Credit crisis

The Dubai channel has been hit hard this year by credit woes, with sources claiming that as much as US$30m has left the market. In response distributors and resellers have been taking a long hard look at how business is done in the channel.

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By  Alex Malouf Published  September 24, 2004

Channel woes|~|compstreet-sde.gif|~|For those with the will, there are numerous ways to set up shop in Dubai|~|The Dubai channel has been hit hard this year by credit woes and resellers “doing a runner”. Sources on Computer Street believe that the channel could have been hit for as much as US$30m. In response distributors and resellers have been taking a long hard look at how business is done in the channel. Recent events may be a case of deja vu but with falling profits in IT trading the channel is feeling the pain. Dubai has been reeling from a string of companies absconding this year, and the channel has been hit hard. More than ten resellers have gone under and have left behind a trail of bad debts wreaking havoc with distributors’ finances and upsetting the atmosphere on Computer Street, the hub of the city’s channel. People have been quick to point the finger but the fundamental problems of doing business in Dubai are to blame. “These hit and runs are mainly found in Dubai as the people doing business here are not locals,” explains Mehdi Amjad, group managing director at Almasa IT Distribution. “You rarely find this behaviour in other countries but foreigners come to Dubai and then leave very easily. And that is the weakness of Dubai. Everybody has foreign nationality and will not lose anything by leaving the market.” This sentiment is mirrored on the Street. Established resellers have looked on with shock at the increasing ease of opening up a shop in the market. “It is so simple to become a reseller now and have a shop on the Street,” says Bharat Kewlani, managing director at Transworld, one of the largest resellers in Dubai. “You can get a sponsorship for US$2,000 to US$3,000 and with that there are no obstacles to starting business.” Channel insiders note that the market has seen hit and runs before, but with margins decreasing rapidly the impact bad debt has on businesses relying on credit has never been stronger. “To trade in IT you need a lot of cash and there are many companies without money trying to run the business on the credit they’re given,” surmises Armagan Demir, VP sales and marketing at distributor EMPA. “Margins are declining, and have now dropped to less than 5%. The revenue generated is so low and the risk being taken is so high. If you are not financially strong then you are in trouble.” The combination of easy credit, high credit lines and low start-up costs has meant that it is often more profitable for resellers simply to leave the market and take the cash rather than investing in the long-term business. Amjad explains: “The cycle is very simple. A salesman in an IT company opens a showroom and takes US$30,000 from his family. He opens the shop and he suddenly finds distis giving him a credit line of a million dollars. Any shop right now operates with a million dollars from the top seven or eight distributors in the market.” There is a clear distinction between resellers that come to the market with the clear intention of deceiving the channel and resellers who get into financial trouble after mismanaging business risks but the result is the same. “Some people use only credit to finance their business,” adds Armagan. “If they cannot manage the business properly then they go down. For others it is more like organised crime. They come to Dubai, do business for eight months or a year and then they pick up and run with a high credit limit. There are different reasons why companies fold but in the end this happens because there are no controls. You don’t have to give financial statements to anybody and so people abuse the system.” ||**||Signs on the Street|~|copsstreet-side.gif|~|Rumours and gossip are enough to send the Street into a frenzy. But there is no smoke without fire and news spreads across the Street in a moment|~|On the Street resellers are aware of the problems distributors face with credit and do agree with having limits on credit lines but many also suggest that distributors should come down to the Street and keep their eyes peeled for telltale signs of trouble. “We feel that distributors should check the activities of resellers and traders and their revenues before giving credit,” argues Tarun Nandi, general manager of Computer Street retailer Bluebell Computers. “A credit limit of US$10,000 is a world apart from US$1m. If someone is getting credit for components it is simple to sell at 3% less and make the cash overnight. So when you are dealing with credit on fast moving stock then it is dangerous.” Selling below cost is the first sign that all is not well with a reseller. But with distributors under pressure from vendors to shift ever greater volumes it is tempting to overlook a rapid rise in numbers to hit target. “When resellers go under it is often due to distributors and vendors pushing for volumes,” adds Nandi. “With the constant demand for sales, is it surprising that people sell below cost to meet numbers? They should look at their own behaviour and ask why people build up such debts.” Awareness of reseller behaviour is crucial if distributors and vendors want to put an end to market malpractice. Recent runners shifted stock at ridiculously low prices to get their hands on quick cash and flooded the market with product. One printer vendor has had a hard time of late trying to meet targets. But resellers have to take a stronger line on Street trading as they get hit the hardest when things go wrong. “I have lost US$60,000 over the past two years,” admits Rakesh Bohra, general manager at Trinity Infotech. “Typically US$27,000 of my bottom line profit is gone annually. Resellers are not making big sums of money and some of us are now stuck after giving credit. What is happening creates a chain reaction and with the very large amounts involved you will see other people also leaving the market after several months.” The answers lie not in audited financial statements or credit agencies but in old fashioned communication. The gap between channel tiers has grown ever wider and the comfort of Dubai Internet City seems a million miles away from the traders on Computer Street. Distributors may tighten credit limit for a few months, but unless concrete steps are taken the channel will experience similar crises in the future. “All the distributors and traders have started squeezing and are collecting their old cheques,” explains Bohra. “It is an example of good discipline which is filtering down to the Street. But the channel will be back to its usual games after a few months. The channel has to meet regularly, maybe at IT forums or something similar, to discuss credit and disseminate the information so that we know if somebody is playing the fool and undercutting the market.” ||**||Fighting back|~|emachine-side.gif|~|To stop future calamities distributors need to do more talking and let each other know about reseller activities|~|One channel player has been pushing for distributors to work together to identify defaulting resellers. Sunil Dandawate, managing director at Kobian Distribution, proposed a shared database of risky resellers back in June and is now moving forward with his idea to safeguard the channel from bad credit. “Customers not paying for product is becoming an increasingly frequent problem for the market,” explains Dandawate. “We can help each other out by sharing information through a forum and possibly paying a subscription to access the information collected. Such a scheme would help identify customers posing a risk and could also help address issues such as resellers selling below cost to maintain their cash flow.” “There have been around 12 hits on the market due to defaulters and to prevent this distributors should be made aware of bounced cheques or resellers selling below cost,” adds Dandawate. “We here on the Street know who is selling below cost. Similar distributor forums exist in places like Bombay and have proved to be a great help for the local channel.” The major distributors do talk to each other when they hear market whispers but an information sharing system would go much further in countering credit issues. “My credit department does communicate with other distis when they hear a rumour but it is nothing official,” explains Amjad. “But so much more can be done by having a formal system in place with more people contributing towards it. This would really identify the problem at a very early stage and would stop dubious dealers from playing the market. Danger comes from resellers who are on a credit hold with one distributor and then get financing from another. That is what we are trying to avoid.” But other distributors believe that little will truly change and that these are the risks they take when working in Dubai. “Distributors will get hit and they have to take the punches,” says Armagan. “We think that more afflictions are on the way but Dubai is based on distribution and freedom. Everybody wants to recover the debt and if they disclose information then credit lines will be frozen and the company will go bust. So distributors wait for the reseller to take from another company, get the money back and then stop credit. This is the mentality of Dubai.” If the channel cannot sort out the mess in the market the last resort may be to seek help from the government but don’t expect any changes soon. “It may take ten years for change to come from the government,” adds Armagan. “If the government introduced a tax system this would help distributors enormously but this won’t happen soon. If I have somebody’s financial statement and they go bust, what can I expect from the Dubai government? They cannot do anything. The legislation on cheques is a bonus but if I put a reseller in jail how will he pay me back? I cannot win!” The only other alternative is to sit the bad times out, but resellers are not expecting business to pick up for some time. This summer has seen IT business drop off significantly in Dubai and vendors should be aware that distributors and resellers are suffering. If the channel cleanses itself and waits for weaker players to disappear then vendors need to hold back on stuffing the channel and support their partners on margins. “In one sense what has happened is healthy and I hope people learn from the credit issue,” concludes Amjad. “Distributors are so pressurised by vendors that they give far too much credit to the market and create an unhealthy atmosphere for doing business. We have spoiled resellers by giving them more credit than they can chew. They are overtrading and whenever there is a problem they drop as they don’t have the capital to pay. Distributors are guilty in part and we have to work together to control credit and maintain a good balance on that level. The market will then even out and people will not to get into difficulties.” ||**||

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