Margaret Thatcher once said, “You and I come by road or rail, but economists travel on infrastructure.” The former British prime minister was speaking about transport at the time, but the same idea can be applied to almost any industry; especially technology and electronics.

Today infrastructure is viewed as the main catalyst for growth in developing economies. “They are still growing because it’s all about infrastructure build-up,” said Robert Chu, vice president of Asia Pacific at Hitachi, told Reuters when asked about the reasons emerging markets like the Middle East are still seeing rapid growth. The same applies to the consumer electronics industry where the development of technological infrastructure is fueling growth in the industry. Throughout the MENA region, depending on which nation you are dealing with, national infrastructure is having either a beneficial or an adverse effect on consumer electronics products, as well as consumer behavior. Moreover, demarcation lines defining what products and services are feasible are beginning to take shape across the region.

Oil rich nations eager to encourage investment are pouring money into their infrastructure. For example, due to its continuing investment in technological infrastructure, the UAE was recently ranked as the region’s most ‘e-ready’ nation, according to the World Economic Forum. Services that require technological infrastructure, such as GPS, have been embraced by mainstream consumers throughout the GCC as price levels become more affordable in unison with infrastructure initiatives.

“You need an appreciation for the technology in terms of an educated market that is willing to pay for those [advanced] features,” said Agop Kassabian, executive director of sales & marketing at Toshiba’s exclusive distributor in Lebanon, “and you [also] need other players that complement that have the available technology for the consumer to make use of these products.”

Despite the rosy outlook for the GCC, not all the Middle East is taking advantage of the fruits of infrastructure. Many countries in the region, such as Lebanon, are suffering from limited buying power amongst their citizens as well as lack of basic services, both of which greatly hinder sales and investment in the consumer electronics industry. “Today in Lebanon we still lack some of the basic means of life — we don’t have power — first we need the basics in order to work on something else,” said Cesar Chalhoub, vice president of ITG Holdings.

In Lebanon, political wrangling and a lack of vision have crippled infrastructure and slowed the pace of progress to a crawl. “There is no futuristic vision … it’s a mentality issue,” explained George Khoury, CEO of Khoury Home. “In terms of the political aspect, if a futuristic idea is proposed, because you are from a certain [political] party, other parties will block your initiative purely for political reasons so as not to give you the credit for implementing such an idea.”

Infrastructure issues are also effect on the cost of finished goods as consumers are having to invest more in order to protect their products from damages. “If you buy a TV set for $1,500 you have to pay an additional $300 for a UPS or a stabilizer to protect it,” Khoury said. Distributors are also feeling the infrastructure crunch in Lebanon. “We have to apply a standard warranty on products by default,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “and if we find that it is an electrical problem that caused this TV to crash, we are repairing the problem ourselves, even though it is not covered by the standard warranty.”

On the other hand, the same consumer behavior that is being adversely affected by the lack of infrastructure is also making up for infrastructure shortcomings. “You have to overcome these infrastructure issues until the government installs the appropriate infrastructure,” Khoury explained. “But people will not stop buying products because of infrastructure constraints. People will purchase products and wait till the infrastructure is available.”

Show me the way

The future of the consumer electronics lies in integration as consumers  demand more and more flexibility and compatibility between products. “Everything is becoming digitalized which allows more flexibility in terms of sending and receiving data,” stated Chalhoub. “Also being able to convert data into different types of media and to transfer and communicate these elements […] integrating and automating everything, whether remotely, wired, or wirelessly is a major technological concern for the consumer.”

This trend is also occurring on the product level as consumer behavior is becoming increasingly dictated by integration capabilities. “The product itself is becoming an integrated product that is compatible across the consumer electronics spectrum,” said Chahwan. “These features push consumers to demand more, so instead of being satisfied by one item they have to have the complete the set.”

This idea resonates with what many of the major consumer electronics manufacturers are promoting as their ‘next big thing’. The answer in terms of products is wireless boxes that communicate with several devices in the home or office to provide consumers with a truly integrated environment. “You already have wireless speakers and wireless communication between notebooks and printers,” said Selim Antaki, CEO of LG’s distribution agency in Lebanon. “Next year, you will have wireless communication between your DVD player, home theater system, and your flat-screen television.” With the recent growth in the consumer electronics industry, the focus of integration seems to be centered on the flat-screen TV and in particular the LCD. “The LCD will be the main unit when it comes to the CE industry carrying all other CE products and peripherals,” stated Karl Zalum, commercial manager of Philips’s exclusive agent in Lebanon. “This will create a centralized technological environment around the LCD that will encompass everything from your mobile phone, to your laptop, to the Internet,” he said.

Other technologies on the horizon such as Blu-ray DVD players and High Definition Television (HDTV) have yet to penetrate regional markets due to high retail prices and infrastructure constraints. Blu-ray initially won the battle against Toshiba’s HDDVD format, which the Japanese company abandoned due to accurate forecasting in relation to limited adoption levels associated with high definition DVD technology.

“The battle was not fought for very long because the market demand for such a product was not that great,” Kassabian explained, “so it wasn’t worth the investment, and the proof is that we don’t see Blu-ray catching on like wild fire.” Blu-ray DVD players are still seen by most as too expensive for mass adoption. “It will take over as soon as it is more affordable and well positioned to reach everyone,” said Chalhoub. Antaki added that “for a Blu-ray, you pay more than 10 times what you pay for a conventional DVD player.”

Regional piracy also plays a role in the adoption of Blu-ray technology. “Blu-rays biggest issue is piracy,” Antaki stated. “People can buy cheap video CDs and DVDs; if they want to use Blu-ray they have to pay fifteen-fold what they are paying locally.”

HDTV has taken off in Europe and North America, though infrastructure constraints and the inavailability of complementary products essential to high definition broadcasting are stunting the growth of this technology in the region.

“There are no high definition receivers on the market,” Kassabian said, “and even if you do have a high definition receiver you need an HDMI (High-Definition Multimedia Interface) cable and a high definition subscription that doesn’t exist.” The main reason behind the unavailability of high definition signals is that most broadcasters do not yet see enough potential revenue in terms of advertising and subscriptions if this service is offered to consumers in the region.

“It is difficult to put a time frame on exactly when we will begin, because it needs to make good business sense,” said Azhar Malik, the vice president of marketing and public relations at Showtime Arabia, to The National. “The decision to begin will be dictated by customer needs and their willingness to adopt and pay for the technology […] We are not at that stage today.”

Moreover, some countries in the region still rely mainly on analogue signals and rather than digital transmission. However, technology products such as FPTVs are beginning to promote the idea of digital transmission in order for customers to make the most out of their products. “LCDs and Plasma television adoption has affected the quality issue,” Antaki observed. “So it is driving people to demand a better [quality] signal.”

Keeping this in mind: many of the industry players believe that the pressure from products and consumers will eventually lead to high definition signals becoming available to the wider market. “It’s just a matter of time until high definition signals are picked up [in the region],” Kassabian said, “and once the consumer sees the picture quality of high definition they will get hooked.”

The service sector of the consumer electronics industry is playing an ever more substantial role, not only in revenues, but more importantly in brand differentiation and after-sales service. It is proving to be the determining factor between lower and middle/high range products and is affecting localization strategies in order to ensure customer loyalty. “Locally, the customer is going back to his local partner. He is becoming more selective in terms of his local partner from whom he is buying, in order to ensure the peace of mind that comes with after sales service,” stated Cesar Chalhoub, vice president of ITG Holdings. “When you buy a new item, whatever it is the major concern is what if something happens to this, where one can go to take care of the problem,” Chalhoub explained.

The success of brand names, with regards to the service sector, is viewed as another reason that third tier consumer electronics brands did not persevere in the market. “They [third tier brands] proved that they are not really reliable and they are not delivering what the name brands are delivering,” Chalhoub remarked. “Their distribution network in itself was not built on a long term vision and this is why they couldn’t provide adequate services.” Added Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “They couldn’t follow the big brands in terms of adapting their products to the pace of technology.”

Globalization and information exchange has also positively affected the service sector. As information about local markets becomes more readily available, strategic investment strategies are becoming increasingly centered on local partners and the service matrix that they can provide. “Today we are sitting at a table to discuss the matrix of service, in terms of what my role is [as a local partner] in order to get his product to the market and how much it costs [the manufacturer],” Chalhoub said.

The nature of service being provided is undergoing a transformation. Sales representatives in the consumer electronics industry are beginning to play more of a technical and analytical role in the sales process as products become more technically advanced and product differentiation becomes less evident. “You have to train your people to ask and answer the right questions and this is applied across the board,” explained George Khoury, CEO of Khoury Home. This factor is also adding to the super-store phenomena sweeping the region as smaller, more traditional consumer electronics outlets are less capable of offering these kinds of services. “The market is not growing at the same rate that we are. It is growing at a maximum of ten to fifteen percent, so this is where the difference is. Even [the] medium sized shops will disappear in the long-run,” Khoury said.

It is not all peaches and cream for the service sector, however. Exemplary service requires a great deal of investment in infrastructure as well as human resources. “The service sector is important for local added value partners such as ourselves, or in any market [where] you are dealing with local business houses; the service sector employs over 50% of our total human resources,” Chalhoub pointed out.

In the end, it’s about the people

Like any sector, human resources are intrinsic to the operations and upkeep of the consumer electronics industry — from the service sector to the showroom. The Middle East in particular has undergone several interconnected phenomena relating to the movement of labor in the region which has affected human resource costs and availability.

The economic boom in the GCC has shifted labor away from non-oil rich countries in the region to the GCC and resulted in a brain drain from countries like Lebanon. On the other hand, growth in the GCC is so substantial that many of the markets staffing needs go unanswered. “There is a shortage at all levels, in the Gulf and in Lebanon,” explained Selim Antaki, CEO of LG’s distribution agency in Lebanon. “We get a lot of inquires from LG distributors in the Middle East; they ask me if we have an excess of technicians or salespeople.” However, Chalhoub noted “The limitation of skills [and] human resources is becoming a problem when it relates to moving and supporting infrastructure elements like servicing, management, and sales.”

The economic prosperity that is recently being enjoyed by countries across Asia, and specifically in the Indian subcontinent, is adding to staffing woes across the GCC, which has come to rely on people from these regions to staff their industries. “For instance in the Emirates, 75% of the population comes from the Indian subcontinent and this relates to other countries in the region as well,” said Chalhoub. The consumer electronics industry in the GCC relies heavily on people from these regions for its service sector. “People from the Indian subcontinent in our industry are on the technical side [of the industry],” explained Antaki. “You don’t see them as sales staff and in showrooms; you see them at the supply level, at the distributor level.” Many of the staff employed in the consumer electronics industry are moving back to their home countries in order to take advantage of the subcontinent’s recent economic success. “India is seeing strong prosperity so I think you will start to see skills moving back to India even though people may have to compromise some income. If we face the lack of such skills then we will see a struggle to fill it in the consumer electronics market,” Chalhoub said.

This is good news for people looking to leave countries like Lebanon where unemployment and low wages have resulted in a mass exodus of brain power to places like the GCC. “There is a difficulty in finding skilled workers in Lebanon,” stated Cherfan, “and if you find any you will pay double or triple what you used to pay because most of the skilled elements in our human resources have been moving to the Gulf because of political instability and because they are getting much better packages.”

Thus the staffing void created by the flight of traditional labor elements in the GCC is being filled by people from the non-oil rich nations of the region. “The void needs to be filled and it is being filled from Lebanon, Jordan and Syria who will be supplying these skills,” said Chalhoub. This shortage and re-filling of labor from within the region is increasing wage levels in the consumer electronics industry and making the industry a profitable one in which to work. “Wages are going up. Recently the talk of the town is about increasing the minimum wage and [a mandatory] increase in wages [in Lebanon]. This all seems a bit silly in our industry since we are well above that in the first place,” Antaki said.

Without a constant supply of skilled labor, organizations are shying away from recruiting highly qualified and costly human resources and are instead focusing on the promotion and training of new and existing staff. “If we go to hiring agencies to acquire highly qualified technical staff, we won’t get them because the market is suffering from the low availability and high demand for such staff,” explained Robert Chahwan, general manager of Khoury Home. “Instead we are focusing on hiring and promoting of our new and existing staff through technical and practical training programs aimed at bringing them to the desired [technical] level.”

This trend is taking hold of the industry as companies have little choice but to nurture talent as the labor shortage becomes ever more prevalent. “We are taking people in lower positions and sending them to our regional or international offices to receive proprietary training in order for them to be efficient in our in-house business practices,” Cherfan stated. Yet training alone does not solve the human resources conundrum. As staff become more qualified they also become more desirable, especially when they are located in low income areas such as Lebanon, and eventually staff retention becomes an issue.

According to Khoury, “Unfortunately, sometimes when you expend a great deal of effort on certain personnel to promote them, you risk them getting snatched up by the wider region in general who look for market leaders to recruit staff.”

Oil. It’s one word with three letters and a mountain of consequences to go along with it; the consumer electronics industry is by no means immune to its effects. Energy management has recently been pushed into the limelight of consumer electronics industry because of increased costs associated with energy. “The major concern now is energy, the management of this energy, the consumption of this energy, and the longevity of this energy,” Cesar Chalhoub, vice president of ITG Holdings, remarked.

In an industry such as consumer electronics the cost of energy permeates throughout all business processes, affecting everything from raw materials to retail prices. This is having a detrimental effect on the bottom line, especially at a time when margins are already being slashed because of price erosion. Accordingly, major consumer electronics manufacturers are finding ways to distribute these costs across the operating spectrum instead of transferring the bulk of this burden to the consumer. “The [increased] cost of oil and the cost and of production will be absorbed on many levels; by the manufacturer, by operating costs of getting these products to the market, and in the end the consumer who will be affected, albeit indirectly,” Chalhoub said.

Transportation and logistics costs are also directly proportional to the cost of oil. Since the increase in oil prices, many consumer electronics manufacturers are adapting their localization strategies in order to transfer the costs of logistics and transportation to local partners. “If oil prices continue to be high then transport and logistics [costs] will be a major reason to reallocate manufacturing in domestic markets in order to reduce such major costs,” Chalhoub pointed out. Retailers are also feeling the oil crunch when it comes time to pay the bills. “Oil is affecting freight prices and affecting our expenses in terms of delivery and general fuel consumption,” said George Khoury, CEO of Khoury Home. “Our energy bill is now multiplied by two or three times what it used to be comparing 2008 to 2007.”

There is, however, some light at the end of the consumer electronics tunnel. As price erosion increases demand levels across the board, a balance is being struck between revenue and energy expenditure. “The pace of technological advance is lowering prices and this is creating some sort of balance in terms of retail prices,” Khoury admitted. Referring to increased energy costs, he concluded, “If we look at it in terms of a consumer basket globally there is a balance overall.”

Making it Right

Increased costs associated with oil prices is mainly at the manufacturing level, starting with procurement costs of raw materials. “Raw materials prices have been increasing and this is having an [adverse] effect on manufacturing,” stated Karl Zalum, commercial manager of Philips’ exclusive agent in Lebanon. More specifically, the pace of recent product cycles are adding to the burden of this increase in manufacturing costs as consumers want the latest products faster than ever and with less regard to actual product durability. “Cellular phones, flat-panel TVs, and computers are still operational when the consumer decides that they want to change these products,” said Khour, “because new technology exists and it is playing the biggest role in this paradigm. In the past you would change your television set because it stopped functioning. It’s not about life-cycles anymore.” 

This faster product cycle is having a reverberating effect on both the manufacturers and consumers as products appear and are absorbed by the market like never before. “What the industry is noticing in general is that the change from one [driving] technology to the next used to take around 10 or 15 years to happen, but now change is happening much faster,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon. The speed of technological advancement is also forcing distributors in the region to take on the costs of price erosion during supply cycles. “There are about six or seven weeks from the time we buy our orders from the factories until they arrive in our warehouse,” Cherfan explained. “During that period we sometimes have to absorb the change in cost of certain products in order to stay competitive in the market.”

In order to deal with the near break-neck speed of product cycles brought about by the pace of technological development, as well as maintain reasonable costs of manufacturing at such rates, major brands are implementing more flexible manufacturing models and moving away from vertical manufacturing models and the associated in-house expenditure and infrastructure.

Asian nations are providing a much needed respite from recent increased manufacturing costs in the consumer electronics industry. Major manufactures have relocated core manufacturing to countries like China and Indonesia to take advantage of lower labor costs and are maintaining supremacy over value brands through quality control. “It is the same old players who are now operating factories in China, Indonesia, Thailand, Malaysia, and India,” said Antaki. Chalhoub added, “Outsourcers are reliable enough also because quality control is always monitored by the brands themselves and this helps to reposition prices to reach optimum levels.”

According to market research firm In-Stat, Asia’s contract electronics manufacturing (CEM) market will grow from $121.5 billion in 2006 to $281.8 billion in 2011. The region will capture 55.1% of the global electronics manufacturing services (EMS) market in 2011, up from 45% in 2006, and China is forecast to account for about 76% of the Asian EMS/ODM (original design manufacturing) markets by 2011, driven by growth from the consumer electronics and communications segments. Additionally, emerging manufacturing hubs like India, Indonesia, Thailand, Singapore, and Malaysia will emerge as leading players in global CEM. According to the World Bank’s World Development Indicators online database, in June 2007 East and Southeast Asia account for more than 40% of the world’s combined GDP for exports of manufactured products. Market analyst iSuppli forecasts the Southeast Asian contract manufacturing market will rise to $24.9 billion by 2011, an increase of about $9 billion from $16.2 billion in 2006. By 2011, Southeast Asia is expected to account for 7% of global electronics contract manufacturing revenue, up from 6.3% in 2006.

Consumer electronics manufacturers are also moving into local markets not only to decrease the costs of transportation and logistics, but also in order to take advantage of local tastes and buying habits. “Localization of manufacturing gives you great advantage and also a focus on local tastes. For instance, in Saudi Arabia they like shiny products. If you go to Europe the style is more or less black and dark colored products,” stated Antaki.

Make it lean and make it green

Green initiatives have taken the forefront recently in Europe and North America as populations in developed countries are taking the ‘green factor’ into consideration when deciding on which products to purchase. This trend is also beginning to take hold in the Middle East as countries across the region become more environmentally conscious and responsible. Regional governments are beginning to invest heavily in alternative energy sources in order to diversify their energy portfolio. Earlier this year the UAE announced that it would make an initial investment of $15 billion in projects targeting solar, wind and hydrogen power, carbon reduction and management, sustainable development, education, manufacturing, and research and development.

This phenomenon can also be observed in the consumer electronics industry as manufacturers implement energy efficient practices. Initiatives such as using recycled plastic, decreased packaging, greener factories, dimming screens, and reducing CO2 emissions as well as e-waste have become mainstream practice across the board. However, regionally, at least for the time being, consumer behavior is not being influenced by these manufacturing practices. “The manufactures are working on such issues because they don’t only sell in the region,” Antaki said. “[But] our consumers in the area don’t care,” he added. Nevertheless, environmental awareness is increasing in the region and may soon have an impact on consumer behavior. “I think this explosion of information access will enhance the awareness of the population whether in Lebanon or in Africa,” said Chalhoub. “Thus, definitely the consumer here will feel more comfortable when finding a green packaged product and it will start to effect their buying habits strongly as it has in the US and Europe.” 

Ultimately, however, the major consumer electronics producers seem to be producing goods with green processes regardless of local attitudes. As Cherfan pointed out, “At the end of the day when the developed areas of the world adopt these technologies we will adopt them whether we like it or not.”

The television set has long been the main conditional indicator of the consumer electronics sector, around which industry analysts and brand names make strategic decisions and forecast the future health of the industry. In recent years, the television industry in itself has seen a transformation from older Cathode Ray Tube (CRT) models to Flat Panel Television (FPTV) models that have become increasingly affordable to the mainstream consumer and steering the consumer electronics boom. “It’s the driving force behind the consumer [electronics] boom,” explained Karl Zalum, commercial manager of Philips’ exclusive agent in Lebanon, in reference to the consumer transition from CRT to FPTVs. 

Indeed, CRT models are being relegated to the history books. “It’s already over for these technologies, especially CRT TVs. The CRT factories have already shut down,” Zalum remarked. Recent figures released by DisplaySearch show that globally CRT TVs make up only 43% of TV shipments in 2008 which is far removed from the 77% market share enjoyed by CRTs in the first quarter of 2006. Most of the market share associated in CRT production has been siphoned off to third-tier manufactures that target lower-end consumers, “This sector has been left to ‘Mickey Mouse’ manufacturers in China and India where the market still exists for these products,” Zalum said.

A similar pattern is developing in the Middle East and Africa (MEA), although the CRT shipment volumes still outnumber Liquid Crystal Display (LCD) and Plasma Display Panel (PDP) TVs combined. According to DisplaySearch, shipments of CRT TVs in the MEA remain high, chalking up 71%of total TV shipments to the region. That being said, the trend is starting to take off in the Middle East. “We are selling more LCD TVs than we are selling conventional [CRT] TVs at LG. We didn’t expect that to happen so fast,” observed Selim Antaki, CEO of LG’s distribution agency in Lebanon. Year-to-year growth of Q1 TV shipments in the MEA region paints a clearer picture, with LCDs leading the field increasing by 153% followed by PDPs (104%) and CRTs (20%).

LCDs take the cake

As the TV industry became flatter, two competing technologies squared off to take over from CRT TV sets. Going back to early 2006, PDPs where the cheapest production option and the most readily available on the global market. However, in just a few short months, major consumer electronics brands began to produce LCD TVs en masse, and overran the market with LCD screens. The resulting price competition and availability of LCDs lowered production costs of LCD screens and sank the PDP market, as LCDs took over most of the FPTV market share. “In any business, the business itself usually revolves around one product […] today it’s the LCD,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon. “The LCD is the cornerstone of any electronics distributor in this market.”

Global figures for LCD shipment rates show a year-to-year growth of 47% and hold a market share of 49.8%, compared to a 7.1% share allocated to PDP TVs, according to DisplaySearch. However, other more industry-specific factors are also being pointed to in order to explain the LCD boom. “One of the first reasons [that LCD took over] is that people associate Sony with higher quality. So [when] Sony began to produce only LCDs, they advertised that LCDs are better than Plasmas,” Antaki said. “Some other manufactures like LG and Samsung have the manufacturing capabilities for both LCDs and Plasmas. They didn’t consider advertising that Plasmas even have some advantages over LCDs.” The trend also applies to consumers’ pre-conceived notions of the advantages of LCD screens over PDPs. “Consumers have been brainwashed to believe that LCD is so much better [than PDP]” Cherfan said, cautioning, however, that “at the end of the day this is really still debatable because it is a different technology and no one can say that one is better than the other.”

Accordingly, the major consumer electronics manufactures either suffered or benefited greatly from the FPTV manufacturing paths they chose as it became evident that there was no going back, “When the issue was which way to go, LCD or Plasma, the big names like Sony, Samsung, LG, Panasonic, and Philips sat around the table to decide which strategy to take,” explains George Khoury, CEO of Khoury Home. “This was a big issue two years ago that made it extremely hard to change course; they [the big suppliers] have chosen their direction and they have to stick to it.”

The third factor attributed to LCDs takeover had to do with sales. “In the showroom, where the purchase is made, you have florescent lighting or you make your purchase in full daylight, [and] LCD looks better than plasma.” Antaki explains. “The sales staff in a showroom doesn’t care about whether you buy an LCD or a Plasma [TV]; they care about their commission. So the customer looks at the TVs and LCD looks better so they make a choice,” Antaki explained.

The final and most pertinent factor was related to size. “The masses will buy smaller sizes and that is the major issue that is [adversely] affecting the sales of Plasma,” Khoury pointed out. Moreover, households with more than one television set were more likely to purchase LCDs due to the smaller size options that were available, “If you have five rooms at home, you won’t install a 42 inch Plasma in each room; you want small sizes,” Khoury said. “You will buy one big size and the others will be LCDs. So you have to decide on the big screen, but for the others you don’t have a choice.”

With all the talk of a LCD revolution it is easy to get caught up in the hype. Many of the major consumer electronics brands did just that last year, when growth forecasts became too optimistic after an initial mass adoption of LCD TVs. The result was an oversupply of LCD screens to the global and regional market. “It’s not only the Middle East that is experiencing an oversupply. The source of this phenomenon is the factories. Growth speculation for a period of about two or three years caused the building of new factories or an expansion of old factories in order to increase supply,” Zalum stated. “However, the market has changed and is not growing as much globally as [previously] predicted and this is resulting in an oversupply. When this happened prices began to drop. On the other hand, two or three years ago we did not have enough supply specifically in Plasma and LCD screens; we would receive around 15% of the quantities that we ordered,” he said.

The oversupply of LCD TVs to the market instantly caused massive price erosion as lack of product differentiation forced retailers to make prices more competitive. The initial blitz to take advantage of profit margins encouraged other brands to emerge and force prices down even lower. “We saw non-traditional dealers in the market such as hyper-markets that are transforming the market into a ‘price busting market’ that creates more demand,” Zalum declared. However, this increased demand could not keep up with the price cuts that where continually eating up margins. “Production was faster than demand,” Antaki explained, “and prices went down in 2007. In 2008 some of the manufactures went out of business as they were not able to follow the price cuts.” 

Many second and third-tier manufacturers of LCD and PDP TVs could not keep up with price cuts due to increased costs associated with panel manufacturing that was not a part of their core business processes. “To be successful in this field, you have to be a panel manufacturer, and you don’t have a lot of these. So a lot of electronics manufactures who didn’t have panel [manufacturing] facilities where buying panels from other manufactures; thus they tried to enter the business and they failed,” Antaki said.

In the end, however, the consumers came back to the major brands. “The market is coming back to the brand, we had been experiencing consumers moving into non-branding products or non-genuine products but now the consumer is coming back to those that are more reliable and more trouble free as per branding and supplies,” explained Chalhoub. Prices have stabilized as distributors and retailers enjoy sustained and medium growth, “because of less competition,” according to Antaki.

Today LCD TVs are selling at affordable and stable prices as well as being available in a variety of sizes and transmission frequencies. Even with an expected 9% year-on-year decline on average prices, there is also ample room to grow in developing economies as LCDs only account for 28% of market share in developing countries as opposed to developed regions like North America, Japan, and Western Europe that already have very high levels of LCD TV share at 80%, 85% and 87% respectively. In terms of the bottom line, major players are seeing growth rates materialize as a result of sheer volume, which has helped to compensate for the decrease in profit margins. “So far the bottom line is increasing because volume is increasing,” said Cherfan, “Of course, volume on margin models has been decreasing.”

Plasmas making a comeback

PDP TVs are on the rise again after being dormant for more than two years — mostly due to new size and resolution categories offered by PDPs. These include the 32 inch model introduced by the US value brand Vizio and Panasonic’s new 46 inch 1080p version — both of which did not exist in the previous year. PDP shipments also grew more year-on-year and over the second quarter of 2008 globally than LCDs (47% Y2Y, 12% Q2Q), registering growth rates of 52% and 22% respectively. With this newfound vigor in PDP growth is mainly being attributed to continuing PDP panel price reductions and the dominance of LCDs forcing PDPs to sell at lower prices. “At the same prices, the customer will opt for an LCD [TV] so plasma manufacturers have to sell slightly cheaper,” Antaki said. This is supported by the latest figures coming out of DisplaySearch, which show the gap between models such as 50 inch HD PDP panels versus 52 inch 1080p LCD TV panels falling from US$620 in Q1’08 to US$480 in Q3’08 and thus decreasing prices of PDPs in relation to LCD screens globally. The result of PDPs being resurrected can only be good for consumers as prices will undoubtedly fall due to competition, as brands increase their panel manufacturing in either LCD or PDP television sets to accommodate for new models.

On December of 1947, a team of engineers at Bell Laboratories in Murray Hill, New Jersey, developed the first functional transistor and spawned the birth of the modern electronics industry as we know it. Today the global consumer electronics industry is valued at over $630 billion and plays at essential role in how we live, play, and work. Over the past couple of years the sector has experienced a resurgence that has resulted in an ever more integrated technological environment where office, mobile, and home technologies are meshing together like never before. As new technologies and increased adoption rates are having a galvanizing effect on consumer electronics sales and investments throughout the region, executives are relying more and more on consumer electronics to play an intrinsic role in everyday life.

Despite a global economic downturn, coupled with perpetually increasing inflation, global sales of consumer electronics will grow nearly 10% in 2008 and hit the $700 billion mark by 2009, according to recent studies conducted by the Consumer Electronics Association (CEA). In particular, the growth in the consumer electronics industry is being fueled by developing economies, and the emergence of large middle classes in those countries who bring with them a newly acquired buying power that has become essential to the growth of the industry.

The forecast for many of the developed economies, however, is not so bright. With growth in consumer electronics leveling out due to mass adoption rates of products such as digital cameras, MP3 players, digital television sets, as well as the effects of a global economic downturn, developed economies such as the United States have been hit the hardest. Nevertheless, consumer electronics sales in the US are doing better than expected with the CEA having to adjust its 2008 expected growth calculations, based on shipping revenues, by $2 billion to $173 billion equaling a growth rate of 7.3% (up from 6.4%). Figures in Western Europe are even lower as the CEA reports a mere 2.3% growth rate for all of 2008.

While higher than expected at the outset of the year, analysts are still hailing the end of the so called “super-cycle” that saw a compound annual growth rate (CAGR) of around 10.7% in the United States from 2002 to 2006, according to the CEA. Some market watchers such as NPD, a leading US retail market research firm, are even predicting growth rates as low as 1-3% for the last quarter of 2008 and all of 2009.

While growth in developed economies is stagnating, the driving force behind consumer electronics growth stems mainly from the BRIC (Brazil, Russia, India, China) economies and the Middle East. The Asian continent is leading this growth as revenues are expected to grow by 16.5% over 2008, according to the CEA. Most of this growth is rooted in India and China who are spurring on the global consumer electronics super-cycle because of their large populations that facilitate consumer electronics product sales across market clusters. “There is definitely a global ‘super-cycle’ that is being driven by Chinese and Indian markets in terms of infrastructure and growth. This cycle started in 2000 and is still going on today,” said Cesar Chalhoub, vice president of ITG Holdings. Furthermore, this foundation for continuing global growth is regarded as sustainable in light of the massive populations of both China and India. “[The] middle classes are emerging in these societies that where traditionally made up of lower income populations,” according to Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “and you have a population of 2 billion or so between India and China, so definitely we will see a lot of growth in those areas and this will continue in the future.”

The Middle East, and in particular the GCC, is enjoying the benefits of the global super-cycle as the consumer electronics industry is

expecting exceptional growth throughout the region in the coming years. As part of her keynote address at the International CES conference in Dubai this year, UAE Minister of Foreign Trade Sheikha Lubna Al Qasimi stated, “The Gulf’s consumer electronics industry is predicted to achieve a 30% growth in 2008.” This trend is also occurring in the wider region. As George Khoury, CEO of Khoury Home, Lebanon’s largest consumer electronics retailer, pointed out, “We are growing at an average of 50% yearly.” The majority of this growth is being attributed to a number of products that are fueling the global consumer electronics market like notebooks which have grown by 87% in the second quarter alone according to the International Data Corporation (IDC). However, the main impetus for growth in the region is the exponential adoption of flat-screen television sets. “We have seen a 100% growth in sales of both LCD and Plasma screens in 2008,” said Selim Antaki, CEO of LG’s distribution agency in Lebanon. 

Investment is also playing a major role in consumer electronics growth as many global players are investing heavily in the region expecting to see large returns over extended periods of time. For instance, Sharp is expecting to increase its annual turnover in the Middle East increase from $200 million today to $500 million by 2011, according Sharp’s Middle East’s Managing Director Tomio Isogai in an interview with Emirates Business 24/7. Added Cherfan, “the Middle East in general is now more and more a strategic market for many of the big [consumer electronics] vendors and players in the world.”

Boom!

The main reasons for such an unprecedented growth rate in the Middle East are rooted in the economic structure associated with developing economies in the region — an economic boom in the GCC fueled by high oil prices and growing government expenditures. “Our region is an oil based income region. Whenever we see a price increase in oil, it immediately induces an excess of cash in the region, so we are definitely enjoying this,” remarked Chalhoub. This increase in buying power is stimulating local markets, as GDP per capita in the region has shot up recently. “The average per capita income for the GCC is likely to reach nearly $30,000 in 2008, more than double the level recorded in 2004,” according to Samba Group (formerly Saudi American Bank). The region is also viewed by many industry players as one that presents a transparent and clear-cut operating environment as well as a gateway to other markets “The Middle East region is relatively more straightforward (with ever more Free Zones emerging) and perhaps more transparent for foreign companies,” said Adam Dent, Optoma’s Middle East & Africa Sales Manager. “The increased economic power of the region is a key driver, as is the fact that it is recognized as a gateway to other significant markets, such as Africa and COS,” Dent added.

Such an atmosphere has encouraged the major players in the consumer electronics market to change their corporate strategies from investing in capital rich and developed economies such as the US, Europe, and Japan to focusing their efforts more on the Middle East and other developing countries. “The boom in the GCC and high oil prices, growing government expenditures and new projects means more business for us. This is different to the US, where there are so many financial problems and a fear of rising oil prices,” explained Isogai.

“In places like the US, Europe or Japan people are pessimistic about the future, but here in this part of the world we see a lot of potential and faster growth for our business,” he said. This investment trend is also beginning to act as a catalyst to the accelerated pace of technological adoption and the production cycle, “as manufacturers see the increased potential of a region, they will invest to gain share in that region through sales and marketing efforts, which causes the whole cycle to accelerate,” according to Dent.

Consumer electronics growth in the Middle East can also be seen as a consequence of high household ownership rates and the emergence of a tech-savvy middle class demographic. “People are more educated — we have more communications in terms of advertising and the Internet, [so] people are more familiar with technology,” Antaki said, a view echoed by Robert Chahwan, general manager of Khoury Home. “Whoever has access to the media and the Internet is demanding more, and this demand is multi-faceted so we need to constantly update our products to meet this demand,” Chahwan said. According to a CEA study, household ownership rates for major consumer electronics products have skyrocketed in recent years with mobile phones leading the way with a 97% ownership rate followed by televisions (88%) and desktop computers (87%).

Age is also contributing to the growth of consumer electronics in the Middle East, where 65% of the population is under the age of 30, according to the Middle East Youth Initiative. Having grown up accustomed to technology this demographic is regarded as a ‘cash cow’ for consumption of consumer electronics goods. “A major issue [in the consumer electronics industry] is that the population scenario in Arab nations […] is composed of about 65 percent young people, which produces a demographic that is tailored to being more tech-savvy,” Chalhoub remarked. Moreover, the ‘Millennial Generation’ (16-27 year olds) in particular is steering demand in the region and worldwide according to a recent study by Motorola. “Technology is the lifeblood of this generation […] It is not surprising therefore to see their influence on technology purchasing,” said Joe Cozzolino, corporate vice president and general manager of Motorola Home & Networks Mobility Europe Middle East & Africa (EMEA).

Political Uncertainty

Despite all the promise in the regional consumer electronics industry, lurking on the horizon is the constant threat of political uncertainty that has plagued the Middle East and North African (MENA) region for decades. Political instability has already taken its toll on markets such as Lebanon. “The confidence factor of the consumer was not high and was very moody. Every time you had an explosion or a postponement of an election people were postponing their decision making,” stated Antaki.

“Everyone feels like the area is passing through a stressful time, especially with what is going on in Iran and Israel. Political struggle is a major constraint to enjoying the prosperity that the oil prices now bring and this reflects on Lebanon instantly,” Chalhoub pointed out.

He believes that it is not only politically volatile countries like Lebanon that are losing out on potential growth opportunities, but also the region as a whole, as some FDIs are reluctant to invest too heavily in the region.

“The main concern and issue that is restraining this growth is the political struggle in the area. If we have the right environment to really absorb an excess of cash and the prosperity of the region, I think we would be better off by far,” explained Chalhoub.