Precious parts

Decreasing margins, an influx of grey market products and credit issues are taking their toll on the components channel. Channel Middle East crisscrossed the channel landscape to get the full picture.

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By  Alex Malouf Published  June 29, 2004

Volatile market|~|image-one.gif|~|"We know that not all distributors are working with credit insurance so this leaves a big risk in the channel," says Mario Veljovic|~|Decreasing margins, an influx of grey market products and credit issues are taking their toll on the components channel. Channel Middle East crisscrossed the channel landscape to get the full picture. For the vendor (V) perspective, Sou Bennani, Gulf channel sales manager at Intel, and Saied Marashi, senior regional sales manager at Western Digital aired their views. At the distributor (D) level Mario Veljovic, regional business unit manager at Aptec Components and Ehsan Hashemi, regional sales manager at Golden Systems spoke out. From the reseller (R) community Omar Musallam, general manager, Musallam Trading and Samer Bayrakdar, director of Direct Computer Systems stepped up.

CME: What are the big issues facing the components channel in the Middle East and how do they affect your regional business operations?

SAMER BAYRAKDAR (R): There are issues with product quality and origin. The Middle East is a dumping hub for other region’s components. You also find products which are not original or pull-ups — refurbished products sold as brand new. This gives a price disadvantage to genuine resellers. There are items which I wouldn’t want to say are stolen but are definitely not legitimate ending up in the Middle East. Genuine dealers have no price edge compared to the new grocery stores opening up that deal in fakes and refurbs.

SAIED MARASHI (V): One of the biggest issues is over-distribution at the second tier channel level. What you see is an increased number of players translating into price competition, thinner margins and a cut-throat approach. The sheer amount of dealers has caused the erosion of margins and fierce competition.

MARIO VELJOVIC (D): One topic is custom and VAT fraud. The other is political instability of some key markets. Egypt is dominated by the former, and then you have Saudi which is plagued by the latter. I think there is a lot of impatience from vendors as they try and rush into the markets now rather than seeing this year as a time to evaluate the potential of the components market.

Cme: How quickly does product move through the channel from vendor to end-user? What is happening to channel inventory?

OMAR MUSALLAM (R): It depends on the item. If I export it may take 15 to 30 days. It takes 10 days to turn over my stock in Dubai. We don’t have much stock as the price fluctuates, especially for memory. CPU prices are stable but for memory and hard drives we have to be careful.

EHSAN HASHEMI (D): For Dubai or Saudi, it is very quick. We have very good transportation facilities and good ports such as Jebel Ali. The movement of products is very fast. Outside these two it is slow. Shipping goods from Dubai to Iran takes the same amount of time as shipping from Asia to Dubai itself. As for stocks it is difficult to say. CPUs are a very sensitive product shipped by air so you don’t need to stock much. For motherboards you need to keep a run rate of about six weeks to make sure that you have enough inventory to supply the channel.

Cme: Is the level of sales between second-tier resellers of components increasing?

SOU BENNANI (V): We have been approached by many people who used to purely re-export Intel components. What they are doing is perfectly fine, but they are missing out on our channel programmes targeted at assemblers. I would think second tier reselling is going down as these people are contacting us and now want to be assemblers to take advantage of Intel programmes. They are opening lots of assembly lines in Jebel Ali and the trend is going towards assembly.

OMAR MUSALLAM (R): I think there is an increase as the second tier has a good chance in newly emerging markets. We have good customers in places such as Iraq. But we are losing some markets as dealers are going direct and getting their own imports. Saudi is less dependent on the Dubai market. Before they depended on us totally, but now this is not the case. They also have capital so they bring their own products from Asia.

MARIO VELJOVIC (D): I see it decreasing and this is a scary scenario as most second tier resellers depend on good cash flow and volume since they operate on minimum margins. This is all backed up by finance given by distribution companies. We know that not all distributors are working with credit insurance so this leaves a big risk in the channel. We saw this when a few players went out of the market and left some holes in a few distributors’ pockets.

SAIED MARASHI (V): In the case of Dubai it is. We like to have as few distribution levels as possible as every time you add another level you increase the cost. But Dubai is the export centre for the region and beyond and we have seen products go from here to Africa and the CIS. Because of that there are more second-tier resellers.
||**||Grey days|~|image-three.gif|~|"Margins are getting trimmer and trimmer and are now about 2% to 3%. I think it is better to run a food store than sell components," explains Samer Bayrakdar|~|Cme: What is happening to margins in the components channel?

MARIO VELJOVIC (D): For the components business it is important to maintain a very lean structure without losing quality and not raise costs relative to turnover. Margins in components are wafer thin and that is why most of the broadline distributors are having difficulties incorporating this segment into their set up. We have a sophisticated system in place to identify the profitability of each division. It is about profitability, identifying cost drivers and building good reserves.

SAMER BAYRAKDAR (R): Margins are getting trimmer and trimmer and are now about 2% to 3%. I think it is better to run a food store than sell components. You have to look at value add. You don’t make money on selling components now; you make money through selling after-sales services.

Cme: What role do rebates and incentives play in the decision-making process when resellers buy components?

SOU BENNANI (V): Rebates are important and that is why we offer them with our products. It helps to make margins healthy and our rebates come in different shapes and forms. Even the most basic assembler can register on an Intel programme, and the more they grow with Intel, the more benefits they get. We have done surveys on our local assemblers and they see rebates as a clear benefit.

EHSAN HASHEMI (D): A few companies such as Intel have had a lot of success in rebates. But it generally doesn’t work well for most vendors because the channel will sell at cost and solely depend on the quarterly rebate to make money. If vendors have the finance and the patience, rebates and promotions are a very good scheme to increase business but they hurt margins. Vendors can introduce promotions, incentives and rebates for a limited period of time to establish themselves in the market and promote their brand for a certain period. After this inital phase they then go back to their normal business strategy and pricing

Cme: How does grey market product impact the Middle East channel?

MARIO VELJOVIC (D): Grey produce hurts the Middle East a great deal. Just a small shipment from the rest of the globe can wildly influence the market price here. These goods come into Dubai and from there will be distributed to the entire region. We have some vendors who are taking care of their distributors in more mature markets, but others don’t care. We see it as a good sign if vendors are stopping large distributors in Europe, US, and Asia from doing crazy things here in the region. For them one palette of grey goods is nothing in their market of several million PCs a year but for us here it would have a big effect.

SOU BENNANI (V): There are grey products in every market, from watches to mobile phones and people buy wherever they want. But those who buy grey, miss out on the programmes and benefits we offer. Grey market products also lose out on the warranty and this is of huge importance to our customers. We put a warranty value of US$150 dollars on every transaction due to shipping costs and tariffs. Our assemblers see the value of the benefits and so they buy from authorised distributors.

Cme: What are the best forms of channel support that can be offered?

OMAR MUSALLAM (R): Distributors have to take care of their big customers and grow with them, which is better than looking for small companies who spoil the market. Marketing funds are needed as well. Vendors have to take care of what they offer to the channel. Some small companies offer low cheap grade products, but most of the distributors sell branded goods. We know about these brands and there is no need for training, but the channel needs pricing protection.

SAMER BAYRAKDAR (R): Basically the vendor has to stand by you. They cannot play the game of giving you a price and giving the guy down the street in his tiny office the same price. This reseller can profit on a margin which I cannot compete with. So the vendor has to support the most important partners. He could be pumping some extra marketing funds to help my marketing, promoting me and boosting my sales. Finally he needs to give me a product that is leading edge compared to other vendors in the market.

Cme: How easy is it to build channel loyalty in the components space?

EHSAN HASHEMI (D): Building channel loyalty is difficult given that the market is price sensitive. You have to give resellers commitment and also guarantee their income as well. The most important factor in our business is price control. We control prices so that our resellers and dealers make enough money to be satisfied and stay committed to us. If they can’t do this, we protect them and make sure that they can survive during the lean times. Our job doesn’t end by selling the product to the reseller. It ends when they have sold the product and they have made their margins.

SAMER BAYRAKDAR (R): Loyalty is negligible because the customer will go to 10 shops before he comes here. We get loyalty through long-term relationships. The customer has tried using different companies and he has had major problems with RMA, with his payment and with the quality of the product. So these customers have confidence in me, but this only comes about through long-term business. But even then, if I offer him the product and another reseller offers him a lower price, then the guy will start thinking twice before he buys from me. This is the mentality of the market today.
||**||Future channels|~|image-two.gif|~|"As we are just into the summer season, the market will pick up in Iran and Egypt due to school vacations, notes Ehsan Hashemi|~|Cme: What are the characteristics of your customer base and is this changing at all?

SAIED MARASHI (V): We are seeing that the distributors — our direct customers — are spending more time courting more resellers, getting more actively engaged with seminars and being more proactive with marketing and education to win the hearts and minds of the resellers. They are building a channel rather than relying on the reseller to come to them for a product. It is easier to act like a supermarket and wait for customers to come to you but our distributors are being proactive and this makes the difference.

OMAR MUSALLAM (R): We used to sell much of our stock to companies abroad but three years ago we implemented a different strategy, to sell only locally. This is preferable, as when we sold abroad we had no payment protection. When I was trying to sell abroad I was losing money. But nowadays, after implementing that strategy, we have a much bigger customer base and we are getting a chance to build our own brand.

Cme: Where do you see the biggest opportunities for growth?

SAIED MARASHI (V): There are a lot of untapped markets in the Middle East like Iraq and then there are other great markets like East and West Africa where there are huge opportunities. One country of huge interest to us is Iran but we cannot sell there because of the embargo. Beyond the geographical opportunities there are also promising market segments such as the consumer electronics space. You see DVD recorders, games consoles and other consumer devices with integrated hard drives. Nobody thought about these markets five years ago and there will be new markets in five years time which nobody thinks about today.

Cme: How important is financing and credit terms to the components channel?

SAMER BAYRAKDAR (R): With the little margins you are making how much financing can you give? If you don’t give it you don’t sell. It is a Catch 22 where you have to give credit, there is no other choice. I am damned if I do and damned if I don’t. We have been burnt in the past, and we still get burnt three or four times a year. Dumping products is common. Everybody in the market knows who deals in these products.

Cme: Is the local assembly market going to gain or lose market share against multinational vendors in the PC and notebook space?

EHSAN HASHEMI (D): There is a shift from desktops as notebooks become much more popular in the Middle East market. Many local assemblers cannot offer notebooks, so eventually the overall market share will tend towards the multinationals given their global warranty, services and consistency in quality. Local assemblers try to cut corners on pricing as much as they can so their supplier relationships are not always consistent.

MARIO VELJOVIC (D): Locals will only gain due to the growing demand of consumers in this region. Consumers require a good priced PC which I think is more likely to happen if they go to local assemblers rather than multinationals. Even multinationals have recognised the benefits of going local and many are now building local assembly lines. I think local brands will definitely grow.

Cme: How will the components channel develop in the next six months?

SAIED MARASHI (V): In the months leading to summer the market always gets to be tough and the summertime is when companies reorganise. There could be some consolidation and some smaller companies will merge with their larger counterparts. In late summer you will see reshaped players back in the market. In the long run dealers that are focusing only on pricing will have a tougher time and the ones that look at a long-term approach and spend more time on solution selling and targeting at the higher end of the components market will be more successful.

EHSAN HASHEMI (D): As we are just into the summer season, the market will pick up in Iran and Egypt due to school vacations. For the Gulf region, the market will drop as locals leave due to the climate. Iran and Dubai are only 30 minutes away from each other, but the market characteristics are completely different. Dubai offers the summer festival to attract tourists to the region but this doesn’t help sales. No one wants to buy a PC when on vacation.
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