Intel audit angers Egyptian PC assembly partners

Chip giant Intel’s recent audit of Egyptian PC assemblers has resulted in a number of partners being suspended from its Intel Inside programme. After the audit, which occurred during July and August 2006, Intel informed some assemblers that they were achieving CPU integration rates below set targets, prompting the vendor to freeze their status on the programme.

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By  Andrew Seymour, Imad Jazmati and Stuart Wilson Published  October 9, 2006

Chip giant Intel’s recent audit of Egyptian PC assemblers has resulted in a number of partners being suspended from its Intel Inside programme. After the audit, which occurred during July and August 2006, Intel informed some assemblers that they were achieving CPU integration rates below set targets, prompting the vendor to freeze their status on the programme. At least three Egyptian assemblers confirmed to Channel Middle East that Intel has stopped some of their payments — and in some cases backdated this freeze — costing them hundreds of thousands of dollars in lost marketing funds. Leading Egyptian assemblers including Moonstone, IBS, Better Business, ETE and Emak are all understood to have received visits from Intel’s audit team. One assembler confirmed that prior to a visit by an inspection team consisting of up to seven members of Intel’s EMEA and local management it had received a letter informing the company that the audit would take place. Intel suggested to the assembler that it wanted to validate the integration rates to ensure the CPUs being purchased were being used for PC assembly and not re-distributed into the market. While the reasons for the specific timing of the visits still remains uncertain, Intel’s approach has left a bad taste in the mouth of some partners. Rola Zaarour, communications manager at Intel Middle East, Turkey and Africa, issued the following statement: “Intel conducts regular audits of all Intel Inside Programme licensees as part of our normal business procedure. These audits are part of the terms and conditions of the programme.” “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 statement concluded. During the audit, assemblers say that Intel checked a range of documents, including payroll details, certification records and purchasing invoices. They also spent time on the manufacturing floor assessing the production process. Hazem El Zorkany, CEO at Boraq, which was visited by the Intel team on August 6th and 7th, said: “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 fulfillments — nothing.” He added: “How can those guys say, ‘we counted the PCs you integrate for 60 minutes on the manufacturing floor ground’. It’s ridiculous. They came with no professional manufacturing people — they were all financial analysts or auditors and they just counted the number of PCs passing through the manufacturing line in one half day, in one hour, in August. Every year by the end of August we usually have ten days mandatory vacation for the 125 employees in labour and we do the regular maintenance for the machinery line.” “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, added: “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.” Following the audit, Boraq claims to have received e-mail correspondence from Intel stating that it will not pay the marketing funds the assembler believes it is owed for the past year — approximately US$400,000 according to El Zorkany. The e-mail also asked him to acknowledge that the company’s integration rate has been 40% during the last 12 months. “I sent a very severe e-mail with all documentations stating that I cannot accept that backwards retroactive integration rate,” continued El Zorkany. “According to terms and conditions Intel has the right to set future integration rates, but not previous integration rates. I’m their partner, I’m their client and I have rights that should be respected. But I have had no answer from their side for three days.” Adel added: “When dealing with a vendor you trust that there is a fair system in place to prevent any problems when you work under a programme. What has happened is that the people that put together these programmes have been isolated from this market and its development.” “Intel’s sales people have been monitoring the market and sending in regular reports,” he continued. “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 OK 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, managing director 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.” “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,” Mohsen added. Since the audit occurred Boraq has shifted much of its business to AMD and claims that other indigenous brands impacted by Intel’s actions plan a similar course of action. With local assemblers threatening to defect to Intel rival AMD, 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 will try to benefit from the lack of emotion between Intel and its partners in Egypt and they will also try to benefit from the problems that these relationships are currently experiencing,” explained Adel at Better Business. Dr. Gaith Kadir, general manager Middle East and Africa at AMD, commented: “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?” “We are holding a channel event in Egypt on October 15th to focus on education and training. Across the region AMD is now seeing great acceptance and momentum. We have expanded our headcount and we are increasing our market share,” Kadir added. 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. Assemblers in Egypt claim that Intel plans to carry out similar audits in other countries around the Middle East, tipping both Saudi Arabia and the UAE as potential destinations for Intel’s crack audit team. 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. “Intel does not have partners, it only has clients,” commented Adel. “Partnership means two parties talking about common benefits. Intel is only interested in looking after its own benefits.” “If Intel was treating us as partners they should have come and said, ‘listen, we have some problems and we want to solve them with a new programme’. They should have drawn a line under what happened before and paid any outstanding amounts. The problem now is that there are some companies with huge outstanding amounts and this will impact their financial status,” Adel concluded. Egyptian assemblers claim that Tim Whitrow, EMEA accounting manager for Intel, is playing an active role in the audit process and the subsequent action that the vendor has taken against in-country partners.

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