Channel bleeds grey

Grey market trade continues to impact the Middle East mobile handset and accessories sector, with some of the industry’s biggest players calling for government intervention to shutdown parallel importers. Ronan Shields reports.

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By  Ronan Shields Published  November 30, 2006

Grey market mobile handset and accessories trade is undermining legitimate routes-to-market in the Middle East and Africa and is impacting profit margins across the channel distribution sector, according to some of the industry’s biggest players.

Grey market goods, wholesaling at significantly lower prices than authorised imports, present an increasingly attractive option for many retailers whose margins are being squeezed by falling retail prices and rising operational costs.

In a bid to head-off the growing threat presented by grey market goods, many distributors and vendors are being forced to slash prices, which is further squeezing margins in the ultra-competitive industry sector.

Sandeep Saighal, regional sales and marketing manager for Samsung Mobile Middle East and North Africa, claims that the Middle East’s mobile handset and accessories market is a prime target for opportunists keen to cash-in on booming consumer demand for new products and a fluid trading environment.

“Strong consumer demand attracts grey market traders to the mobile handset and accessories sector,” he claims. “The relative ease with which these goods can be distributed circumventing official channels is another incentive for parallel importers.”

Harout Radossian, product marketing manager for Motorola MEA, claims the wholesale nature of the mobile handset and accessories sector also attracts opportunists looking to make quick financial gains.

“The increasingly compact size of mobile phone handsets enables grey market importers to ship greater volumes of goods at cheaper prices,” he claims.

“The increased rate of return make this an especially lucrative market at the moment.”

Parallel imports in the Middle East are typically sourced via Dubai’s booming re-export sector, according to industry identities surveyed by ECN.

“Grey market trade is a common problem in re-export markets,” claims Radossian. “Dubai is the major logistics hub for the mobile handset and accessories industry, and as a result plays a key role as a redistribution base for both authorised and grey market goods.”

Chris Rae, the director of Dubai-based mobile handset and accessories distributor, SourceIT, agrees with Radossian’s assertions.

“The sheer volume of goods passing through Dubai’s Jebel Ali Free Zone makes it difficult for Customs officials to monitor all the shipments entering and leaving the country,” he claims.

Dubai has also attracted unwanted attention in recent years from European Union officials, who claim the emirate’s liberal trading environment has been leveraged to the benefit of criminal organisations involved in VAT fraud carousels.

“Motorola has also observed in recent years that many grey market mobile handsets and accessories are sourced from the Far East and then re-exported to Europe via Dubai as part of EU VAT carousels,” claims Radossian.

Jihad El Eit, vice president of Dubai-based mobile handset and accessories distributor, i2, claims the lack of authorised distribution channels in certain markets in the region provides a window of opportunity for parallel importers.

“Grey market goods are available in large numbers in the emerging markets of North Africa and sub-Sahara,” he says. “Mobile handset penetration is low in these countries and manufacturers and authorised distributors are still developing their strategies.”

The situation in the Middle East lies in stark contrast to India, where authorities are implementing a systematic clampdown on grey market distributors following a recent Supreme Court judgement that declared grey goods contravened the country’s copyright laws.

The situation arose following Samsung India Electronics’ decision to sue several retailers for selling its products sourced from unauthorised distribution channels.

It ultimately resulted in the prosecution of a number of grey market distributors operating in the country.

Middle East channel partners surveyed by ECN agree that the introduction of similar measures in the Middle East would significantly curb grey market trade in the region.

However, some argue that such measures contradict the free market ideology embraced by regional governments.

In a previous interview with ECN, Samsung Gulf president Je Hyoung Park argued that halting grey market trade was not a major priority of UAE authorities.

“Samsung and its Gulf partners have pleaded with UAE authorities to rein in grey market trade,” he says. “But very often we are told that there is nothing that can be done to stop it.”

“Governments in the region should impose stringent legislation stating that mobile handsets and accessories must be exclusively imported directly by the manufacturer or through an approved distributor,” claims Sudreesh George, senior sales manager for South Korean mobile handset vendor, LG Electronics.

“If government bodies were given adequate powers to tackle the problem then it would benefit every player in the mobile handset and accessories channel.”

i2’s El Eit agrees with these sentiments and argues that Middle East authorities should take a greater role in protecting business and consumer interests in the region.

“The issue with grey market goods is that quite often you cannot determine where they have originally been sourced from, and whether they have been shipped according to official corporate policies,” he says.

“As a result, you cannot guarantee their quality, which is a major concern for consumer protection bodies.”

Given the lack of intervention from officials in the region, vendors and distributors are increasing their cooperation and implementing a range of measures in a bid to challenge grey market traders. However, the trade continues to significantly impact the margins available to authorised channel distributors, claims Saighal.

“Grey market trade impacts channel margins in many ways,” he says.

“The nature of the Middle East market makes it imperative that vendors remain competitive in terms of pricing, but it is a huge challenge trying to match the wholesale prices offered by many grey market traders.”

Motorola’s Radossian agrees. “Parallel imports affect every segment of the channel,” he says.

“Every player must compromise in terms of profit margins to maintain competitive pricing structures in a bid to discourage retailers from turning to goods distributed via unauthorised channels.”

LG’s George also observes that engaging in a price war with parallel importers often compromises authorised distributors’ returns.

“Distributors often take the biggest hit in terms of sacrificing their margins in order to compete with grey market traders on price,” he claims.

This adds further pressure to distributor profit margins as manufacturers still demand high levels of service from their channel partners.

“Motorola insists that they [distributors] offer a premium level of service to protect the brand’s reputation in the consumer sector,” Radossian explains.

i2’s El Eit claims that distributors often effectively operate as ‘channel watchdogs’ on behalf of vendors in terms of monitoring grey market trading activities.

“As a result, many vendors try and bridge the price gap between authorised products and those available on the grey market,” he explains. “This strategy is a common approach to block the activities of grey market traders, however it does place pressure on distributors to remain the ‘eyes and ears’ of manufacturers in the channel sector.”

With grey market trade causing significant hardship for distributors, and acting as an alternative source of distribution for retailers, just how do parallel imports affect vendors?

Most vendors argue that parallel imports adversely impact the brand-equity they work hard to establish with consumers, arguing that many grey goods are often damaged en-route to market.

“Grey market goods affect the reputation of manufacturers as they are often stored and transported in a such a way that they are easily damaged,” says Radossian.

“This nullifies the customer’s warranty as vendors cannot take responsibility for the condition of the product when it reaches the end user.

“This can alienate many consumers who will often switch brands when they next purchase a handset.”

Radossian also maintains that raising customer awareness about these issues is a crucial part of many vendors’ strategy against parallel imports.

“We stress to all retailers and consumers that Motorola goods purchased on the grey market are not covered by our official warranty programme,“ he says.

“Consumers must be made aware of the dangers of purchasing goods outside legitimate distribution channels,” adds Sony Ericsson’s general manager, Husni El Assi. “In many cases, consumers are naively purchasing products not covered by warranties.”

Samsung Mobile’s Saighal claims that the threat of parallel imports is prompting the region’s mobile handset vendors to step up their ‘brand building’ activities.

“This has led many companies to develop comprehensive after-sales service initiatives supporting authorised products in a bid to build brand-loyalty, as it is often too challenging to compete with grey market traders on price alone,” he says.

“All vendors should offer comprehensive warranties to differentiate authorised products in the marketplace.”

He also confirms that Samsung’s channel partners in the Middle East have been forced to offer additional insurance incentives to counteract grey market trade.

“Our channel distribution partner in Egypt, Raya, has been forced to offer distribution insurance to ensure the goods are received by authorised retailers.”

With regional markets being rapidly transformed by the implementation of liberalised trade policies, the challenge presented by grey market trade will only intensify unless industry stakeholders work together to combat the threat, argues Rae.

“The burden of this threat must be spread across the mobile handset and accessories channel to prevent it crippling any one sector of the industry,” claims Rae.

“The industry needs to police itself with all channel players cooperating with each other, rather than waiting for the authorities to act.”

Rae also stresses that regulated distribution channels are being jeopardised by regional retailers slashing costs, and customer care standards, in the tussle for market share.

“We’re trying to move them [retailers] away from this position to show them that they can create a successful business by providing quality service and added value to their customers,” he says.

Ultimately, while the financial burden created by grey market trade falls to distributors, retailers have a major role to play in stemming the flow of grey market trade.

Retailers must be encouraged to only deal with authorised resellers and distribution channels and be provided with incentives including after-sales service facilities, to ensure they resist the quick returns offered by parallel imports and ensure the maturity of the regulated mobile channel. As the key interface in the mobile handset and accessories channel, the industry’s future prosperity is arguably in their hands.

"If government bodies were given adequate powers to tackle [grey market goods] then it would benefit every player in the mobile handset and accessories channel." - Sudreesh George, senior sales manager, LG Electronics.

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