White Box Rising.

No-name computer makers gain market share on Compaq, IBM and other major players.

IF YOU THINK GENERIC PERSONAL COMPUTER MAKERS are fighting over Latin American crumbs left by the industry's big brand names, think again. The so-called white box" firms are quickly becoming the region's technology establishment.

In fact, off-brand PC makers, which are most popular with small and medium-sized businesses, have watched their sales skyrocket in recent years. Generic computers now account for more than 55% of all desktop and laptop sales in Latin America, according to the Massachusetts-based International Data Corporation.

Born as sub-contractors to the major manufacturers, white box makers are gaining popularity in their own right thanks to improved products and support services, bargain basement prices that are typically 20% lower than brand names, and a cheap Third World labor pool.

"At the regional and national level, white box manufacturers are among the top sellers, usually in third or fourth place after Compaq, IBM and Hewlett Packard:' says Elias Obadia, Latin America business development manager for Novell, a Utah-based network software company.

Brazil and Mexico are the white box epicenters. In Brazil, 75% of all PCs have names such as Itautec, Microtec Vision, Procomp and Metron. In Mexico, Alaska, Lanix and BTC computers comprise 35% of total sales.

Mexico has also become the favorite destination for contract equipment manufacturers, according to California-based industry research group Dataquest. PCs and other electronic shipments have increased by 68% during the second quarter of 1999, more than any other nation in Latin America.

"They are attracted by cheaper labor costs, improved infrastructure, and proximity to original equipment manufacturers, " says John Tuck, publisher of the Massachusetts-based Manufacturing Market Insider, an industry newsletter.

Take the Boca Raton-based Computer Products and Services. Less than two years ago, it solely distributed computer components to Latin America. Now, it assembles them and white boxes account for about 16% of its US$27 million annual sales, and are expected to reach 60% within the next five years, according to Albert Bozoki, vice president of international sales and marketing.

"We have an agreement with a major company--I do not want to tell you which one--to send our product to Mexico, where the finished system is then distributed to Central and South America," says Bozoki.

In recent months, contract manufacturers of all stripes--not just computers but also telephones and other electronic equipment--have joined the party, gobbling up factories or expanding existing facilities in Mexico and Brazil. Consider:

* The Alabama-based SCI Systems, the leading U.S. white box maker, recently purchased two plants in Brazil and another in Mexico.

* The California-based Solectron Corp. acquired its first South America facility in Sao Paulo to complement its Guadalajara operation.

* The Canadian firm Celestica Inc. has purchased a Lucent Technologies plant in Mexico.

* The Florida-based Jabil Circuit Inc. has acquired a plant in Mexico and plans to open another in Brazil.

To confront the generic onslaught, brand names are slashing prices by as much as 20% and targeting white box companies' favorite clients: small businesses and individual consumers, says Dataquest analyst Luis Anavitarte. They are also initiating marketing campaigns to convince consumers that generic products are inferior.

Ironically, some brand names are fighting back by contracting white box makers to produce cheaper computers that then carry their name. For example, SCI Systems produces up to $1 billion of computers annually for Hewlett-Packard's European operation. Solectron Corp. has an $800 million deal with IBM to make motherboards for Big Blue's notebook PCs, which are then assembled in Mexico. And Novell is aggressively looking for "system partners" and has already signed nearly a dozen agreements with white box makers in recent months.

With a virtual price war underway, off-brands are cutting prices even further, increasing warranties and accepting thinner margins. In the long run, experts say, they are gambling on winning consumers by enduring smaller margins and offering the sort of hands-on technical support that only a small company can offer. Yet analyst Anavitarte says that's a dangerous strategy unless off brands dramatically improve customer service and product promotion and secure more contracts with brand names. "As brand vendors become more aggressive, the only way white box makers can maintain market share is to become more than just a white box builder," he says.

Typically, the scenario plays out in the following way in Latin America: retailers stock up with brand names before ordering cheaper white boxes; customers complain about generic brands having less quality and technical support; retailers return to ordering more brand names; white box makers cut prices and improve technical support and brand names respond by lowering prices.

In Brazil, the Sao Paulo-based white box maker Metron is trying to maintain market share after Compaq and IBM recently dropped their prices by about 10%. Metron, which sold $82 million in equipment in 1998, devised a strategy that may well become a survival blueprint for other regional white box makers, according to Clovis Ferreira Valerio, Metron's industry director.

* Double the number of contracts with brand-name companies within the next four years.

* Hire independent technicians throughout the nation to improve customer service.

* Hire more sales personnel to promote company products and answer consumer questions at large retail outlets.

* Convince industry titans such as Intel and Microsoft to share the advertising burden.

* Secure market share in one's own country before branching out to neighboring nations.

Ferreira Valerio also urges white box colleagues to help solve the expensive and time-consuming process of ordering parts and replacing defective or broken components from U.S. and Latin America distributors. He hopes distributors will follow the example of Western Digital, a California-based hard drive manufacturer, that will soon launch a Spanish- and Portuguese-language website to help customers order parts more efficiently and improve training for employees who handle such merchandise. "Broken products often result from poor handling by Latin American distributors, and not defective manufacturing," says Ron Pack, Western Digital's director of sales for Latin America.

In the meantime, most white box makers agree that they must find a way to counter a current brand name marketing offensive that portrays them as inferior companies selling sub-par products.

"Most of our customers are first-time buyers who are convinced that even though we are cheaper, we are just as good as IBM or Compaq," says Ferreira Valerio.