Under Scrutiny

Where is Intel’s EMEA auditing bandwagon going to pitch up next? That's the question being asked by local PC assemblers as the chip giant continues to examine if partners in certain Middle East markets are achieving the integration rates required by their status on the Intel Inside Programme.

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By  Published  October 31, 2006

Intel’s gang of EMEA-level beancounters is acquiring quite a taste for the Middle East landscape following a period spent auditing Egyptian assemblers during the autumn.

Assemblers such as Moonstone, IBS, Better Business, ETE and Emak all received a visit as Intel did the rounds of some of the market's most prominent system builders.

Now it's the turn of their UAE counterparts to get the on-site treatment as Intel prepares to head to the Emirates for three weeks at the end of November.

Some local partners believe the CPU manufacturer is perfectly entitled to do whatever it takes to ensure assemblers are meeting their integration targets in a lawful manner, but others fear the decision to conduct sweeping audits of local assemblers threatens to drive a wedge between Intel and some members of its partner community given the approach it took in Egypt.

That audit resulted in Intel freezing some assemblers' status on the Intel Inside Programme after informing them that they were achieving CPU integration rates below set targets.

At least three Egyptian assemblers confirmed to Channel Middle East that Intel stopped some of their payments since the audit occurred - and in some cases backdated this action — costing them hundreds of thousands of dollars in lost marketing funds.

However, one senior manager at an authorised Intel distributor with Egypt rights said it has received assurances from Intel that Egyptian partners would get paid.

“I know that for some reason the partners in Egypt are very angry at Intel and it is to do with the payment of rebates.

We have been receiving a clear message from Intel that the partners in Egypt will receive these payments and things will get back to normal.

For now though, the Egyptian assemblers and integrators are not happy with the situation,” he said.

The whole issue of integration rates remains an emotive one.

Intel needs to validate the ratios to ensure that CPUs being purchased are used for PC assembly and not re-distributed into the market, but mystery still surrounds the reason for the timing of the audits.

Hazem El Zorkany, CEO at Boraq, which received a visit from the Intel team at the beginning of August, complained: “The outcome of the audit was an unfair judgment from Intel’s side.

They came over for just one and a half days and figured out that my integration rate was 40% for the past year.

If my integration rate today is 40% then how come it is also 40% for the past year?

They came in August, which is the holidays when there are no orders, no commitments or no government fulfilments.”

He continued: “I told them that if they came at the end of August my integration rate would be zero.

And if they came in December when I have a lot of fulfilment my integration rate would be 500%.

It’s insane to just drop by for one hour and figure out the integration rate.”

Essam Adel, VP at Egyptian assembly outfit Better Business, was equally perturbed by Intel’s visit: “The Intel sales team in Egypt knew that this action would cause problems because the people that came in were not sales people — they were auditors and accountants who care only about numbers and regulations, despite the fact that the market itself is not controlled by these factors alone.”

He added: “Intel's sales people have been monitoring the market and sending in regular reports.

Let’s say that that they have been saying everything is fine for the last four years and now all of a sudden these problems have appeared.

Intel's people should be blamed for all the reports that claimed everything was okay when they were enjoying achieving their targets based on our business.”

Not all Egyptian assemblers agree that the audit was handled badly by Intel.

Mohamed Mohsen, boss at Moonstone Integration, said: “Intel representatives came to Egypt and conducted the audit and the results were very fair in my opinion.

We had a minor issue that they asked us to solve so that we could benefit more from Intel’s programmes.

They gave us six months to solve this issue and we neither gained nor lost benefits.

On the other side there were some companies that were conducting enormous violations of the programme.”

He added: “I have heard that the audit will happen every year to make sure that everyone follows the correct procedures.

There are many rumours on why this audit occurred.

Some say it is because Intel has been accused of overstuffing the Egyptian market but nothing is confirmed.”

Intel has so far declined to elaborate on the reasons and objectives behind the audit, but Rola Zaarour, communications manager at Intel Middle East, Turkey and Africa, issued a statement saying that Intel conducts regular audits of all Intel Inside Programme licensees as part of its normal business procedure.

“These audits are part of the terms and conditions of the programme,” read the statement. “

The Intel Inside Programme is one of the world's largest branding and cooperative marketing programmes.

Intel and its customers have invested billions of dollars in the programme to create a recognisable mark of quality, and, as such, inherent value for our customers.

The company has an obligation to both customers and shareholders to protect that investment.”

The danger for Intel, however, is that assemblers angered by the way the audit was conducted in Egypt will switch allegiances to AMD.

Should this happen, the implications for the rest of the channel are huge. Distributors that previously relied on these assemblers for Intel CPU sales will now need to find their volumes elsewhere.

AMD, meanwhile, is doing its best to capitalise on any fallout.

It held an education and training-focused channel event in Egypt during mid- October, which was attended by several hundred assemblers.

Speaking to Channel Middle East prior to the event, Dr. Gaith Kadir, general manager MEA at AMD, said: “We have been really focusing on the Egyptian market and there is significant interest in AMD’s offerings and solutions.

Assemblers are extremely dissatisfied with what Intel has done — first in Dubai, now in Egypt, who knows where next?”

Intel’s latest showdown with members of its Middle East partner community — coming so soon after the Dubai-based channel credit crisis earlier this year, which saw several high-profile Intel IPPs flee the market leaving behind huge unpaid credit lines with authorised distributors — once again raises serious concerns regarding the vendor's overall channel engagement model in the region.

That will be firmly put to the test when Intel's auditing team begins a three-week inspection of UAE partners on November 26th.

If IDC data is correct then the typical output of local PC producers in the UAE is between just 14,000 and 16,000 a quarter.

Serious questions will clearly be asked of any assembler buying unnaturally large quantities of CPUs.

In confidential documents seen by Channel Middle East, Intel said the audit was necessary to “validate the accuracy of the current processor integration rate and to ensure advertisements and claims are in compliance with terms and conditions.”

The documents make it clear that any assembler found to have overstated its integration ratio, or who fails to comply with the audit, risks being suspended or dropped from the programme.

The vendor also threatens other punishments, including the recovery of prior marketing payments and a reduction in accrued Intel Inside funds.

One UAE PC assembler said Intel had every right to perform the audits, but questioned how effective the process would be.

“In their terms and conditions they have the right to do this, but on our terms and conditions it is not always possible.

Sometimes the policy and the methodology of business in the Middle East is not the same as the European market.

We are not an HP or Acer.

We are a small company and in the market here most of the companies are doing assembly the traditional way.”

Assemblers in the UAE affected by Intel’s forthcoming visit are set to have their manufacturing and sales processes heavily scrutinised by the vendor's auditing experts.

The process will include an examination of documents to support current integration rates, a physical review of manufacturing facilities, and an assessment of claims and payments made under the Intel Inside Programme during the 12 months to September 30th 2006.

Intel has also instructed assemblers that in order to conduct the audit it will require private onsite workspace for up to five auditors, access to manufacturing facilities where PC assembly is carried out — including permission to take photographs — and access to a broad range of company records.

In correspondence seen by Channel Middle East — which was sent to local assemblers from Intel’s EMEA programme marketing finance manager Tim Whitrow — the components giant laid out a seven-point plan that assemblers are advised to follow to “minimise the onsite duration of the audit and the support required from your team.”

This includes a list of dates when it is not suitable for an onsite visit to occur; addresses of all manufacturing sites; attendance on a pre-audit phone meeting; and details of any licenses that the auditing team might need to access certain offices and manufacturing facilities.

Assemblers are also obliged to complete a preaudit questionnaire and extensive list of documents.

The eight-page questionnaire, which Intel plans to use in the course of the audit, requires assemblers to divulge information about the company's structure and management during the past 12 months, key contacts within the organisation, such as the Intel Inside Programme administrator and sales staff, the level of Intel Inside expenditure, and the proportion of Intel products that are integrated into PC systems.

The form also asks PC assemblers to disclose a series of details about their inventory management policies and the scale of their manufacturing processes, including a breakdown of the total number of shifts worked by factory staff.

In addition to the questionnaire, Intel has instructed assemblers to prepare an exhaustive list of documents for the audit including purchasing records, monthly inventory data, sales reports for Intel-based systems, methodology for calculating Intel CPU integration, and details of any transactions involving sub-contracted manufacturing partners.

One assembler, which told Channel Middle East it expected to be part of the audit, said it was unconcerned about the volume of documentation and data that it must supply, but questioned its ability to meet all of Intel's demands: “I think the way that we heard Intel conducted the audit in Egypt is not healthy for us in the sense that you can’t really give all the data you have.

You cannot always be 100% accurate about your [integration] percentage because it fluctuates and there is so much old data that sometimes we ourselves cannot even dig through it to determine where every system was shipped and how it was shipped.

If Intel was only asking for us to support it by sending through this information it would be alright, but I’m not really comfortable with it coming over and digging through all our specifics and details.”

If my integration rate today is 40% then how come it is also 40% for the past year?


These audits are part of the terms and conditions of the

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