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In a very interesting move, Apple announced that they would invest in returning some production to the US. At first blush, this seems like a bold tactic  which will certainly improve Apple’s brand reputation in the wake of long-standing criticism for moving skilled manufacturing jobs to China, where worker pay and conditions are bad enough to drive some to suicide. And as the number one technology company in the world it is also heartening to see some jobs come back home, but there are a few caveats:

The Apple MacBook is the top of the line notebook with a premium price point, out of reach for most small businesses unless there is strong justification, such as for professional designers and developers who need to pay double that of a similarly equipped Wintel device to do their work effectively. That share of the market has always been small relative to Wintel machines, both desktop and notebook. Apple manufactured Macs in the US until the mid-nineties, after most competitors had moved production offshore. The caveats include 1) whether this experiment will grow to the more strategic iPhone and iPad product lines, and obviously, 2) whether Apple can turn a profit that makes the decision stick after the first $100M is spent.

Apple cites the inability to find the level of skills and manufacturing equipment in the US to be able to turn out production rapidly and with high quality. No doubt Foxxconn, Apple’s Chinese production partner, who already operates some plants in the US, will be looking to expand operations here. They had issues ramping up production to meet demand for the new iPhone and there were hiccups, followed by reports of Foxxconn negotiating multi-billion dollar deals in Brazil, to manufacture there. Regardless of how that materializes, today’s announcement will dampen some criticism that would accompany the final press releases from Sao Paolo.

Enter the Dragon

Another reason this makes sense to us is that China’s technology vendors are on the rise – no surprise there. But consider that within 7 years of buying the ThinkPad brand and manufacturing rights, Lenovo has become the #1 PC vendor in the world in unit shipments, (#1 by Gartner, #2 by IDC) squeezing 10% out of the global share in a stagnant market in the last few years alone while jumping to 30% share in China, 3X the nearest competitor.  It was also announced today by Reuters that Apple fell to #6 in the Chinese smartphone market, which is growing in leaps and bounds to 60M units per quarter, with intense domestic competition and Samsung leading the pack. Lenovo is number 2 in the smartphone market as well as having the overwhelming first place position in PCs mentioned earlier, #5 smartphone seller Huawei, is gobbling up global market share in the telecom equipment market at an alarming rate.

We have written several times about the rising competition from China in the hardware manufacturing end of the IT market, and of its’ growing importance as the second largest PC, and largest Smartphone market in the world, with a billion users and 60 million units sold per quarter. As shared with our readers in a September article about Internet adoption and managed economies, China and Korea have many similarities that make for a reasonable scenario of things to come. Take it from someone who lived 15 years in Asia and has been watching Korea for 30 – the voracious appetite for material wealth, pragmatic style of government and East Asian capitalism will leave no stone unturned. Take Samsung for example: between 1990 and now they have become the number one maker of TVs in the world, starting from scratch and displacing the Japanese faster than they displaced American manufacturers, #1 in memory chips and some other semiconductors, #1 in Smartphone handsets (almost double Apple in unit shipments), a global leadership position in screen technology, squeezing Sharp, Toshiba and others for the keys to the future standard, and a global frontrunner in CE and white goods. These guys are US Steel in their heyday. And they are a major supplier to Apple for the most important products. And the legal battles are not over yet, according to this CNET News video. They have Foxxconn on the left and Samsung on the right. With friends like these who needs enemies?



CNET on Samsung Apple Lawsuit.

Strategically Apple’s move is understandable, at least from the outside looking in. Steve Jobs’ genius for aesthetic design, usability and commitment to quality helped create the PC revolution, arguably the single most important technological advance aside from the Internet since the Industrial Revolution. It also got him ousted from Apple as decisions about long term architecture were made. Although Apple always had (and still has) a very loyal following in the computing arena, they did not gain more than 10-12% market share from 1980 to 2000. This meant that Apple had to drive enough margin to support R&D for operating systems, a proprietary microprocessor, end user applications and non-standard chassis and other components.  By contrast, the rest of the PC market leveraged standards and Scale Economies as investments were diffused in the market. The Microsoft standard OS and a maturing suite of interoperable applications were the lynchpin of the ecosystem and resulted in hundreds of companies joining the competitive fray. White box and private label manufacturers sprang up everywhere, eventually producing branded competitors like Dell and Compaq who were selling practically as fast as they could produce. By 1996 Apple was being counted out by many analysts as an also-ran. Eventually in 1997, Jobs was brought back in to save the company, which was considered a very risky personal move at the time.

In his second stint as CEO, Jobs turned Apple around and helped solve a problem that almost put the recording industry into insolvency; how to make money in the music business when new technologies allowed free files to be distributed at will and pirated on a global scale. Apple introduced iTunes in conjunction with EMI, and solved the Digital Rights Management issue. Under Jobs they had to kowtow to Redmond and adopt compatible MS Office Application Suites, which were not interoperable to that point – no swapping files between Apple and Microsoft users, and move to an Intel architecture. Despite several earlier failures, such as the Newton, Apple achieved a breakout hit with the iPod, and iTunes began printing money. Next came the iPhone, which almost immediately become the third largest handset brand in the market, followed by iPad in 2010, and several versions of iPhones. The products have produced a ravenous worldwide customer base and made Apple the most valuable (tech) company in history with a half-trillion dollar war chest.

The point is that Apple’s meteoric rise is more a function of the transition to CE and Smartphones than its’ leadership in computing and now they are in a bind; they are stretching their existing supply chain, they rely on advanced manufacturing resources and skilled labor that have been developed offshore, their largest potential market (China) is controlled by arch-rival Samsung, with whom they are in a nasty legal battle and depend on for key components. Prepare to Repel Boarders.

Next Chapter in the Bits vs. Atoms Saga

Apple’s success with iTunes came as a result of a property of the Internet that is now at the root of their problem: value moves at the speed of light when it can be digitized, and even when that value is in the form of an optimized supply chain, there are physical limits imposed by materials and the movement of products that ultimately make manufacturing a challenging business. On one hand you have companies like Apple, who source, manufacture, sell and distribute 125 million smartphones, along with millions of other devices. On the other hand there are companies like Google, whose value can be delivered over a network, relying on increasingly large server farms and unfettered access to electricity, but with much less need for operational infrastructure. Cisco and Oracle are another example although not as stark. Huawei is exerting substantial pressure on US firms as a global competitor and causing Congressional sabre rattling, as we noted here.  Telecom equipment has been a hardware-oriented business but is less at risk because of innovation toward software and network integration – moving toward bits and away from atoms, demonstrated by Cisco's recent alliance with Citrix. Earlier we discussed Lenovo, which has overtaken first Dell and now HP and is the global leader in PC unit shipments.

As noted, we think moving some manufacturing back to the US will bring some benefits, not least of which is the PR value of bringing some jobs back home. It is slightly diluted by the fact that production of the most important product lines will not be possible for some time to come and does not decrease reliance on Foxxconn or really help with the Samsung conundrum. However if the experiment succeeds and a profitable advanced manufacturing sector can be developed and others follow suit it will be a very good thing for all of us in the technology industry.

According to our latest forecast, which takes into account the first three quarters of 2012 research, the SMB Managed Services market will grow from $27B to $44B between 2012 and 2016, compounding at over 12%.  Remote management monitoring services will cross US$15B during the same time period. Key points of the update include:



The most attractive segments are shown in the chart and sorted based on opportunity (2016 value>$1B), and growth (arrows are relative), so the largest and fastest growing segments are shown. Rank based on revenue opportunity is listed in the left hand column.

13 of the 19 sub-segments are expected to reach over 1B$ in opportunity by 2016, with over half growing at double-digit rates,

The Remote Services segments are generally growing faster than onsite, with notable exceptions in India where the labor market and domestic bandwidth contribute to a viable onsite market, and China, where second and third tier markets are expected to adopt remote services more slowly than the combined remote/onsite increase.

While at 12%, the market is not growing quite as fast as in Cloud Computing, the robust increases will be a very good opportunity for SPs and MSPs in the market. The difference in fulfillment and delivery between cloud computing and managed services is thinning rapidly. Channel partners and managed services providers are quickly cross-migrating their skill sets to serve both technology areas. The path being chosen by Channels to move from one offering to the next is strongly dependent upon their current offering.  Those that are in the mobility space are moving to cloud, while those in the cloud are moving to managed services. The point being that understanding the channel dynamics and current offerings can provide  clues in the direction they will move. Similarly, within managed services, the channels are moving from one offering to another; vendors wanting to partner with Channels must identify the ideal cluster of services to take advantage of Channels outreach and capabilities.

Techaisle offers forecasts for all the above sub-segments by Region, Country, SMB company size and Channel flow share, customized to your needs. Please contact us if you would like more information on how this information can be combined with your internal market model to offer a clearer view of  opportunity and resource allocation to best increase market share share during 2013 and beyond.

Target Market Attack Strategy

Looking at the Mashable.com infographic on China’s Internet speed and other stats, we started noticing similarities between where China is now and Korea was 10 years ago. Growth of broadband Internet availability is already remarkable in China, but we only need to look across the Yellow Sea - a one-hour flight - to Korea to see the real potential.

According to an Organization for Economic Cooperation and Development (OECD) report published in July 2012, South Korea's high-speed Internet penetration rate topped 100 percent for the first time among the group's 34 nations, making it #1 in the world for broadband usage. Exceeding 100% is possible based on the connected devices per capita rather than each individual in the country having broadband access. For comparison purposes, the US is at 76%

After a 10 year break, I visited Korea in 2010 for a month-long project with one of the National Universities. In the decade between 2000 and 2010, the level of infrastructure build out and ubiquity of free broadband wireless access, even in the smaller cities, was incredible.

It shouldn’t have come as such a big surprise; Korea has been making deep investments in national communications for over thirty years, beginning with a strategic move in the mid-1980s that separated voice and data traffic, effectively taking data away from the government voice monopoly, Korea Telecom, and giving a data monopoly to a company called DACOM, with the charter to develop a national plan for data networks. The economy was regulated at the time and the political system still very authoritarian. National policies (successive five-year plans initiated by strongman Park Chung Hee) dominated decisions about investments, especially in areas of finance, technology and industrial infrastructure.

One of the strategic initiatives was the national development of Value-Added Networks (VANs) that the conglomerate companies – Samsung, Hyundai, Lucky-Goldstar (LG), etc. - could use to connect their manufacturing operations with suppliers using ISDN technology. This telecom foundation was critical to the contribution of these companies in building an economy that grew from $2.7B in 1962 to $230B in 1989. GDP passed $1.5T (PPP) in 2011.

This brings us back to the point. There are a lot of similarities between China and Korea that could help us understand the potential explosion of Internet adoption and application in the PRC. Among the most relevant are:

Rapid economic growth: Korea’s economy grew at a compounded rate of over 8% between 1962 and 1989, laying the groundwork for it to be the 12^th largest in the world today, despite a population of less than 50M. As seen in the Economist chart here, China’s GDP growth has grown at a rate above 10% since the early 1990s, and although it slowed significantly with the US downturn in 2008, it is still forecast to grow at an 8-9% rate through the end of next year, according to the IMF and major trading houses.

Infrastructure investment: Korea’s economy was managed through successive five-year plans that directed Bank of Korea investments deep into all areas of infrastructure and heavy industries, and these continue today, in a much more democratic - yet still pragmatic way, with huge projects to position the country as a commercial hub that can grow on the back of China’s emerging leadership role. In order to re-energize China’s economy the government poured over $630B into infrastructure projects in 2008/9. The second round, which seemed a little more cautious represented another $157B this year involving an additional 60 major projects. Even with this level of investment, there is a substantial IT gap that needs to be filled for SMBs to be able to automate effectively. Of the 3.7M SMBs in China, only 56% currently use PCs, while virtually all of Korea’s 3.2M SMBs have at least one PC and an internet connection.

Managed Economy: A large part of Korea’s success came from the ability to resist pressure to open up the economy and maintain a trade balance that spurred growth of a middle class, driven by domestic rivalry in the areas of steel, cars, consumer electronics, construction equipment, etc., followed by an explosion of exports in these areas. Korea’s strategic and geographic and political boundaries during the Cold War allowed them to resist this trade pressure. Situated between Japan, China and the Soviet Union, Korea’s security role superseded global corporate interests in agriculture, manufacturing and heavy industries allowing managed capital flow, political selection of winners, focus, hard work and sacrifice to build a robust economy from the ashes of the Korean Conflict. Also important was that the GDP per Capita only reached $5K in 1989, making it a little difficult to argue for changes that might have a destabilizing effect on the impressive string of results.

Now China has emerged as the new regional miracle and holds strong political, economic and military cards that will allow it to resist similar pressures and continue to exert control over its’ economy. While it remains very vulnerable to external forces such as financial volatility in Europe and the US, it has managed to control the areas of technology adoption and control of the mass (and individual) communications  For example Google’s only true global competition outside the US is Baidu; the leader in the PRC so far, and let’s not forget that Lenovo, the PC brand that IBM sold less than 10 years ago to its’ major Chinese ThinkPad OEM, is poised to overtake HP and Dell this year as the global leader in overall PC shipments, not just notebooks. Another relevant example is that Samsung was a strategic HP OEM for high-end workstations and low-end servers in the 1980s using PA-RISC architecture.  Intel won the war of the processors, making PA-RISC obsolete and Samsung became a global leader in memory chips and disk drives, which is now giving way to solid state memory, a fundamental component in the new generation of tablets PCs and other end-user devices. Oh yeah - Samsung is also a global leader in smartphones, shipping twice as many as Apple did last quarter; 50M vs. 26M. Oh yeah - they also supply Apple with a lot of important components. I would be scared too. But more to the point, Apple manufactures in China, just as IBM did with their flagship Notebook. Ironically, in the last few years Samsung emerged #1 in television shipments and has only been in that game since the late 1980s. This is not an argument for a managed economy - just some observations about long tail trends. My personal opinion is that Korea benefited from resisting pressure to open their economy too soon. I’ll let readers draw their own conclusions here.

Concentrated Population and Vertical Architecture: Korea’s Internet leadership benefited at least as much from the urban architecture as the government policies; maybe more. A small country with a rapidly-growing population and standard of living, Korea was transformed from a country of 1, 2 or 3 story cement block houses to a “Republic of Apartments” since the mid-1980s. In preparation for the 1988 Seoul Olympic Games, thousands of post-Korean War tenements and lower quality housing was razed and hundreds of 20-30 story modern apartment blocks took their place. The current apartment complexes have everything needed for comfortable living, including underground shopping centers and subway stops – almost like small cities. And typically they are modern and very well built - think New York - not $700 a month on the other side of the tracks. By concentrating 20M people into Seoul, the vast majority of whom live in these towering apartment blocks, the challenge of providing the last half-mile can be solved by bringing fiber to the curb and connecting hundreds of families at a time. Now consider that according McKinsey, China will have 221 cities with over a million inhabitants by 2025, adding more urban population than the total US population.

To accommodate this growth, the country needs floor building space equivalent to the land mass of Switzerland, or up to 50K 30-floor+ skyscrapers. If that is not enough to make the point, one of the megacities planned is supposed to combine 9 existing cities in the Pearl River delta into a single megalopolis of 40 million inhabitants, ringing Hong Kong with China’s largest manufacturing center. This optimism has been slightly dampened by the bursting of the property bubble that came with the anticipated growth of the area, lots of empty office space and apartments. Despite the local setbacks, analysts at Goldman Sachs expect a “soft landing”. Personally, I don’t think anyone can accurately predict where any economy will be in two years, but we use the tools we have.

There are other similarities such as national pride, a hungry population that is willing to sacrifice, work ethic and cultural bonds, but for the sake of brevity we don’t need to go into a lot of detail here.

The Elephant in the Room: Most people would agree the biggest single risk to China following Korea’s lead on Internet adoption is whether the government can hold the population down while they become increasingly affluent and aware of the personal freedoms and opportunities in other advanced economies. In Korea, the catalyst for the explosive growth between 1990 and 2007, when per capita GDP reached $20K from $5K, was the first peaceful transfer of power to a civilian government. All of the Internet adoption and high tech growth followed this major political reform, and would have been very unlikely without it.  As described in our post about Managed Services adoption in the PRC Mid-Market, there is very quick adoption of the best new technologies (as long as they do not pose too much risk to the powers that be).  China could take a much faster path to prosperity by relaxing the political control on personal freedoms - but speed is not the priority and the problem with making political predictions is that it is much too complicated to get right. But it only takes one person, a Gandhi, Gorbachev, Aquino, or in China's case Deng Xiaoping to make history jump instead of crawl. It is good to keep in mind that stranger things have happened; none of the experts predicted the fall of the Soviet Union in 1992 and nobody could have imagined Korea bailing out Russia – the patron of their arch rivals in North Korea.

As might be more evident in this post, I am a Korea watcher, not a China watcher. For an expert view on what is happening in China related to Internet adoption and social issues, this TED presentation by Michael Anti (aka Jing Zhao)  is a good place to start.

• A lot has changed in the last 10-15 years and channels feel that in next 4-6 years by 2013-2014, about 20% of Indian market is predicted as a MATURE MARKET. Ten years ago the awareness for IT was created, PC was becoming a necessity. In last 6 yrs market has really picked up.


• The India IT market is growing and are looking for big changes. Most of the partners for various MNC brands have recognized the changes and are moving from being mere VARs or System Integrators to solution providers, getting into more of services than selling boxes.


• A dealer who has been selling software for a long time is now thinking of giving the whole solution. In the hardware market the margins are thinning, so the question is - how to make money?


• Money comes from services so channels are moving towards better markets like the Managed Services, Infrastructure software implementation, maintaining the hardware as well as the software. This has already happened in the mature markets outside India.


• One may also witness partnerships here - two big partners merging or two small partners merging forming the equation of 1+1=11 and not 2. Consolidations of various services are happening and some channels are emerging as leaders in the market.


• Business models are also heading towards a big change. The today’s scenario allows any partner to be ‘single vendor dedicated’. As an example if one is HP partner he is still selling & setting up solutions for Cisco/ IBM/ Mac. Channels opine they have to position themselves as multi brand and multi solution provider. Whatever the demand they should be able to supply it.


• The customer is negotiating or dealing with one single partner rather than trying multi service providers. This is one big change that has happened among channels keeping in view the changing perspective of the customers. These changes will help India emerge as a mature market.

• It is a very disorganized segment.


• The IT maturity level is very low.


• A lot of patience is required while dealing with this segment.


• The volume business has always been a key concern.


• The principles / vendors only interested in managing bigger accounts as more money/ revenue and less effort involved.

• Instead of choosing many partners, vendors should focus on the selection of partners.


• The partners who are capable should only qualify the selection.


• They should then be trained and most importantly be supported by the vendor to grow and become a bigger partner of that small town or city.


•  The corporate clients of a smaller city always lack confidence in the local partners and their capabilities and deliverables. Therefore, a partner from a nearby big city may not be working efficiently but is always looked upon with confidence because of it partnerships & technological capabilities.


• If the vendors succeed in doing the same with the channels of smaller cities, this will surely be an advantage to ALL.


• The small city partners have the best of contacts to explore more business. The only challenge they face is the Bandwidth and proper guidance. The Channel partners feel that the vendor should fully support them.

• There is and is not awareness about the new technologies among the channels. For example many partners may have only heard about Cloud Computing.


• Channels feel that the vendors themselves should come forward to promote the new / emerging technologies among their partners as well the users.


• There is always a demand for the new technologies and the channels are gearing up themselves for this.


• Channels also feel that today’s customer is obviously more knowledgeable. To cope up with the knowledgeable customers channels have to upgrade their skills and knowledge base. And that is the key to a partner’s growth.


•  All the big organizations the ITES/ IT companies and large corporate have their own in-house resources. They have a fully fledged IT department which takes care of all their IT needs.


•  Here, the channels only work as suppliers for the hardware and software.