Grey market costs IT vendors $5 billion per year

Research from KPMG suggests that the international grey market in IT goods may account for as much as $40 billion worth of products each year, costing the vendors $5 billion

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By  Mark Sutton Published  March 3, 2003

KPMG has completed one of the first ever surveys of the grey market, and is suggesting that the grey market may account for as much as $40 billion of IT products each year, representing a loss to manufacturers of as much as $5 billion. The study, carried out by KPMG on behalf of the Anti-Gray Market Alliance, found that the end-user is most impacted by the problems of grey goods, while only one third of vendors have full time resources dedicated to combating the problem.

“Until now, this has been a largely unexamined problem, but clearly the grey market is thriving,” said Dale LeMasters, partner in charge of KPMG’s electronics practice. “Manufacturers need to understand its impact on their profits and brand integrity, and scrutinise their internal and external controls.”

KPMG spoke to eleven global OEMs, and 43 authorised resellers in the US, Europe, and the Pacific Rim, plus ten brokerage companies for the study.

The survey found that although most distributors and resellers were aware of the issues of buying grey, such as lack of warranty or risk of getting counterfeit products, 71% felt that it was necessary to buy from the grey market to be able to compete, especially given that grey products could be as much as 40% cheaper than authorised products.

The figure of $5 billion lost each year was calculated by taking the price advantage of buying grey market and multiplying it by the volumes sold through distribution by the top 30 IT companies in the ‘Electronic Business 300’. Rob Pink, partner in charge of channel services at KPMG said that the figure was “conservative”.

Most of the OEMs surveyed had suffered from discounted products being mis-directed or from inappropriate discount claims, but although 87% of them required their distributors and resellers to be authorised, variations in contract terms meant that OEMs still do not have adequate control over channels.

“Many OEMs dedicate some or part time resources to the problem, so that doesn’t mean that they are not concerned about fighting the problem, many just haven’t dedicated full resources to the issue,” said Pink.

“Just like Tech Data’s codes of ethics prohibit under-invoicing, it also does not buy into the grey market,” said Eliot Shephard, marketing director of Tech Data. “Grey channel does not support end-users and many times, resellers buying from grey end up loosing the loyalty and trust of their clients. Tech Data would like to see greater consolidated efforts in the channel to control the grey channel.”

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