Arrested development

For the Middle East IT distribution channel to really move to a model based on local stocking points, some fundamental channel changes need to occur

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By  Stuart Wilson Published  June 12, 2004

While vendors are keen for their major IT distributors to venture out into the Middle East market, invest resources in building up a network of sales and support offices and start holding stock in-country, there remain a number of factors working against this vision.

One of the main reasons why this has not occurred is due to the actions of brokers, traders and unscrupulous sub-distributors. Purchasing out of Jebel Ali, many of these channel players will move goods between countries, avoiding taxes and duty, and dump product on a local market at a price that authorised distributors — having brought product into these markets legally — just cannot compete against.

In some cases, the distributors investing in building local presence are also the ones selling to the channel players moving product around the region and avoiding import costs. A few have tried to carefully segment their customer base to ensure that there is no conflict between the sales they are making out of Jebel Ali and those made at an in-country level by local sales staff and supplied by local stocking points.

For any strategy of not selling to resellers engaged in the dubious movement of goods to work, it requires the involvement of every single distributor representing a particular vendor. One distributor turning a blind eye to the occasional dodgy trade can stop the channel evolution dead in its tracks. Time and time again, distributors ask vendors to keep a closer eye on the customers that their Jebel Ali-based distributors are selling to and the impact this is having on the overall channel model.

The problem with this request is obtaining accurate channel visibility at the second tier reseller level and below. Once product makes it down to this level, there is very limited information available on where kit is going in terms of reseller name, country of destination, or even target market segment. Referred to by one major distributor as ‘the washing machine’ syndrome, transactions at a second tier level are often rapid, incoherent and confusing to a casual observer.

This in turn can wreak havoc with the purchasing predictions of major distributors. For example, a distributor with UAE rights purchases stock based on UAE demand, sells the stock to a dealer on Computer Street who promptly re-exports some of the product through a ‘briefcase trader’ to take back to another country. This puts product, initially destined for the UAE, on the market in another country and causes problems for the authorised distributor buying product to serve that particular market.

The current situation faced by the Middle East IT channel is a Gordian knot of the highest order and it will require the co-operation of major vendors and distributors alike to be remedied. Unless tax and duty laws are enforced and harmonized across the region, canny resellers will continue to see the opportunity to move products around in grey channels. Any price differentiation by region or on a country-to-country basis will be ruthlessly exploited to rake in that valuable margin.

All these issues are arresting the development of the Middle East IT channel. The confused movement of goods and the continued presence of the grey market is also hampering vendors’ abilities to introduce channel rebate and incentive programmes for second tier resellers. With these programmes tied into purchasing patterns, it is vital that resellers wishing to take part are buying authorised kit from authorised distributors.

Building a local distribution infrastructure adds a great deal to operating costs and major players are understandably cautious. There are massive benefits to local stocking points: closer links to true second tier resellers serving end-users, the erosion of the role of sub-distributors and brokers, the opportunity to hold less inventory in the channel and an improved ability to control the flow of grey market product.

For now, vendors and major distributors alike appear to be stuck in the grip of a complicated hybrid channel model. They both want to go in-country but know that they cannot afford to miss out on the re-export business being done out of Jebel Ali. Trying to run these two models in parallel causes administrative headaches and makes channel management a complex affair.

All these issues are commonplace knowledge in the channel but they are not talked about nearly enough. Changing the status quo looks like being a long and drawn out affair. Vendors and major distributors need to open up to each other and work together to get a better understanding of the mechanics of the second tier reseller level. Without this knowledge, the channel shenanigans that are part and parcel of the Middle East IT supply chain will continue unabated.

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