The dirty dozen

Major distributors reckon that a dozen resellers have gone under in the last six months in Dubai. According to their estimates, this has left a financial black hole of approximately US$10m in unpaid credit.

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By  Stuart Wilson Published  September 8, 2004

Major distributors reckon that a dozen resellers have gone under in the last six months. According to their estimates, this has left a financial black hole of approximately US$10m in unpaid credit — money that comes straight off the bottom line of the distributors that have been hit.

Given the wafer-thin margins of IT distribution, this is a massive loss for the channel to absorb. With volume distributors working on gross margins of 5% at best, a quick calculation reveals that it would require US$200m in extra sales to cover this loss.

It is natural for distributors to pull back credit lines in the wake of recent events, but this will only be a temporary measure. The fact remains that a distributor’s major function is to help finance the channel and offering resellers credit is a vital part of that role. A couple of distributors pushing hard into the Iraqi market are already offering in-country resellers credit. This is a risky proposition but they know that credit drives business.

Resellers select their distribution partner based on a few select criteria: price, stock availability, credit terms and support. The distributor that comes up with the most attractive package gets the business. That’s why distributors are frequently tempted to increase credit lines to ludicrous levels that do not accurately reflect the size and stability of the customer they are serving.

On a long-term basis, the propensity of distributors to offer credit fluctuates. Right now it has been reined in sharply but it will inevitably rise again in the future. Why? Because the distributor that starts to take the risks and extend the credit will win the business; and business means margins. Each distributor is engaged in a complex risk-reward calculation on a daily basis and that is not going to change.

There are a few Middle East distributors that have escaped the carnage relatively unscathed. Many of these companies — although based at Jebel Ali — are not interested in serving the Dubai reseller market. Their efforts are instead concentrated on developing reseller customer bases in-country around the region. Taking this path of business development is hard work but if done properly it is much more stable than supplying the traders engaged in re-export business out of Dubai.

Let’s not forget the role that vendors have played in creating the current issues in the market. Their desire to push more product into the distribution channel than the market requires is a frequent tactic employed by sales managers keen to meet their end of quarter sales targets. Once in the channel, it is much harder for this product to find its way out.

The distributors don’t want it sitting on their shelves depreciating so they do everything in their power to push it out to the resellers. Aggressive pricing coupled with friendly credit terms is one way to achieve this aim. So the product makes its way to the reseller (read trader or-exporter) who is happy at having negotiated such a great price. Now all he has to do is find a customer to buy the product from him. That’s the difficult part especially if the vendors’ actions have resulted in a glut of this product in the market.

This whole situation does go back to the vendors. Too often they are motivated by a desire to meet quarterly sales targets rather than encourage the development of a long-term sustainable channel infrastructure. In some ways, you can’t blame them. Distributors and resellers are pretty expendable and if some do go under, there is always someone else prepared to take their place. Throw in the fact that vendors don’t really have any credit risk of their own with the distributors they sell to and it becomes pretty clear why some behave the way they do.

I’m not blaming the vendors, the distributors or even the resellers for the recent chain of events in the market. It is just natural channel dynamics. It is all about risk management and developing an intimate awareness of the market conditions.

The dirty dozen of the last six months are not the first companies in the IT channel to go out of business and they certainly will not be the last!

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