Cutting out the Dealers

The international grey market trade in computer components has created a commodity market of surplus and shortages that the channel is forced to manage, often at great expense. Vendors want it to stop.

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By  Mark Sutton Published  July 29, 2001

Boom and bust|~||~||~|Grey marketing has always been a problem for the IT industry in the Middle East. Erratic supply chains, poor vendor representation and the famous trader mentality of the Gulf have combined to create a market where the channel rarely seems to care too much about where its products come from or go to. Everyone knows there are grey market goods out there, and it is accepted as just part of the business. Even humble retail consumers are aware of the difference between authorised and unauthorised products, even identical items that come from the same shop.

The components market in particular has suffered from unauthorised imports recently. In an already volatile market, with seasonal peaks and troughs of demand, the introduction of a few hundred thousand units of a product can send prices plummeting. But vendors want things to change. As the Middle East market matures, so manufacturers are attempting to bring in better controls to manage stocks, and to impose penalties on the dealers that are abusing competitive pricing. But does the channel want to change?

The main way in which vendors are attempting to control the market is through imposing tighter controls on stock. To start with, this means improving supplies to the channel. Hard drive manufacturer Maxtor recently announced plans to address this. “Grey markets flourish where there is a failure in supply to the market,” explained Didier Trassaert, Maxtor’s vice president, EMEA. “The mission of our distributors is to complement our sales force in selling our product to the resellers and the end-users, and the grey market is completely disturbing that.”

Vendors are attempting to address the problem by offering better logistics and price protection The aim is to get the right amount of product into the market, otherwise too little and the channel looks elsewhere, too much and they are left holding products that they can't get rid of. “I think we can steer it from our side,” said Klass de Vos, VP and GM of Western Digital, EMEA & SW Asia. “At the moment, sometimes a product is dumped below cost, so people in the chain lose money. Our distributors are sensible business people, they don’t want to lose money, so we can help them manage stock better, offer them some protrection from the market and from transition points.

Seasonal demands particularly aggravate the components market. As the demand from OEMs ramps up from Q3 into Q4, so manufacturers struggle to meet demand. In the other two quarters of the year, demand tails off. “The grey market is something that is under control for six months of the year, because demand is balanced with supply; the rest of the year we have to apply controls,” says Trassaert.

||**||Stock Control|~||~||~|In order to try and control these seasonal variations, some suppliers have tied partners in to buying agreements, that guarantee supply so long as partners take a certain amount of drives during the more quiet periods. Fujitsu offers this scheme to its partners. “For six months of the year they get the very best price available,” said Adam Harris, vice president of Fujitsu Europe, “for the other six months they might have an equal, or higher price than elsewhere, but what they do get is guaranteed supply. My distributors made huge profits because of this. In the last three months of the year, they make money, one of my distributors was probably making $8-10 per drive last year.”

Another way of tackling this problem is through the introduction of consignment stock. Fujitsu has introduced this system with its drives in Europe and South Africa, and intends to bring it to the region soon. “People have excess stock, they have paid for it, they have to pay their banks so they have to get rid of it—so prices just spiral down,” said Harris. “We are the only disk drive manufacturer that has implemented consignment stock. If the resellers don’t own the stock, all they have to do is when they sell it, let us know, and we will invoice them at the price at that preciese time minute. There is no huge pressure on them.”

Improved tracking of orders is also being used to control supplies. Many vendors now require airway bills from distributors so they can see exactly what products are going where. Weekly reporting of inventory is also being requested so that vendors are aware of when a reseller might be tempted to offload product.

Poor supply is not the only cause of grey marketing though. One of the biggest problems is with OEMs that are offered drives at a special reduced price over ordering and then selling the drives on, either to clear stocks, or sometimes to deliberately play the international component markets. “What happens is very simple,” said Tanguy de La Horie, business manager for Intel architecture products, MENA channel. “A multinational buys too much of a product, it needs to deplete its inventory, so someone sends an email to the broker community, saying make me an offer, and then 40 or so brokers send out an email of the day offering those CPUs at a profit. It works very well if you are a bargain shopper, but if you want a regular supply, you can’t work like this.”

Intel takes a fairly relaxed view of the open market, as they call it, so long as preferential pricing is not being abused. “It is an Intel CPU after all, the customer isn’t suffering, it is good open competition,” said de La Horie. “If they are different prices, and it turns out that it easier to buy 300,000 CPUs sub-distribute, well the dealer has taken the risk to buy 300,000 CPUs, he has paid the commercial costs, the distribution costs, and if it turns out to be a better price proposition, then we have a problem with our channel. It is something we need to assess in a fair way.”

||**||The Real Cost|~||~||~|Other vendors are keen to take action against this sort of trading. To some extent, regional variations in pricing are unavoidable—prices must be competitive within their markets, but when dealers take advantage of this to ship outside of their own region, the companies take action.

Fujitsu has taken action in the past against those that abuse special pricing. “We have caught OEMs, because we track the serial numbers. They first get a warning, if they get caught again they have to sign a letter saying that if they resell again they pay the difference between the two prices. We have gone as high as global OEMs—it is difficult to threaten a global, but we will not ship to anyone that resells,” said Harris.

Last year 3Com took the process one stage further, and sued two VARs in Canada, who had invented large contracts to get special prices. The VARs were hit for $14 million and $5 million each. “There is a very fine line between doing the right thing and going over the top, but we need to be aggressively competitive, and so we have put in much tighter controls,” explained Shane Buckley, vice president of channels and OEM for 3Com EMEA.

But does the channel really want to change? A recent eCRN spot poll would suggest not—66% of respondents said they would buy grey goods, with only 20% saying they wouldn’t. Sometimes it seems that no matter how much value a distributor tries to add to an equation, the reseller is not interested in anything other than the bottom line. “There is always going to be somebody finding a deal somewhere to bring something in cheaper than what we are selling at, bankrupt stock, fire damaged stock, somebody just dropped the price somewhere in the world,” complained one distributor recently. “It is a bit frustrating when you have supplied thousands of units to an outlet the years and they come and complain about something that someone is selling for $3 cheaper.”

It is not just a question of maintaining an above board business relationship though say the vendors. Some are even ready to cut off support to everyone but the end user, to push home the message that they offer more. “You may be able to save a $1 on the drive, but if your RMA is useless, then you can lose whatever margin you have made,” says Harris. “Don’t just look at what you sold the drive at, look at what that has cost you over the life of the product. If a drive fails it is a loose for everybody, we have warranty cost down programs, we go to integrators and we look at their drive handling processes and we save them a lot of money in terms of failures on the line. there is a cost of ownership to that product is well.”

“At the end of the day, we might be able to stop our own grey, but we can’t stop everybody else’s, the issue will always be there, no matter what we say or do,” he said. “The region is still not ready, but you have to start someplace.”||**||

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