A brief insight into the Personal Computer Value Chain and its relevance to local assembling.

My study is not to decide in favor of buying computers from abroad or in favor of buying locally assembled computers but to determine how best we can bring costs down by using the benefit of both.

The Personal Computer or PC is the most significant object of today’s era of digital technology. It’s population has surpassed the 1 billion mark in 2008 and is one device which has truly harnessed the power of internet as we perceive it.

The debate between global and local assemblers is derived from the modular design of the PC. The physical components of the greatest value and electronic intelligence are the ‘semi-conductors’ and the ‘hard disks’. Although the earlier bulky monitor is not part of this but the new flat panel monitors may form part of this high risk, high value component as well. This family of high value components experience RAPID IMPROVEMENTS while the value of their earlier generations decrease considerably almost at the rate of 1% a week. Outside of the electronic sector, it may be only ‘fashion forward’clothing that experiences a similar rate of value erosion.

For PC assemblers, mastering this pace of change is ‘key to success’ and even more than that ‘their survival’. Generally all PC assemblers try to bring in heavy items such as bulky cases, power supplies, etc. by ocean freight and try to get the high value items, mother boards, RAM, hard drives which occupy only 10% of the weight of final product, by air as and when required. Excess inventory or transit time, delays in the arrival of expensive components, or any finished and semi finished product containing these expensive components, anywhere in the value chain, results in VALUE LOSS.

A PC is like a hot potato, any body holding it and allows it to become cold experience ‘VALUE LOSS’, while those holding it for less than the average time experience ‘VALUE PRESERVATION’ , which counts as profit. Thus LOGISTICS CAPABILITIES are a central competency for a successful PC industry and whether we have achieved that in our region needs to be seen.

Out of any technology products ever invented, the Personal Computer as mentioned earlier is the ULTIMATE MODULAR product, containing about 8 to 10 different modules including keyboards, mice, monitor, etc. This facilitates the disintegration of value chain into separate firms manufacturing those components and assemblers thrive in the close vicinity of such firms for easy access and logistics challenge to collect all components under one roof. All major PC firms such as HP, IBM, ACER, except DELL, actually assemble only a fraction of their PCs and majority are outsourced to ‘contract assemblers’ located in the far east just next to their ancillary industry. More fundamentally, the assembly process adds little value and the process is so routinized that proprietors of small shop and even individuals at home can undertake it. In the light of more functions being placed on a single circuit board, the motherboard A PC assembler especially of today in many ways has become more of a‘logistics co-ordinator’ rather than a true manufacturer.

Moreover this disintegration of value chain among separate component manufacturers with lot of them manufacturing motherboards, hard drives, etc. has created a tough competition and hardly any significant profit margins for any of them. This may at times put a challenge on quality for some of those

lesser priced lesser known component manufacturers who are tempted to do business with lesser known assemblers operating out of their ecosystems, there by creating a big challenge for assemblers, out of the eco system of component manufacturers to source the right quality of products for the end-users of their area. Additionally when smaller assemblers approach the same sources where big boys HP & DELL buy, they get bullied by higher prices to maintain similar quality levels while still reserving their top cream of quality products for big boys alone.

The only firms to consistently make profit in the PC value chain are INTEL & MICROSOFT because they have been able to prevent entry of their competitors, although both firms are aware that lower PC prices will encourage more sales for them, hence they compete with each other in form of : Microsoft tends to encourage other CPU manufacturers like AMD for bring lower cost CPUs in the market and Intel encourages other Operating Systems such as Linux . The final aim of both Microsoft & Intel is to bringcost reduction but it should happen with the other vendor of the value chain and not themselves. With all these big boys fighting themselves, the benefit gets derived by the END USERS who is able to take advantage of continuous price reductions.

Two decades back when IPMC started its local assembly operations it faced the challenges of

- Weak distribution links- Higher financing costs- Lack of skill set and the quality of skill set- Failure rate higher than what is acceptable to corporates - High cost of spares during warranty period.- Lower turnovers, hence stress on inventory becoming outdated over a period of time.

AND today the

- latest threat anyone faces is the inflow of second hand computers which has become the biggest competition for locally assembled PCs.

Due to the geographical advantage assemblers or contract assemblers of the far east enjoy for sitting next to its ancillary industry, even countries like India who are not very far from Taiwan China has not been able to compete in this sector. India rather chose to concentrate on other areas such as software development and software services. And this is the model what most countries world-wide are adopting. Since it is difficult to have an ancillary industry of computers in any other part of the world except far east, some countries have adopted and are concentrating on areas which bring value add to the IT industry such as local software development, local software services. Rather than thinking about reducing the PC or CPE price which is already happening automatically on the global level, we canconcentrate on increasing income levels of our populace by making our country as the favored Business Processing Outsourcing destination. In Ghana GASSCOM is currently endeavoring to do the same.

However there is a huge market where local assemblers can contribute significantly and for that let us look at another phenomenon experienced in the US which can be replicated elsewhere. USA has the largest consumption of PCs and there are basically two types of Assemblers there, the very large ones

HP, DELL, etc. who supply to most corporate and business houses due to reliability of their product and a well organized channel for delivery and support. Secondly the US market has the largest number of next door assemblers who provide personalized configuration, personalized support to their neighborhoods. Given the ease of assembly of this product and as Michael Dell proved by beginning such an operation from his University Dormitory, such ‘screw driver’ guys enjoy a 25% share in the US market. Ghana although a much smaller market as compared to US but has a very high potential for a fast growth, especially the $1bn oil revenues coming to its citizenry will increase their purchasing power, hence we should facilitate to grow these next door assemblers in large numbers. For this we should remove impediments by ensuring easy availability of PC components and creating a strong distribution channel for the same. Availability of Microsoft software at reduced prices, availability of latest intel/AMD CPUs at reasonable prices, etc. needs to be taken up with Government’s assistance.

We should also look at alternative technologies of bringing affordable computing to masses by considering products such as the ones from NComputing which allow multiple users to share theimmense and unutilized power of today’s PC. When looking at laptop for each house hold or each child, we can have a look at the new up coming lesser priced application centric laptops or devices which come pre-loaded with specific applications such as student course materials (there by cutting down costs of expensive software on one hand and lower CPU power on the other). These application centric laptops also allow restricted controlled access to internet for student research work. One company based out of Mumbai India, DSK technologies has been praised in the global press for bringing out a similar product and we need to encourage growth of such companies in our region here.

How to bring down the cost of the highest value component of a PC, which is the CPU, the operating system, and other software applications, should be in our plan for bringing low cost PCs and laptops to the masses. Thank you.