Spooking the grey ghost

Clamping down on the grey channel for IT products means vendors developing closer links with authorised distributors in the Middle East. With global grey channels for IT worth an estimated US$40bn a year, tackling this trade is far from easy.

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By  Stuart Wilson Published  March 13, 2004

The global grey market for IT involves product flows worth US$40bn a year according to a report prepared by KPMG and the Anti-Grey Market Alliance (AGMA) — a group funded by major vendors including Cisco, HP, 3Com, Western Digital, APC and Maxtor. While vendors speak openly about their desire to stop the grey trade, they also need to take responsibility and understand it is their distribution policies that feed the grey channels.

Put simply, the grey market still represents an opportunity for channel players to purchase product at cheaper prices. These products have often been exported and re-exported around the world before finding their way into the channel and onto the end user. At some point, these products have been introduced into the distribution channel by vendors.

Distributors and resellers will argue that the grey market merely takes advantage of vendors pushing more product into the channel than can actually be sold; a simple supply and demand dynamic that ensures the most competitive price for end-users. Some vendors, or their sales managers at least, remain guilty of channel stuffing at the end of a quarter to meet targets. The short-term benefits of this strategy are outweighed by the long-term disadvantages as a glut of cheap product, available thanks to the channel stuffing policy, finds its way onto the grey market. This may be attractive to resellers but is not welcome news for the authorised distributors or vendors themselves.

Vendors can criticise the grey market as much as they like, but need to realise that it is their channel policies that feed the market and ensure this phenomenon is alive and kicking. The problem is that eliminating the grey channel requires the support of all the vendors operating in certain sectors in the IT market. It is all well and good for the major brands to take a stand, impose strict controls on distributors, request detailed sales out data and refuse warranty service for product that has not been sourced locally. But if a competitor does not show such commitment or restraint when it comes to supplying the channel, the knock-on pricing effects are felt by all.

Dubai is a massive re-export hub sitting between Europe, Asia and Africa. As such it is an environment where grey market channels can thrive with product shipped in and out in huge volumes. The first signs are starting to emerge that major IT vendors are looking to take active control of grey market issues in the region. This means focusing on a few selected and trusted distributors to sell into and asking them to develop internal systems to allow electronic data interchange (EDI) of sales out data on a weekly or even daily basis. Such moves allow greater analysis of the second-tier customer base and can be coupled with steps to reduce the amount of inventory these distributors hold.

While this can help reduce the amount of inventory entering the grey market from these distributors, it does not prevent the arrival of product from outside the Middle East into the regional channel. Even the most mature IT markets have thriving grey markets and it will take a long time for vendors to reduce the trade. Stamping it out entirely may be an impossible dream. In a growing market like the Middle East, the desire to ensure product is reaching the market in adequate quantities is also an issue for vendors. Those clamping down on the grey market by enforcing strict channel policies may find less scrupulous competitors eager to capitalise on this strategy.

Are grey channels healthy in ensuring products reach the market at the best possible price? What role do grey channels play in the Middle East market? This is always a controversial topic and feedback is especially welcome — on or off the record. The best comments will be published in next month’s Channel Middle East.

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