African adventure

Building channels in East Africa is a top priority for IT vendors looking to tap into the market's strong growth potential. With many committing more resources to markets such as Kenya and Tanzania, a select breed of distributors and logistics providers is emerging with the skills and contacts needed

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By  Alex Malouf Published  December 27, 2004

Long-term potential|~|Tikoo,-Navin-----APTEC-----.jpg|~|Navin Tikoo, sales and operation manager at Aptec Africa |~|The African IT sector offers huge long-term potential for those that understand the intricacies of the market dynamics. However, vendors and distributors have to time their investment carefully, reflecting the readiness of the region to build an IT infrastructure and also the limited spending power that exists. In East Africa specifically, markets such as Kenya, Tanzania and Uganda have attracted the attention of major vendors and distributors. To date, investment on the ground has been limited and ensuring that the local channels are well financed is an ongoing challenge. Channel Middle East caught up with distributors leading the charge into East Africa and gauged vendor opinion on the prospects for growth. Investment in East Africa has already begun in earnest for several major distributors. Leading the charge from the Middle East are Aptec and Redington, both of whom expect to accelerate their penetration of the market during 2005. Besides these two players, there are also a number of indigenous African distributors such as Jet and Tarsus with limited reach into the market either directly or through sub-distributors. “Redington identified Africa as the next growth engine and hence set up a dedicated division to focus on the market,” says Anil Sharma, sales manager East Africa at Redington. “In the last two years we have worked very closely with vendors to secure Africa-specific distribution rights from vendors like HP, Intel, Acer, BenQ and Fujitsu Siemens. Redington now has two local offices for sales and distribution in East and West Africa.” The main focus countries in East Africa are Kenya, Ethiopia, Tanzania and Uganda with limited sales also possible in Eritrea and Rwanda. Defining the target countries is the easy part for distributors; identifying the best resellers to work through provides a much more daunting challenge at present. Navin Tikoo, sales and operation manager at Aptec Africa explains East Africa’s appeal and also the limitations of its existing channel landscape: “East Africa is one of the key markets in the continent. It may not be the largest by volume or growth, but it is important because it is stable politically, both in terms of regulation and currency fluctuation-wise.” The local channel landscape consists mainly of SMB-focused resellers with a few enterprise players on the ground and a nascent retail sector. “As is typical of all emerging markets, most of the resellers engage at all levels, bidding for projects, servicing small dealers and even consumers,” explains Tikoo. Sharma at Redington paints a similar picture: “The channel landscape is fragmented. It is not a cohesive community of resellers. There are distributed pockets, which cater to the SMB and tender business. Although some channel partners are quite up to date, parts of the channel still need a lot of education in areas such as server configuration.” The emerging channel landscape also makes it difficult for vendors to identify the best route-to-market in East Africa. “From the distribution point of view, we are dealing with some regional and local distributors,” says Elias Boughosn, country sales manager at Acer. “But you don’t find global broadliners in East Africa. This is mainly due to the difficulty that distributors experience financing the tier two channel. We also have difficulty in giving long credit lines to the local or regional distributors because it is difficult finding an insurance company to cover this.” ||**||In-country issues|~|tanzania.jpg|~|Tanzania's market is a microcosm of the larger African scene|~|Channel finance — especially at a local level — remains a massive stumbling block in the development of the East African IT market. This is one of the reasons why traders and sub-distributors prepared to take a risk on giving credit lines to customers in the region can still carve out a lucrative, albeit it slightly risky, business in the region. The lack of a clearly defined channel structure on the ground and the embryonic nature of many vendors’ channels has also left the door open for product to enter East Africa from practically anywhere in the world. At present, product finds its way into the East African market from Dubai, South Africa and even the UK. Supplying kit from outside the region remains preferable to a local presence, but this may change in the years to come. “Because each country has its own set of regulations, an in-country operation can only service the needs of that particular country,” explains Tikoo. “Having said that, barriers to cross border trade in the region are being streamlined and in due course movement of goods between countries will become viable and cost-effective.” Vendors are aware of the limitations that exist in the development of in-country operations by major distributors. “Most of them are dealing out of a regional base holding stock outside the countries,” says Boughosn. “One of the main problems is that distributors shy away from moving in-country because of the unpredictable socio-economic position and the diversity that exists from country-to-country.” The relative immaturity of the markets in East Africa is reflected in the composition of IT buyers and the type pf products they demand. Like all emerging markets, hardware takes the lion’s share of initial IT spending as organisations look to build up their basic IT infrastructure. “The government followed by the finance sector have been the major segments driving demand,” explains Tikoo. “Of late, we do observe demand being generated by the private sector, spearheaded by mobile telecommunications companies. The product demanded is mostly hardware, which includes components, branded PCs, printers, servers, networking and notebooks. Software and services demand still lags.” Estimates on the total market size vary wildly. Consensus estimates put the total addressable PC market at 100,000 units per year, including both branded and locally assembled machines. The important point to bear in mind is that not all products sold into East Africa are brand new. Boughosn explains: “Locally you will see a lot of secondhand items being sold such as Pentium III machines or 14" CRT monitors. If you take this into consideration, it is a sizeable market. But if you talk about new releases and the very latest products it is not as large. The spending power of the local population does not allow vendors to make real volumes. Yes, these countries have very large populations, but many are looking for an extremely low cost PC, notebook or monitor.” ||**||Logistics headaches|~|SukantMishra.jpg|~|Sukant Mishra, Redington’s business manager|~|Moving product in-country also creates an administrative headache for the channel with a web of complex customs and duty legislation in place in East Africa. Sukant Mishra, Redington’s business manager explains the issues: “There is 0% import duty on PCs but there can be 15% import duty on peripherals and then there can be further taxation such as VAT at 16%. There is inconsistency in the taxation structure leading to tax evasion by unscrupulous dealers.” “Goods can get blocked at ports for reasons ranging from changed duty structure on peripherals and computing equipment like routers being reclassified as communications equipment with higher duties. In a nutshell, it is an ongoing fight,” he adds. With duty levied on components imports, the local assembly market has a real battle to supply machines at a price that appeals to customers in East Africa. Some have found innovative ways to combat the problems. One popular ploy is to import from Dubai, using local consolidators who pack components into a PC chassis to ensure that it is classified as a complete PC and hence duty-free. The local assembly market accounts for 60% to 70% of the local market according to distributors operating in the region, although product quality and post-sales service levels remain an issue. Authorised channels are not only up against the complexities of the import systems; they also have to contend with the impact of the grey channel. “Grey is a global phenomenon,” says Tikoo. “As the market size in East Africa is relatively small and complex, grey movement of products does affect the authorised channel more than other parts of the world.” The relative proximity of Dubai also increases the impact of grey channel activity in East Africa. Brand names without a local presence in East Africa can also see their brand equity eroded with grey channel players happy to replace defective parts with local products, thereby destroying product quality, according to Sharma. Vendors and distributors are hopeful that legislation will improve the situation in east Africa in the coming years. “We have already observed a positive change in regulations and duties for ICT products in this region, which is conducive for business. Having said that there is still a long way to go before these barriers are in line with a place like Dubai.” One problem facing vendors is ensuring that their channels and their branding activities are focused on the relatively small percentage of the population that can actually afford to purchase kit. “You are looking at countries with huge populations but it could be the case that 95% of the population has a GDP less than US$200,” says Boughosn. “Then there is a niche market with a high disposable income. How do you target the sales and marketing effort appropriately? Local dealers are almost having to engage in one-to-one marketing activities.” ||**||Africa appeal|~|nairobi.jpg|~|Nairobi: Only a small percentage of the Kenyan population can afford IT kit|~|Selling IT products into East Africa is certainly not a walk in the park. Because of the limited market size, it is difficult for distributors and vendors to justify expenditure in the region. With a chaotic channel landscape, and a strong grey channel challenging the role of the authorised channel, it is little surprise that many companies are taking a wait-and-see approach with East Africa. Sharma explains the main issues faced: “There are long credit periods and cheque defaults are very common. There are longer lead times to close sales, longer shipping times, high duty arbitrage and selling out without a proper invoice to avoid 16% VAT by the unorganised channel remains an issue. Typical sailing time is three weeks for material to land at sea ports. Material gets stuck at sea ports and airports and the infrastructure is poor. Import declaration forms and subsequent inspections delay the arrival of material and to top it all off, one has to be very alert as theft of stock in transit is very common,” he adds. East Africa is a region where the growth of the IT market remains tightly constrained by financial issues. The inability of vendors and distributors to inject finance and credit into the channel coupled with the limited spending power of the consumers creates tough conditions. Credit is incredibly risky and typically stretches to 60 days as a matter of course. Dealing in East Africa is certainly not for the faint-hearted and it is no wonder so many IT companies still tread cautiously. ||**||

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