Growing Your Market

Marketing development funds (MDF) from vendors have a tendency to be seen as extra cash by resellers-is that changing and what can be done to make MDF more productive?

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By  Guy Mathew Published  November 7, 2002

Introduction|~||~||~|It is still clear that the trade in IT hardware, particularly PCs and mass-market systems, in the Middle East, is one in which price is often the most important calculation in business. This much is widely accepted. Therefore it is unsurprising that major vendors are keen to offer some sort of competitive advantage for their reseller customers because it will help them shift more product. A key way to do this is through market development funds but as the region's markets mature, people are beginning to realise that adding value and looking to future developments may be the best approach as financial incentives often end up in the general cash flow. The result is programmes like Intel's channel programme that offer rebates along with strategies to grow and develop the market.

Not all programes have a basis that includes the long view though. There is a tendency for rebates to be seen as just extra cash in the pocket. Eliot Shepherd, finance director of Tech Data, believes that many vendors in the region are reacting to the market and follow the model of paying partners to take on more inventories than they really want. "This is basic 'push' marketing," he says. "Buy-in programmes that offer money back for stock bought are not very creative; what is needed are programmes that cover the channel from top to bottom."

Fortunately there are programmes that use more innovative and long-term methods to actually develop business rather than offer short-term incentives. The most well known to the channel in the region is probably Intel's IPI programme. Intel Product Integrators (IPI) are those assemblers of PCs, notebooks and servers who sign up to have a relationship with Intel in order to benefit from rebates and crucially the Comprehensive Corporate Advertising Programme (CCAP). The latter offers a fund comprising two percent of the value of products purchased, to be held by Intel as a source of advertising budget for the individual IPI.

These players are very much Intel's core market. In the Middle East the channel is its business, so it is vital to maximise the involvement and growth of partners, no matter how small. That is done by seeing parters as fitting into a pyramid with the smallest at the bottom and major regional IT companies at the top.

The broadest category at the foot of the pyramid is the newly designated class of IPI Resellers. This bracket encompasses the smaller system builders and requires no minimum number of purchases per quarter to be a member. But if someone is buying just a handful of processors and registers online, they will still be sent emails and promotional material aimed at encouraging them to expand their business. They are also eligible to attend Intel's Channel Conferences (ICC).

Next are IPIs, the assemblers buying more than six processors per quarter and the top five to ten percent of these are Intel Premier Providers (IPP) a status that grants them early access to the latest technology, higher-level training and a closer level of communication with Intel.

The first part of the programme is a fairly standard rebate of a few dollars per processor depending on the specification. That is available to all IPIs regardless of the volume they are shifting. But CCAP is the element of the programme that has drawn the most approval from partners.

Maan Ahmadie, channel org? describes it as: "Basically... the light version of the Intel Inside programme. That was created for multi-national companies; now this is the same thing for assemblers and we are working to make it as flexible as possible for them."

One of the key advantages that IPIs see is that the funds are untouchable as far as using them for cash flow issues are concerned. Vasant Menghani, managing director of Quality Gulf Computers, maunfacturers of Touchmate PCs, explains the benefits: "CCAP is excellent because it does not come directly into your pocket. You automatically have two percent of the value of your spend [held in an account with Intel] with the authorised distributor and then once you have all the plans for your advertising campaign, then you send it to them [Intel] for approval. And 60% of the cost is paid by them because you are using their logo prominently, and 40% from your CCAP budget."

||**||Encouraging Growth|~||~||~|

CCAP has recently been widened to include a variety of different advertising mediums. Previously it only allowed for advertisements in print media, i.e. newspapers and magazines mainly. Now, as resellers have got wiser, campaigns are being seen in broadcast media, billboards and shops. Amanda McGonigle, channel manager for EMEA explains that this is a function of Intel's worldwide presence and learning from the experience of different markets. "There is a split between mature and emerging markets and even when you look at the Middle East you have to look at it country by country. For example what is the balance between retail and resellers, government and corporate buyers? You have to tweak the programme to suit, so we allow CCAP to be very flexible in how it is used."

Such flexibility is important to make a global programme work locally. However Meghani is not without criticisms of the decision making structure at Intel. "The problem is sometimes the rebates do not arrive after one month but three months. The other problem is that because a lot of the finance is controlled from the UK we have delays. Sometimes this also true of marketing and promotion campaigns we want to do. I understand they are a big company, but it can be frustrating."

Ahmadie refutes this suggestion saying that for advertising campaigns the local office usually has the final say-so, and that delays in rebates are most often down to a reseller's mistake. It does not greatly affect the success of the programme though. Ahmadie says Intel now has over 1,500 partners in the programme in the region, and he expects more than 1,100 partners to have attended the ICCs held at nine cities throughout the region at the end of October.

Despite the large number of partners involved in the programme there are still many companies that source some or all of their stock from the grey market.
While this is a headache for Intel, Ahmadie says that the programme is also about rewarding resellers for going to authorised distributors as opposed to sustaining the grey market. "We can't change the market in a day or two but eventually we can change it by getting everyone on board and people will recognise it and say 'Yes, I can make more money by buying from an authorised distie because Intel is giving me the right support,'" he notes.

However, the threat of the grey market is not one that will disappear quickly. Meghani mentions a number of reasons but most compellingly he says that a high end processor can be as much as $25 cheaper from the grey market compared to an authorised distributor. "When it is one or two dollars cheaper, yes we can sacrifice that margin because we have the good name and the back up so it is worth it. But when the difference gets too high Intel's support and rebates and CCAP bceome worth less," he complains.

He suggests that Intel should offer some form of price protection or similar discounts to those available to multinational OEMs, however he recognises that such hopes are unrealistic at present.

Intel believes that growing local brands will open up new markets. According to Ahmadie by the simple expedient of selling chips and then helping assemblers use them as part of building local brand PCs, they are going to have a wide-reaching effect on the local economy. The way Intel sees it, by having a company building its own brand PCs it is going to be in a better position to seek out sales through contacts like local businessmen that are not open or known to international companies or non-local partners. That will result in technology and the internet spreading deeper into the market and from that more productive business practice. It may sound a little far-fetched, but it is in Intel's direct interest to drive just such a process as it will expand the potential market for processors.

||**||The Way Forward|~||~||~|

Overall the programme is well regarded but some make the distinction that as Intel makes processors and not finished hardware, it has to be more proactive. Ahmadie states his view succintly: "To be honest we do not want to promote the P4 processor if we do not have a machine in which to put it-we would not be making money. But if we support a brand in the market he can bid for the big corporate tenders and government tenders. This is where we can make more money. That means that building the brand is my major focus as a member of the channel organisation at Intel."

In Ahmadie's view, the benefits of keeping a close relationship with Intel are clear: "These people [assemblers] are capable but we need to take them up to a level where they can trust their own brand. If they need to deliver a hundred machines they don't want to worry about whether they are going to face returns within a couple of weeks. Today it is easy because you buy on price and save a couple of dollars on a processor but when the day comes that you have a big tender and you ask for support, you will not find us with you to support your brand. Long term you are losing money."

For companies that are making completed, and sometimes very complex hardware items, the ways of persuading resellers into bigger contracts are harder to be clear about. Tech Data's Shephard cites Fujitsu-Siemens Computers (FSC) as an example of a company that has a top to bottom strategy. "Fujitsu-Siemens has tremendous visibility in the market considering it has only been in the region for two years or so and I think it is because they are working with resellers but also distributors and end users making sure the prgramme works and taking responsibility."

However, he is not optimistic about the chances of other vendors developing a deeper approach. "It is getting worse. A lot of vendors programmes are channeling marketing funds away from where they are most needed. For example at Gitex Shopper Microsoft offered its partners a place on its stand if they bought x hundred thousand dirhams worth of software so people ended up overstocking to get on there. This sort of marketing doesn't do any good in the long-term-it crucifies profitability and cash flow. One, two or three months down the line you get resellers coming to distributors saying they cannot pay for other things or passing dud cheques. Pilling high and selling cheap doesn't work in a depressed market," says Shephard.

Microsoft disputed his assertion saying that it was resellers that approached them to be on the stand and that it could provide space for everyone who wanted to be there so a minimum level of sales was a necessary requirement.

Meghani has no such complaints about Redmond saying it is extremely responsive to his needs as it realises end users often do not understand why they should pay large sums for software. Therefore it has a service to add branding for local partners like Meghani's Touchmate to its products.

While there may be a lack of forward thinking about how to develop the market from some vendors there is no doubt that marketing development funds will still play an important role while price remains the key factor for most resellers. But that shouldn't stop plans like Intel's from doing what it is supposed to do, that is nurture small systems builders, and eventually having a positive affect on the market.

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