Building up a profit with components

The PC components channel is rarely cited as the sexiest sector of the IT industry. People are often more interested in the final product than the nuts and bolts which make it possible. However, that does not mean the components space is void of attractive money-making opportunities, if resellers know how to efficiently operate in the space.

The components channel has a slightly more diverse mix of resellers than many IT channels. Partners in the components space vary from system integrators, white-box makers, more traditional resellers and a large spread of retailers offering upgrades. With this in mind, it is interesting to note just how vendors use the channel.

Using the channel

Caleb Leung, country manager A/NZ at AMD, said: “When we deal with the channel we offer partners a differentiator to ensure that resellers are positioned differently in the market. If you look at components resellers today, they could be focusing on the SMB sector, government or retail, but they have been evolving over the past couple of years and moving more into areas like the gaming space.

“The gaming area is not 100 percent hardcore gaming people buying $4,000 to $5,000 machines,” he said. “They are buying $2,000 PCs, too. It is also about more people using the internet for entertainment, such as watching video and overseas programs. That has been happening over the last couple of years and has added a new ingredient to the white-box space.”

Leung said the opportunity in the desktop space remains strong with graphic and CPUs to be a focus over the next 12 months.

Thomas Tapsas, area sales manager for A/NZ at rival Intel, said: “The channel is our biggest customer worldwide. It enables us to market the latest technology faster and let customers access these products. When we want to ramp up a new technology, the channel is ideal.”

Tapsas underlined the concept of the components channel having a diverse range of players. Intel partners include large system integrators who build PCs, mobiles and servers, with these firms building machines in the hundreds. “We also have the smaller guys that do their business more locally. When you take away the big guys, the majority of our channel serves the SMB market,” commented Tapsas.

The Intel camp also stresses the opportunities in the low cost computing space, though Tapsas questions how big it will be in Australia: “[The market] is new and growing, but there is not a lot integrators can do as the model for the low cost computers will be similar to mobile where you add it with a service.”

Tapsas added: “The video market is also very exciting at the moment with growth in the graphics area. Desktops may not be in double digit growth, like notebooks, but the space is still growing. I am positive about the future of the desktop, with components remaining quite strong.”

Alan Chen, managing director of Gigabyte Australia, said: “We have two types of channels: [the first is] our distribution channel where we have four distributors who deal with the resellers. The second type is us selling directly to system integrators who use Gigabyte products to build PCs.

“The PC growth every year is very significant. But a lot of this growth is from the mobility segment. Desktop sales are mainly coming from emerging markets, such as China, India and Russia. Desktops will remain stable or decline in Australia, and as a developed country we will be looking towards notebooks. Low cost PCs will become a main focus for vendors like Asus, HP, Acer and Dell, and low cost PCs will become mainstream.”

Earlier this month, Gigabyte extended its channel reach after appointing ultra mobile PC (UMPC) and tablet PC-specific distributor, Tegatech Australia.

“Gigabyte has several devices targeted at this new sector, of which Tegatech will play a role to promote and distribute them to the A/NZ sector,” said Hugo Ortega, principal of Tegatech. “In this space, as a distributor we will be expected to support, warrant, stock and advertise Gigabyte’s range. Tegatech will also be expected to target channel resellers and look at retail opportunities to help sustain volume expectations.”

Kevin Hartin, marketing manager at distributor Altech, said: “The distributors are the link between the component vendors and the resellers. When you break it down, nine out of 10 vendors want numbers. We are here to sell their products. The other one in 10 are the larger vendors with a more holistic approach and put a lot more into building their brand.”
Dealing with margin pressures

The components space has often had a reputation as a tough low margin sale for the channel. That is at least the case for the basic box-shifters, as with most sectors of the IT channel. The key is knowing how to make the most from component sales, and, as ever, adding services.

“Services have become a major part of partners’ business today,” said AMD’s Leung. “The margin from the component is small, but the services opportunity is huge. In terms of the value of a customer contract, the components are about 10 percent and hardware is around 15 percent. The rest is services. After-sales services are still one of the highest requirements for the end-user, and resellers need to be aware of the services opportunity.”

Leung said the most important role AMD plays is training to assist partners with their services game. “As a vendor we need to provide that type of support. We have started to do web training and [are] spending time to educate customers, too. It is the reseller’s sales people that you need to educate, too, and that is something we have been doing.”

Intel’s Tapsas said: “For the partners who purely resell components and do not build, there is little value for them. It is about using the components to build more complex solutions where resellers can add more value.”

Gigabyte’s Chen agreed that the component space is tough, with distributors and resellers not enjoying large basic margins.

“There are also lots of component price drops so resellers need to be dynamic. Distributors are very important in terms of supporting resellers. We try to manage our channel so we do not have too many distributors, and the ones we do have operate in different markets. This avoids over-distribution,” said Chen. “If resellers want the higher margins, they can provide more services to end-users. To provide a good service, resellers need to come to a vendor who assists with aspects like technical support.”

Teagtech’s Ortega said: “Components and ultra mobile devices all suffer from a tightening of profitability. As a result it is important for resellers to look for ways to add value by bundling services, like maintenance agreements, or as witnessed more recently, to look for ways to provide market specific turnkey solutions; for example, home valuation software, or doctor and patient applications which sit on these devices.”

Altech’s Hartin said the components channel has a variety of end-user markets with system builders buying hard drives and the retail market being the main outlet for upgrade sales.
“There are low digit margins for the system builders, but the retail space can get double digit margins. The same product can have different margin levels,” he said. “We take a value-add approach and people have been talking about that since PCs started. If you want to make the fat dollars you need to provide services.”

Integration and hardware upgrades are value-add services which become available due to making the initial component sale, said Hartin.

The tackling of margin issues in the components channel seems to require no black magic. It is just the old channel ethos of looking to add services and not just shifting boxing. Nothing new there.

Green IT focus

If there is one unavoidable issue in the IT industry at the moment it is surely Green IT. Vendors are scrambling to get their Green messaging to market, but the components space poses an interesting angle to the debate.

Both the development of components and the complete machine have traditionally centred on performance. This enhanced performance has often come at the expense of some serious power consumption. So how has the components channel reacted to the increased focus on Green IT?

“The Green message has been in the world for many years and it is a big topic today,” said AMD’s Leung. “IT firms needs to translate the Green message into more than just a Green message. Every single vendor talks about Green, but we need to talk about how this affects the cost of ownership.”

Intel’s Tapsas commented: “Green is a hot topic. We are seeing more focus on Green from the channel and end-users. People are now asking: what are your company policies when it comes to Green? We are working closely with our customers to offer sustainable products. Everyone has a role to play with Green, even the integrators.”

According to Gigabyte’s Chen, Green - especially energy saving to improve climate change - is the main focus for Gigabyte this year and moving forward.

“We try to make our products more energy efficient and work alongside firms like Intel and Western Digital. We are also trying to educate the resellers and end-users to adopt Green products,” said Chen. “Desktop component users want to buy performance. They also want to buy Green, but not sacrifice performance, so resellers need to provide Green products with the same performance. Everyone is talking about Green, so it is a good time to raise the importance of Green issues.”

The distributors are also keen to contribute around the Green issue, with Ortega proudly stating that in the third quarter of this year Tegatech’s offices will be fitted with solar panelling to help reduce its carbon footprint.

“While solar panelling is still considered an expensive solution, the overall benefit to the environment is too great too avoid any longer. As an IT distributor we are above average in our usage of electricity [and] we are taking all the steps within our means to ensure this usage does not impact on the environment excessively. Recycling boxes is something we’re [also] committed to.”

Hartin echoed the Green sentiment. “We have seen Green IT evolve for a number of years,” he said. “A couple of years ago there was strong push from the components vendors and this will continue to evolve. On the other hand we are seeing more powerful computers, but we have more efficient power supplies.

“Resellers are between a rock and a hard place. They have access to the components and have to respond to their customer base. If their customer base wants Green products, they will provide them. However, if the customer base is ignorant to the Green issue then resellers still need to make a sale,” Hartin added. “Distributors need to improve the education they offer and be vigilant to look for Green products to supply; and the vendors need to lift their games in terms of providing educating information.”

The two resounding issues of margin pressure and Green IT could be more closely linked than first thought. If the channel needs to boost profitability, then using an environmentally beneficial angle on sales could be the best way forward.

However, if end-users do not want to listen to a Green-focused pitch, it could make the job of resellers a lot more difficult. This all goes back to the notion of end-user education and, as the trusted advisor, it could be the reseller which forces the changing of the tides. But, should they manage to boost those tough component margins at the same time, I do not think many channel players will be complaining.
Research house iSuppli has found that the Annual Growth Rate (AGR) for the semiconductor market in 2007 came in lower than previously expected.

The 2007 annual growth rate came in lower than the 4.1 percent forecast in the fourth quarter. Strong growth did still occur in the second half of last year. However, the projected growth was stunted by an 11 percent plunge in memory IC revenue.

A weak first half in 2006 and 2007 was followed by a 10 percent growth in the second half of the year, a trend likely to be repeated in 2008 as the seven percent expected revenue decline in the first half will be corrected by a 14 percent revenue growth in the second half.

With some electronic uncertainty, weakening consumer confidence and declining memory ASPs, the forecasts for both electronic equipment and semiconductors have dropped since the last forecast.

The 2008 equipment revenue growth has dropped by 0.7 percent to 5.9 percent, while the 2008 semiconductor forecast has dropped 3.5 percentage points from 7.5 percent to four percent. iSuppli does not expect double-digit semiconductor revenue growth over the 2007 to 2012 forecast period.

iSuppli has also found that dynamic random access memory (DRAM) revenues have been in decline since late 2007. This revenue decline will continue into 2008 and lead to a 12 percent revenue deficit in the first half, compared to the second half of 2007.

Although a recovery is anticipated to start in the second quarter of 2008 – leading to a second-half uptick of 33 percent revenue growth over the first half – it will not be sufficient to make up for the first half, and revenues will be flat for the year. Modest revenue growth will be seen in 2009, but a return to double-digit growth does not seem likely until 2010.