On the edge

The atmosphere on Computer Street in Dubai is tense, nervous and edgy. The whole issue of channel credit and the classic hit and run tactic practiced by resellers on the verge of financial collapse has created an aura of uncertainty among the traders, retailers and re-exporters plying their trade.

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By  Stuart Wilson Published  September 1, 2004

The atmosphere on Computer Street in Dubai is tense, nervous and edgy. The whole issue of channel credit and the classic hit and run tactic practiced by resellers on the verge of financial collapse has created an aura of uncertainty among the traders, retailers and re-exporters plying their trade.

This uncertainty is permeating up the channel to a distributor level. Tales of huge losses and even distributors forcibly reclaiming stock in lieu of credit outstanding are becoming commonplace.

There are a few oases of calm amidst the chaos — the grandfathers of Computer Street if you will — who have seen it all before and possess an intimate knowledge of the market dynamics. You can walk down Computer Street with these guys and they can point out in an instant the companies that are running a decent business and those that have all the hallmarks of a potential hit and run.

The important point during the current confusion is to separate fact from fiction and prevent scare mongering from inducing even more panic into the market. Names are being bandied around left, right and centre often based on little more than a whim.

The problem is that facts are hard to come by — a reseller with a set of up-to-date accurate accounts is the exception to the rule. Information on the ownership of resellers and their financial links to one another is often murky. Distributors are loath to reveal the amount of credit they have extended to resellers. All these factors conspire to create an atmosphere of FUD — fear, uncertainty and doubt. Financial transparency is required and new regulation needs to be introduced to safeguard the industry from the shenanigans that have engulfed the IT channel in a FUD fog.

We are in the middle of a shakeout but this is symptomatic of industry conditions and should not be confused with the classic hit and run. A clear distinction needs to be drawn here. In a classic hit and run a business starts up with the intention from day one of building up credit and eventually selling its stock for cash, leaving the credit lines unpaid and then vanishing.

That is not what we’re seeing now. The current crop of companies facing financial difficulties are being forced into increasingly untenable business positions through the market dynamics and the competitive landscape.

Last month was exceptionally poor in terms of sales and banks have also started to get cold feet in terms of financing resellers. Couple this with distributors getting worried by their credit exposure, and you have all the conditions required for problems to occur. With sales low, credit lines being reined in and resellers worrying about stock depreciation, it is little wonder that some resellers start to sell below cost. As soon as they start doing this, they set in motion the FUD machine.

There are myriad reasons for the current problems the market is experiencing. To repeat a channel phrase that is frequently used, ‘margins are wafer thin’ and they are not going to improve any time soon. There are too many resellers in the market undercutting each other and trying to mask core profitability issues through increased cashflow. Too much credit has been extended to the market and distributors are scared. There needs to be much better dialogue between all levels in the IT channel and a greater degree of financial transparency in the market. Bounced cheques should become the exception to the rule not the norm!

Let’s not forget that everyone has their own agenda in the claims they make about competitors. All distributors are keen to point the finger at rivals as the ones left holding outstanding credit but never admit if they themselves have been hit. Resellers are often quite happy to discredit a rival if it serves their best interests. The market is entering a paradigm shift and a whole host of companies need to decide the best route to take.

Get big, get niche or get out!

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