Grey days here to stay

Some vendors are actually not that bothered about the grey market even though they will bang on about how bad it is and toe the corporate line when necessary. In fact, some actually see it as a necessary evil that opens up new markets and customer bases for them.

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By  Stuart Wilson Published  June 30, 2004

Some vendors are actually not that bothered about the grey market even though they will bang on about how bad it is and toe the corporate line when necessary. Talk is cheap and it is action that counts, and frankly, despite having all the information at their fingertips, some vendors are quite happy to turn a blind eye to the massive grey trade that underpins the Middle East IT channel.

In fact, some actually see it as a necessary evil that opens up new markets and customer bases for them.

The grey channel — especially in parts of the components world — has become an intrinsic part of the global supply chain. Feeding off global pricing disparities and offering resellers cheaper product prices than the authorised local distributors, the grey channel keeps the processor world ticking over. It is a similar story in other components areas and, while global pricing disparity and issues with product availability remain, simple economics will ensure that the grey channels continue to flourish. Why should vendors waste time and effort trying to stop such a global phenomenon?

Why indeed. In some specific Middle East channel sectors, grey market product has become so prevalent that anyone buying through authorised channels is actually the exception to the rule. A vendor has to think long and hard before really attacking a supply chain model that is feeding a large proportion of its customer base with product.

When discussing grey channels it is important to get a grip on a precise definition even though there are hundreds of interpretations out there of what exactly constitutes grey product. According to the snappily titled Alliance for Gray Market and Counterfeit Abatement (AGMA), “The grey market is the unauthorised sale of new, branded products diverted from authorised distribution channels or imported into a country without the consent or knowledge of the manufacturer.”

That means IT kit pumped into the European, America or Asia-Pacific channels — and intended for purchase and use in those geographies — winding up in the Middle East markets. It also involves refurbished and faulty products being sold through grey channels. And let’s not forget the important role that Middle East grey channels play in getting product into countries that they are not actually allowed to end up in.

In the Middle East the authorised distributors can find themselves in a position where they have no advantage over the brokers and traders bringing in grey product from outside the region. Authorised channels have to abide by the rules when it comes to duty and import taxes and the distributor needs a margin to live on. When grey product is available substantially cheaper than authorised product, resellers are forced to buy it — whether they really want to or not — in order to remain competitive against their peers. It is a vicious circle that fuels the growth of grey channels in the market. As that demand grows, the supply of grey product naturally increases to meet it.

Resellers know how the grey market works, distributors know and even the vendors themselves know what is really going on. But, like an ostrich with its head firmly buried in the sand, it is frequently a case of hear no evil, see no evil, speak no evil from the vendor perspective. Vendor executives can bang on about engagement with second tier resellers, explain what a good job their official distributors are doing and talk up the benefits of channel programmes quite happily, but mention problems stemming from the grey market for their products and they often lose the power of speech.

The problems of the grey channel can only be understood, addressed and remedied if they are talked about and actually admitted by all sides involved. It would not be difficult for a vendor to identify grey product in the market, take down the serial numbers and work out where the product entered the global supply chain. The vendor can then work down the channel from the distributor at the top of the chain and find the reseller or broker moving product into geographic areas it was not initially intended for. It is a simple enough process but why rock the boat? The channel is one big sales engine for vendors and as long as they get the money for the sale and meet their quarterly targets where the product ends up is really of limited consequence.

The grey market exists and it needs to be talked about if vendors are serious about putting in place channel policies that make buying from authorised local distributors a compelling option for resellers. It is quite ironic when vendors urge resellers to only buy their products from authorised channels, despite the fact it is their own global policies and failure to monitor channel activity properly in other regions that creates the incentive to buy grey.

Grey product is a necessary evil in today’s global IT marketplace. Some vendors are taking tentative steps to combat grey product but these are the exceptions to the rule and many are only taking a half-hearted approach. Will grey go away? Don’t bank on it anytime soon. Please e-mail your views on grey channels in the Middle East and what, if anything, should be done to address the problem.

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