Channel year review

2003 has been a big year for the channel in the Middle East. Not only has the sector itself matured, but so have a number of its target markets. However, at the same time, margins have continued to shrink and supply chains still need to improve. Key distributors share their views on the high and lows of the last twelve months.

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By  Paul Barthram Published  December 1, 2003

I|~||~||~|2003 has been a big year for the channel in the Middle East. Not only has the sector itself matured, but so have a number of its target markets. However, at the same time, margins have continued to shrink and supply chains still need to improve. Sumant Saran, general manager of Reddington Gulf, Vijay Saraf, marketing director at Emitac Distribution, Bahaa Salah, general manager of Aptec and Hani Harik, president of Emirates Computers, spoke to Channel Middle East and identified some of the high and lows of the last twelve months.

CME: 2003 has been a hectic year, from the political instability early on through to the boom of Gitex and the overall recovery of the Middle East market. Where have you seen the most significant improvements in the channel this year?

Sumant Saran: I'd say assembly. The SMB segment has matured more over a period of time and over this last year we have seen assemblers in general come up with good projects. The governments have released a lot of funds, which has created opportunities, and the assemblers themselves have gone after a lot of corporate business, which has been really good.

Vijay Saraf: I'd say it's the maturity of the channel and its staff. There are a lot of improvements as far as the commercial aspects of doing business is concerned. They are no longer just going and selling to everybody, they are sitting down and analysing the deals they do. They're more educated, there's more of a push from the vendors as far as the training is concerned. So overall it's the commercial aspect that's improved.

Hani Harik: [For] our business, the biggest success has been the consistency and educating people who have not been in the business before to forecast [sales] and stick to that forecast and move the quantities they've predicted. That's no easy task because we're not talking about 200 or 300 units here, but thousands. You have to put a target that is stretching your partner slightly but not stretching them too thin.

Bahaa Salah: The SMB market is maturing. It is really finding its way to tackle certain businesses and make profits from them. In 2002 we noticed the SMB market was not really mature enough in terms of understanding how to make the profitability from services and how focusing on certain areas rather than just moving boxes. But now this is one area where we've seen significant improvement.

CME: What has been the surprise success story of the channel this year?

Saraf: The re-export business has done very well. Dubai is a land of opportunities and I'll find resellers who have never expected to be in country 'A' when they came across a re-export deal but they have addressed that business none the less.

Harik: I'd say for convincing Dell, which is a direct company worldwide, to go through a master distributor for the SMB market in the Middle East market. What has helped us achieve this has been the consistency of the partners... We cleared over US$5 million worth of stock for Dell during August and September in Saudi Arabia, which went into the SMB market.

Bahaa Salah: The notebook success story during 2003 is certainly something we can talk about. For notebooks, the percentage against the PCs has gone from something like 20% notebooks and 80% PCs in 2002 towards 40% notebooks and 60% PCs in 2003, which is a success story for notebooks.
CME: Do you feel the logistic supply chain has worked well this year, or is it still proving to be a very cumbersome model?

Saran: From a Middle East perspective I'd say it's more or less been satisfactory, and I'm talking from a point of view of the distributor to the reseller. But for Africa, logistics is a nightmare and it's still quite difficult even though we've been operating in Africa for the past two years. It is still a difficult and daunting task, where there's been thefts and consignments not arriving.

Saraf: Things are much better now compared to what it was a couple of years back. In the past it would take 8-12 weeks before you'd get new technology here for various reasons. Because of the presence of multinationals here though they [now] understand the market. They understand the Middle East market is growing very fast, they've understood the need for announcing the products and bringing them here in the shortest possible time.

Salah: I think 2003 was a very good year. As for us delivering to our customers, as a distributor we see it as a very essential element of our business having a very solid logistics set up. The problem is who is the supplier from the source? The Middle East is part of the European centre for operations covering Middle East and Africa. Where logistics in Europe is very simple and can take a day and is very efficient, we're talking about receiving products here after about fifteen days, which definitely affects the IT business here. We're trying our level best to push the vendors here to improve in this area... but I'll say we're facing some huge problems at least from five major vendors in terms of logistics.
CME: Do you feel there was more that could have been accomplished this year in the channel, or do you feel it's reacted well considering the world economic position?

Saran: I think it has. No complaints. The channel has reacted very well. Looking at the overall slowdown in the world economy and Europe being very slow, some of the other markets being very slow, India till last year had a negative growth... so looking at all that, though we initially feared the targets each vendor gave us [this time last year] would be difficult to achieve, but I'd say things went very well.

Saraf: The constraints of the world economic position aside, the Middle East has faired very well. I would say the majority of the vendors, but not all, have seen their numbers growing. This is possible because of two reasons, one is the growth of the market, and the second is through the channel, which with the help of vendors is really stretching to reach its targets and making it happen.

Harik: Given the situation, politically, economically and with what happened in Iraq, I feel it wasn't a bad year for us in the region or us as Emirates Computers. You always want to do more, but we are satisfied by what's been achieved, because we went from being a Dhs1 billion company to being Dhs1.6 billion company. And the 600 million generated has come from distribution, we can't complain. Would we have liked to achieve more? We would of course, but that's what next year is for.

Salah: We've experienced some reasonable growth. And with all the noise of the economic problems, I believe the channel can continue to be stable for the next two or three years. There will also be the kind of investment that will allow it to grow dramatically being put in place here.
CME: Across the board, have margins improved or got worse this year?

Saran: Definitely got worse, with more distributors coming in, more brands, more choices of label, markets being opened. Its not just us in distribution today, its more of a financing business. You don't make money in distribution. Similarly on the PCs, one very big vendor has reduced the back end rebates so that has impacted the overall margin. Overall, the margins have been very poor.

Saraf: Margins overall are shrinking. They're becoming wafer thin every day and everybody is under tremendous pressure to sell more, to generate more revenues, to be able to have a decent bottom line. The smart guys have increased their revenues and have kept cost under control. At the same time they've looked for more businesses, more brands, new markets and emerging markets where there are still decent profits. I would say in the UAE and Saudi we always say that with the margins, no matter what you do, you cannot increase the margins according to your choice. The market decides it, and the customer decides it, so you cannot decide the margins for yourself. They're very thin, and the best way to deal with this is to look for other markets.

Harik: Emirates Computers, according to the auditors, have improved their margins on the productivity business by 1.5% points over the previous year. We've done this by excising stricter control on the operation, by adopting more focus and specialisation.

Salah: No it hasn't improved unfortunately. One thing specifically we can talk about in relation to the distribution business we've experienced is that competition is getting tougher. It's a very price sensitive market. We're trying our level best to come up with other services, other value added concepts that might help us to really differentiate ourselves from others and it is working sometimes, but again, because it is a very price sensitive market, resellers here are interested in [only] one main element. One other reason that will definitely affect this low margin is that for some products the vendors are putting many distributors [in the field].
CME: Has the continued influx of international vendors into the Middle East weakened the standing of the channel or strengthened it?

Saran: The way we perceive it is that it has increased the channel's strengths. For example, Fujitsu Seimens won a very big contract through Emirates Airlines, but the routing was done through assembly. Emirates probably would not have had the faith to buy 2,300 notebooks through local assemblers for the whole of its airline, but because they had FSC backing and FSC pitched the case very strongly they won the business. A similar thing happened to us in Saudi Arabia. So yes the vendor helps, and the vendor presence is a very good and positive sign as long as they're working with the channel.

Saraf: Their presence has strengthened the market and it has grown market share for them. But if you ask the supply chain, the distributors, then there has been a drop [in their market share] because of that, because the pricing and all the policies is decided by the vendors, and the channel has little role to play. For example, if the vendor comes and announces a promotion they fix the end user price because they feel that, based on the international standard, this is what is going to fly.
However, the vendors have started looking at different schemes, different promotions and different rebate schemes to make this business profitable for the channel. So overall, yes the entry of multinational vendors in the market has strengthened their position. As long as the channel interests are kept and reasonable profits are assured, it is a good sign.

Harik: It depends on who you talk to and how you look at it. It has weakened the current players for those who would not adapt, and it was an incentive for the more determined stronger players to enhance their standards and levels of services. Initially it created an anxious state-of-mind for a lot of local companies, because of the sudden influx. Once it cooled down, everybody was thinking more clearly and it turned out for companies like Emirates Computers that the effort towards globalisation has served us beautifully so far.

Salah: We've noticed constructively that if a vendor is approaching an end user through the channel properly, through the distributors and making sure that everyone is aware of the fact that there is a help, there is a value add being put in place here, no one will be against that. We've also noticed that the vendor sometimes will be running very successful events targeting directly the channel resellers and end users and if these events are successfully planned it affects all of us. We as a distributor make the best out of it as well as the reseller, so there are some activities, if planned properly, that add to the existing set up that will benefit everyone. However, when it comes to the stage where they [the vendors] are forcing others to do things their way the market isn't very happy about it and they feel there is a threat there.

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