Credit clampdown

Whispers that reseller Golden Bell and assembler eMachine had hit the skids circulated around the channel like wildfire. With credit lines of up to US$4m in place, some distributors have been hit hard.

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By  Stuart Wilson Published  August 18, 2004

Whispers that reseller Golden Bell and assembler eMachine hit the skids circulated around the channel like wildfire. With credit lines of up to US$4m in place, some distributors have been hit hard. Do not expect these to be the last resellers to disappear this year. Distribution sources reckon there are several others in dire financial straits, as channel credit once again becomes the hot topic of the day.

For many distributors with large credit lines, the natural tendency is to reduce exposure by cutting back and reducing the risk. In reality, what distributors need to do is become much better in identifying the risks associated with each individual reseller and calculate a healthy credit level accordingly. It is easy to increase a customer’s credit line, but it is much harder to reduce it back down at a later date.

Distributors need to make sure that they are selling to the right type of resellers — those with a sustainable and healthy business as well as a long-term outlook. The problem is, it is often still a temptation to sell to some of the less scrupulous resellers — especially if it helps a distributor’s sales manager make his or her numbers.

There should be a clampdown on the credit given to some resellers in the market. Unfortunately, many of the resellers that don’t deserve hefty credit lines already have them in place. This means that a distributor cannot always reduce credit for fear of putting that customer out of business. If that happened, there is a danger that the distributor would get none of its money back.

Once again, the concept of a defaulter database needs to be considered; an information system whereby distributors work together to build a centrally held database of risky resellers. Identifying resellers that are selling below cost or defaulting on payments, such a system would be a valuable tool for distributors to use. While there are semi-formal information sharing agreements already in place involving credit managers at some major distributors, a more formalised system would help to protect the wider distribution community.

Given the low-margins that now exist in distribution, the runners and riders of the resell channel is a serious problem. Royal Star ran off earlier this year leaving behind debts estimated at US$1.4m while Golden Bell and eMachine have combined credit lines in the region of US$4m according to some distributors. Those cases alone mean that US$5.4m has been wiped off distributors’ bottom lines this year. With small net profit margins at best for distributors, recovering that level of loss would mean finding hundreds of millions of dollars in extra sales.

When resellers do eventually decide to do a runner they often create problems by dumping their stock onto the market at ridiculously cheap prices. If they have no intention of paying back the distributor they can sell the stock onto another reseller at 10% below cost and take the cash and run. So, not only does the distributor lose out on the original payment, he also finds sales to other customers dropping because the products are already available in the channel at lower prices.

So who’s going to be the next reseller to go? There are resellers out there with huge credit lines to distributors already stalling for time. Payments have been defaulted and dubious reasons given for delays. No distributor wants to name these companies for fear that this will put the reseller out of business meaning that the whole credit line will be lost. What often happens is a game of pass the parcel with a struggling reseller being propped up by its distributor to enable it to clear its credit line over time. To clear one credit line, it slowly builds up another credit line with someone else. This can go on for many months until the reseller eventually collapses leaving one unlucky distributor with a mighty big hole in its finances.

There’s going to be plenty more fun and games involving channel credit and rogue resellers in the next few months. Some vendors are aware of the problems that their distributors are facing with risky resellers in the Middle East. Intel is putting together a credit insurance scheme for its authorised distributors to protect their exposure to resellers.

Away from the murky world of channel credit, K. V. Narayanan, business manager at Redington has left the distributor in order to jump over to the vendor side of the channel fence. Sources indicate that Narayanan is taking on a senior regional management role with Taiwanese vendor BenQ.

Elsewhere, rumours that Aptec has been up for sale have been circulating the market for years. While Ingram Micro has often been touted as the likely buyer, the channel rumour mill has sped off in another direction this week with a Dubai-based private equity house being linked with the regional distributor instead.

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