It was once said no-one ever got fired for buying IBM, but today every second desktop PC sold in Australia does not even have a multinational brand name on it.
Australia has one of the strongest locally built -- or ‘white-box’ -- markets in the world. In most countries stickers from household names such as IBM, Dell, Hewlett-Packard and Acer adorn the majority of Windows boxes, but in Australia local names like Optima, Ipex, Pioneer and Compucon combined to make up 52.4 percent of PC sales in the first quarter of this year.
You do not become a multinational giant by giving up without a fight, and the box-building Goliaths have struck back at Australia’s local Davids with a price-cutting onslaught designed to undermine their price advantage.
Optima Technology Solutions has been building computers in Sydney’s west for more than a decade and has the highest market penetration of the ‘local kings’, as Australia’s white-box builders often refer to themselves.
Optima sells its own brand of Windows desktop and notebook PCs and also produces OEM boxes for other local companies to rebadge as their own.
Optima-branded computers compete head-to-head with multinationals in stores such as The Good Guys and Retravision as well as through Optima’s own channel. Optima is also a major player in the big end of town, winning a number of major corporate and government tenders to supply desktop and notebook computers.
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| Optima’s Ung: Can’t rely on price to win |
"As a local king, price is important, but you can’t just rely on price to win. If multinationals want to win the market they can, because they’ve got deep pockets.We also have to add value, to service the customer and to meet their needs by doing more than just shipping boxes," Ung says.
"Of course for resellers, the product has to be feature rich against others and the price point must be able to make an impact in the market. Still, we can offer them better margins."
Australia’s geography and population spread has contributed to one of the highest white-box market shares in the world, says IDC PC hardware analyst Michael Sager. "You have to have critical mass in order for investment to come and, if a multinational vendor isn’t going to put money in, then white-box will be strong," Sager says.
White-box is strongest amongst Australia’s 1.2 million small to medium enterprises, which are less prepared to pay a premium for brand names, Sager says. As a result, white-box sales made up 60.2 percent of SME desktop sales in the first quarter of this year.
"The SME market doesn’t really think of it as being white-box, they just think of it being the local small company that makes PCs," Sager says. "Every one of them has a brand, some are just more recognised than others.
"If you ask the average consumer they’re probably not going to know Optima versus someone like Dell or HP, but if you talk to Cornel at Optima he’ll say, 'We’re not whitebox', but by definition they are, they just happen to be the biggest and most recognised."
In a small business the owner or managing director is also likely to be the makeshift IT manager. This makes them highly reliant on their supplier’s customer service, often to meet more than just their basic computing needs.
As a result, SMEs derive a strong "comfort factor" from dealing with a local retailer, Sager says. "If you are a company that has 40 people located in central Australia, it’s much easier for you to know the person that can do your entire IT infrastructure, not only sell you your whiteboxes but do your networking, your security and your broadband. If they can come in cheaper than the cheapest multinational then they get in the door and that’s where they get the rest of their revenue, from doing all the other services for that company -- being a onestop shop," he says.
"There’s also a comfort factor in knowing you can call someone up on a Saturday if they’re your retailer in a small community, it’s not just about return to base or warranty. When you put that in there, that’s where white-box has an advantage.They’re never going to have 2000 customers, but they’ll have 200 they can service really well."
This relationship has made an SMEs’ whitebox provider the first port of call for all their IT-related needs. Resellers make 44 percent of their revenue from selling PCs, yet a further 19.4 percent comes from IT services, 14.5 percent from selling peripherals and more than 6 percent each from repairs and networking services. "When you put it together, all the stuff that rides on the back of selling PCs contributes almost as much revenue as the PCs do," Sager says.
"It does make more sense for resellers to sell their own white-box because then any customer question related to IT goes directly to them, so all the revenue goes to them. It’s about locking it down and ensuring you do everything in IT for that customer."
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| IDC's Sager: Not just about return to base or warranty |
"The comfort factor helps white-box overcome the fact multinationals can offer a better level of service and support, but it’s something for white-box to watch out for," Sager says.
Still, providing good service and support is the key for white-box builders, says Greg Schroeder, marketing communications manager at Compucon.
"Every systems customer [reseller] is genuinely important to Compucon. whereas small resellers may feel overwhelmed and/or undervalued by multinationals.
"We know most of our customers really well and we’re very responsive to each of them. That kind of personal service just doesn’t scale up very well, especially when corporations squeeze their headcount to boost profits and their share price."
He continues: "No matter what their PR or advertising may try to suggest, large corporations simply aren’t customer centric -- their performance metrics force them to mostly focus on financial results, and the little guy knows he isn’t getting much mindshare from them," he says.
The builder’s direct relationship with Intel as an Intel Premier Provider also enhances its service delivery, he adds
Despite the David and Goliath image of whitebox builders battling the global brands, multinationals such as Hewlett-Packard see local vendors as a serious force to be reckoned with. "Basically they own the market here in Australia -- not one of them but the group collectively," says Hewlett-Packard new channels manager Rosalie Boyd. "You can’t ignore the biggest player in the industry."
An industry veteran, Boyd denies the success of white-box is due to multinationals failing to focus on Australia.
"Look at pre-merger Compaq, look at IBM, they were always very strong players in the market and that hasn’t stopped the white-box market at all. It’s not as though Australia is left alone by the multinationals and just paid lip service, they push very hard," she says.
Last year Hewlett-Packard chose to embrace rather than fight the white-box market, signing a deal to provide Australian white-box builder Westan with unbranded computers, with Westan providing them to resellers under the Armapro brand or to brand as their own.
"The big mistake most vendors make is trying to compete against white-box -- you’re not going to win. What we’ve done with our approach is a partnering agreement, so we can bring value to the white-box guys so that they’ll be interested in playing with us," Boyd says.
"This is not a market share drive; it’s not competing with our brand. These are unconfigured, unbranded and have a completely different warranty. The consensus was that we were going to get flak from the channel; the reality was all I got was positive feedback and a snowball effect where some of the partners who are currently selling their own unbranded box are interested in taking this up with Westan."
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| HP's Boyd: Can't ignore biggest player in the industry |
"Over the last couple of years I believe that multinationals have been taking white-box share through very aggressive pricing, in particular Acer and Dell and more recently Hewlett- Packard as well. The advantage that white-box used to have is narrowing.Whereas a few years ago you could have as much difference as $1000, today it’s a much narrower gap – possibly $100 or even less in some models," Aghtan says.
"When the multinationals decide to really get aggressive and dump stuff in the market you can see that white-box can’t even build them at that price. White-box is losing market share and the trend seems to be continuing, which is a bit of a worry for the channel."
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| Westan's Aghtan: White-box advangtage is narrowing |
"The current products the white-box market is introducing have too many changes in them -- they swap and change components all the time."
After announcing the deal in October 2004 and delivering the first product to market in December, the program "ran into a lot of teething problems", Aghtan says. "I suppose you could say we have now taken a step back and reassessed the whole program and how to go forward again," Aghtan says."We are reassessing how we’re going to do it, not if we want to do it."
Boyd adds, "I’m not going to say to you that it’s a resounding success because we’re very much in the early stage of the program".
Despite Aghtan’s concerns about white-box losing its grip on Australia’s desktop PC market, IDC’s Sager says this could only happen if several multinationals made "a very concerted effort".
"If all of a sudden Acer, Dell and HP decide for six months in a row to target the white-box market very hard and really beef up their channel relationships, then white-box would really be hurt.
"The thing is it’s really expensive for a multinational to do that. It’s easier for them to be the branded offering alongside a whitebox assembler."
The biggest wildcard in the Australian and global PC market is this year’s US$2 billion acquisition of IBM’s personal computing division by Lenovo -- China’s largest computer maker.
"If Lenovo were to come into consumer, or into white-box below the IBM ThinkCentre product range, it could have a huge impact on the white-box market," Sager says.
"It depends on what Lenovo decides to do. It doesn’t want to sacrifice the IBM brand and will probably want to make sure Lenovo would be separate. It’s definitely the most critical question for white-box."
So is Lenovo the 800-pound gorilla preparing to squash Australia’s white-box market? It’s a question of ‘wait and see’, says Lenovo offerings manager David Nicol. "Lenovo’s strength is in the consumer and small business desktop market in China, so we have the opportunity over time to bring new products to Australia," Nicol says.
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| Lenovo’s Nicol: Targeting white-box’s one-stop advantage |
Meanwhile IBM/Lenovo intends to target white-box’s one-stop IT shop advantage. "Having a local presence is one way those suppliers are able to deliver some benefit to their customers.
"We are looking to continue to work with our business partners who have a regional presence, for them to supply a Lenovo PC but for them also to gain significant revenue and margin from selling warranty upgrades, wireless, broadband and peripheral products that complement our offering," Nicol says.
While this may hit white-box sellers where it hurts, they have more than one trick up their collective sleeve. Nimbleness and the ability to quickly bring new technology to market is another of white-box’s strengths compared to its multinational competitors, says Pioneer Computers Australia product manager Jeff Li.
"In the technology area we try to stay three to six months ahead of multinationals, but this can be difficult," Li says.
"Multinationals have direct support from Microsoft and Intel, and for CPUs we have to pay full price, but multinationals sometimes get special deals from Intel and even a special model you can’t get anywhere."
Pioneer sells desktop and notebook PCs via three main channels -- government, resellers and mass retailers such as Harvey Norman. Local support from Intel and Microsoft was crucial in gaining a foothold in the mass retailer channel, Li says.
"Locally, Microsoft and Intel really support us, AMD as well, but they have to fight with the US parent companies because all the special deals are done over there," Li says.
"For our first order from Harvey Norman we had huge support from Microsoft and Intel. Intel paid for the advertising and Microsoft provided some software for free."
Pioneer is a member of the Genuine Intel Dealer program started 10 years ago in Australia, which now has 160,000 resellers and system builders worldwide.
A significant amount of the silicon sold in the white-box market comes from Intel, says Intel area sales manager for Australia & New Zealand, Andrew McLean.
McLean denies Intel favours multinationals over local white-box builders, insisting local assemblers have access to new products within seven days of launch. "We have been extremely supportive of the local channel and we are very supportive of our multinational customers as well. We continue to work very hard with local system builders to put them in a position where they can have new product in a very timely fashion," McLean says.
"Intel provides to both local companies and multinationals the building blocks to build standards based PCs so the quality of product that can be manufactured by local system builders is very high."
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| Intel’s Mclean: Assemblers have access within seven days |
"Occasionally we work specifically with the white-box vendors. An example of this is the Windows XP Media Center Edition launch where, prior to the availability, we worked with the systems builders to help them understand the technology and opportunity for them," Baxter says.
"Under the Microsoft Partner Program we’re about to launch a new white-box competency called the OEM Hardware Solutions Competency.This competency will enable system builders to reach the Certified or Gold Certified Partner level in the Microsoft Partner Program by recognising a system builder’s specialisation and expertise in building PCs, servers and devices, and pre-installing Microsoft software."
The Australian launches of Windows XP Media Center Edition and Intel’s Pentium D dual core processor both showcased computers from local system builders.While the rapid introduction of new technology is a strength of the white-box market, IDC’s Sager does not consider either of these technologies another string to their bow.
"Dual-core is a big advantage, but every 12 to 18 months there’s a technology upgrade so it’s not as though it’s something completely new. Dual core is completely new, but not the upgrade cycle," Sager says.
"I think the biggest thing is that there’s no killer app attached, until Longhorn comes out. If it’s good, that would be the next killer app."
While there currently is not any one technology giving white-box builders the upper hand, their ability to build customised boxes to order gives them another advantage over multinationals. This has forced multinationals to improve their definition of Build Your Own beyond merely letting buyers choose the size of their monitor and hard drive, says Sony Vaio business manager Gordon Kerr.
Sony is a major component supplier to Australia’s white-box builders, who can then reconfigure their offerings very quickly to meet customer demands, Kerr says."The build-toorder facility is definitely being pushed in branded companies like Acer so much more in Australia, ahead of some other areas, specifically because of Australia’s build-to-order white-box market," he says.
"We’re now working on our Vaio models for five months from now.We’re locking that in now but the specs we’re talking about you could get today if you went to a local assembler, because the components are already available."
Ingram Micro is another long time supplier of components to local white-box builders and it has watched white-box and multinational fight for supremacy, says Ingram Micro OEM business manager Danny Kwoh.
"About 10 years ago, anyone that could pick up a screwdriver and build a PC could make a fortune out of it. Then competition got stronger as more people started jumping into the market. Under pressure from tier 1 vendors such as Dell, Acer and HP, the market really got squeezed," Kwoh says.
"As white-box fought back the branded players were forced to become more flexible. In the past you saw labels on HP machines that said if you open the box and update something the warranty is voided. Now they have clauses so you can upgrade if you go to an authorised agent."
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| Acer’s Mikaelian: Flexibility, service are key strengths |
"Australian people feel warm when they walk into a store and someone can help them; we are a very service-orientated country and whitebox meets that need.That’s why, no matter how hard the tier 1 try to push down on this market, while-box still survives."
Acer has been watching the white-box builders closely and recognises their flexibility and customer service as key strengths, says Acer Computer Australia channels general manager Greg Mikaelian.
"We’ve been looking at what the white-box offers customers -- it’s not necessarily price, it’s the ability to be there for customers’ needs, offer flexibility, offer upgrades and offer service," Mikaelian says.
"We looked at why white-box was so successful and, as a result, we really tried to meet customers’ needs and offer them something different, as opposed to 'here’s a branded box from a vendor and that’s all you’re going to get'."
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