new chips and price cuts, AMD has seen the market share in the x86 processor market it built in 2006 all but erode by the end of the first quarter of 2007, according to the latest figures from research firm Mercury Research. Since launching its Opteron processor in 2003, AMD had managed to chip away at Intel’s market share for x86 processors, as it beat Intel to market with dual-core systems and led the price/performance curve. At the height of its growth last year, AMD was shipping 25 percent of all x86 PC processors for desktops, notebooks and servers worldwide, according to Mercury. But as Intel struck back with its Core 2 Duo processors and quad-core chips, and a raft of price cuts, AMD’s share fell below 19 percent again by the end of March this year, while Intel’s ballooned past 80 percent, according to Mercury.

Analysts note, however, that AMD’s current market share is higher than these percentages indicate, as OEMs in the first quarter were still selling excess inventory shed by AMD in the fourth quarter.

While data for the Australian chip market is still preliminary, it appears there was a very slight quarter-on-quarter and year-on-year growth in the PC market in Australia. However the desk-based PC market is slipping at the expense of mobile PCs. Desktop sales appear to have fallen by 10-12 percent while laptop sales continue to flourish with an increase in sales of around 30 percent year-on-year and quarter-on-quarter in unit terms.

That’s great news, isn’t it?
The mass consumerisation of PCs means there is high demand for products from low end-users. People want to have at least one computer in their home, so system builders should be able to cash in on this demand. Unfortunately the demand for cheap PCs only benefits big name vendors who can afford to mass produce products and dump them on the market, long before a system builder has built its first customised machine.

Jeff Li, managing director of local company Pioneer Computers said an IDC report he recently looked at showed that the local builder market share dropped 50 percent to 22 percent.

According to Li, the analyst organisation expects another 10 percent drop in the next year, signifying tough times ahead for the local builder.

“If you go to an Asian country such as Taiwan, you will see a street which only sells IT products. At least 99 percent of those resellers on-sells notebook products and it’s really hard to find a desktop PC,” said Li.

He said this alternative market reflects what could potentially happen to the Australian market and believes “what’s happening there is going to happen here.”

According to Li, multinational desktops are why the market is smaller and smaller.

“HP has a policy that if it has extra stock, it will dump it for dealers to sell at a very cheap price,” he said.

Kevin Hartin, managing director at motherboard maker Nvidia said he also believes the biggest issue from everyone’s perspective is while the overall PC market is growing by three percent a year, local builders are seeing their market shrink by five percent.

“Retailers jumped on the HP and Acer bandwagon. The other thing is as notebooks are taking over, more and more people are moving away from having a desk station, which eats into any opportunities for local builders,” said Hartin.

Li said the Australian market is 20 times smaller than the US market, so there are very small dealers in the local place, compared to that of the US.

“The cake is already being halved, it used to belong to local builders, but in the past five years it has gotten smaller. In another five years that cake will get even smaller. Dealers rely on selling cheap components such as motherboards and video graphic cards will only receive half the margin,” he said. “It’s cheaper for the end-user to buy a whole PC than to buy bits and pieces for it,” he said.

Premium solutions
Local builders, both at the commercial and government sector are seeing their business being taken away by big name vendors. Just
recently the NSW Department of Education and Training took away a tender from two local system builders, ASI and Optima, handing over the tender to Lenovo.

Maree Lowe, director at ASI said it came as a shock, but the company has gotten over it because the shrinking white-box was something ASI has seen coming for a while.

“We have seen this coming for years as products become more of a commodity and are not surprised by the shrinking market. There are various streams within the server market that we have been investing in,” Lowe said. “Notebooks and PCs are still part of what we do, but we have been offering everything from server out to storage.”

ASI product manager Craig Quinn said the change was necessary for the company because it can’t compete with the bigger guys unless they “don’t pay our own staff”.

He said competing with these offshore companies means you have to take the wages side out of the equation.

“If you talk about a situation where there needs to be volume purchasing, you have to let the big guys slug it out because the further you move up the food chain, the less you are going to be able to compete,” Quinn said. “The reality is you can’t compete on massive deals, because big-name vendors sell the equipment at low cost. In the end you just give it away because you don’t want to work in that area.”

Quinn said the upside of building products is the ability to configure customer requirements and it may be small things such as floating assets, configuration to products and just a reworking product — which happens overseas.

“There’s nothing we can do about the particular trend (handing tenders to big name vendors) but there are other things we can do and it’s just a matter of moving onwards and upwards,” said Lowe.

Kee Ong, chief executive officer at Synnex also believes there’s nothing white-box players can do in this area.

“The top players have deep pockets and are going to be able to compete easily for government products. It’s not surprising that at the next level down, consumers don’t want customised products,” he said.

According to Ong, Synnex started as a major component distributor, however now that area is just one part of the business.

“Technology is becoming more plug-and-play, survival will all depend on how you can become value-added service provider in this tough competitive market,” said Ong.

Becoming a chameleon
After 22 years in the business, ASI has become like a chameleon and changed with the times. For the local system builder there is plenty of value in delivering services in high-end systems. ASI is looking for customers who need services and functions, it’s taken on another perspective and is looking at more agencies which offer more value, with more project-based work.

“The secret is to work towards network infrastructure-based products working with groups with high-end applications. Parts of the company are now only looking at managed services,” said Lowe.

At the other end of the spectrum is the reseller PC market,
which has also diversified from building machines to selling notebook products.

Ming Wei, director at PC Market said the reseller was still building some white-box computer systems and servers for the medium/high-end gaming market.

“We are still doing white-box-like computer systems and servers, but a lot of our systems are medium, high-end.

“There is still a market in gaming because Dell and HP don’t have gaming computers and it’s still a local niche market but it’s not very big,” said Wei. “We started to see the tightening in the whitebox market at the beginning of last year and the gaming market was also getting a bit quiet because customers wanted to wait for a new operating system and everyone was scared of upgrading computers and were holding it off until Vista came out.”

Wei said more customers have been picking up because of all the new video cards and motherboards.

PC Market is continually looking at ways to sustain the business.For Wei and his business partners, concentrating small/medium business with higher-end computers and gamers are just some of the areas where it has been making money for the past few years.

But the biggest change for the reseller has been the switch to selling more notebook products.

Although margins in the notebook market have also shrunk due to the launch of machines such as the sub-$1000 notebook, Wei said more high-end notebook machines are becoming popular.

“We find we can make money if we stock of a lot of notebook brands. People want to buy a notebook as soon as they come into your shop, if you don’t have stock in the shop then they will walk away,” he said. “Volume is the only thing that will cover the margin back.”

Although Wei is continually looking at ways to sustain the business, he is disappointed with the government for not supporting Australian-owned businesses with local tenders.

While PC Market doesn’t compete in this arena, he said it would be better for system builders if tenders were fulfilled locally.

“At the end of the day I guess when it comes to price competitiveness local builders just can’t beat those (big name) guys,” he said.
Show me the money
Li agrees with Wei’s strategy, while the margins in notebooks are tough — especially at the lower end of the market, there is still a viable market for system builders in high-end notebooks.

“Gaming notebooks just released are even priced and have similar specs to a desktop. End-users can pay anywhere between $5000 to $6000 for a desktop notebook gaming machine,” he said.

Li said system builders heading into selling notebooks need to get ready for new product lines, with commercial and industrial products being the type of products they will need to sell in the next few years.

Synnex’s Ong said at the customisation level the local builder can play a role especially if they are going into the gaming PC area.

“These resellers need to be able to tap into the Quod-core solution area because of the need for fast internal processing in the gaming arena, a normal local assembler can make a quicker win to their customer,” he said.

Games, games, games
Kevin Hartin, A/NZ channel manager at Nvidia said the motherboard maker has noticed that the local channel is holding its own on the premium end of
the market performance gaming media centre.

“Personally I think there are emerging retail opportunities in built to order. If you go and knock on the door of Dell, one of its premium gaming machines costs around $6000 to $7000. This is where the immediate opportunities for the local builder are,” he said.

Systems builders could argue against the notion that PC gaming is dying out entirely in favour of console-based gaming, such as the popular new Nintendo Wii. Many, in fact, say that they’re seeing more demand than ever for custom-built systems designed for gaming, and some systems builders not traditionally in the gaming market are now jumping in.

While the volume isn’t extremely high, there’s a very high revenue dollar for a lot of resellers as people tend to buy at the high end.

Some of the gaming machines show what’s best about systems builders, because end-users want to personalise those machines to make them attractive to customers, with a new paint job or specialised cooling features.

Hoping to add a little more fuel to the excitement over gaming, AMD has unveiled its ATI Radeon HD 2900 XT graphics card, which it says boosts performance for DirectX 10 gaming and high-definition multimedia.

Hartin believes the size of the Australian market works to a reseller’s advantage because in the US, the components channel structure had deviated to become direct sales. “Distribution had been squeezed out of the channel model and small independent resellers are becoming scarce because box builders tend to buy direct. However it’s thriving in Australia because the end-user is still going to the reseller for parts,” he said.

In the IT industry convergence has driven products to become a commodity market, yet there is still an appreciation for customised machines.
Viktoria Kulikova, national marketing manager at Altech said there is still a deep respect for the components industry.

“The picture has changed and has become specifically focused, as there are different types of customers. Some people prefer to build their own machines and source products from various places, but there’s a vast majority of customers who want to invest in an all-for-one package. Whatever their needs, they are willing to spend top dollar to get the machine of their dreams,” she said.

“They are willing to spend top dollar to get the machine of their dreams. ”

Portable super computer
First there was the portable phone, then the portable media player. Now, say hello to the portable supercomputer. Nor-Tech, a custom-systems builder based in the US, has designed and configured a portable high-performance cluster for researchers in the field of fluid dynamics.