Are you ready to run?

This time last year, the Middle East IT channel was hit by a severe credit crisis as a spate of resellers dumped stock, shut up shop, jumped in a taxi to the airport and left behind millions of dollars in bad debts. Is it going to happen again in 2005?

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By  Stuart Wilson Published  April 19, 2005

This time last year, the Middle East IT channel was hit by a severe credit crisis as a spate of resellers dumped stock, shut up shop, jumped in a taxi to the airport and left behind millions of dollars in bad debts. Is it going to happen again in 2005?

It could. In the last couple of weeks a couple of small resellers have ‘done a runner’ leaving behind significant debts — although nowhere near the scale of losses that the channel suffered last year. Some do this deliberately while others are forced to give up through the harsh realities of their financial situation.

According to informed sources, the resellers in question had been purchasing from other second-tier resellers as opposed to first-tier distributors meaning that there has been limited impact higher up the channel chain so far.

However, as always, any bad debts in the channel will eventually work their way up the chain. The second tier resellers that sold to the companies that have made off leaving behind unpaid credit lines will now face problems paying the distributors that they bought from.

As soon as anyone runs off leaving behind bad debts there are knock-on consequences for every company that they bought from. From small acorns mighty oaks will grow and in the case of a potential credit crisis that is certainly true. It is something that distributors are increasingly wary off although nobody wants to spread any panic in the market.

By even talking about this issue there is concern that it can exacerbate the problem as distributors become increasingly nervous about their credit exposure and start calling in debts from resellers. When you consider the fact that most resellers rely heavily on their credit lines to keep the cashflow ticking over, a little bit of fear, uncertainty and doubt (FUD) at the distributor level can have severe repercussions on resellers' day-to-day ability to continue trading.

Simultaneously, distributors cannot just ignore the warning signs and hope that the problem will go away. That attitude smacks of a hear no evil, see no evil, speak no evil approach and merely lays the foundations for even greater pain further down the line.

Credit remains the lifeblood of channel activity and it still remains a constraint that hampers the ability of resellers to grow their business. It is a problem that will not be solved until there is greater financial transparency in the region, and any move in this direction has to be driven by government and legislative bodies.

Now the question that has to be asked is, if this problem started in April last year, why are we starting to see the possibility of a similar situation developing at exactly the same point this year?

There are a few theories floating around the market — some with more credence than others — that attempt to answer this question.

The first theory relates to demand seasonality in the market. The market has just come out of the busiest two quarters of the year running from October 2004 to March 2005 inclusive. According to vendor estimates, these two quarters account for 65% of the total sales that will be made during the financial year running October 1st 2004 to September 30th 2005. This means that April 2005 through to September 2005 will contribute just 35% of the regional sales volume.

As this dip in sales occurs those resellers that have been masking their losses through increased cashflow suddenly find that the cracks in the business model become a lot wider and the stakes have suddenly changed. They could keep buying more and more to maintain the illusion of growth but frequently this just means holding more and more depreciating inventory and digging an even deeper hole, or selling the product on at below cost just to get it out the door.

So that’s reason one. The second reason that some people reckon could be the cause is the fact that many major vendors financial year-end occurs around April. Their desire to meet sales targets and claim hefty bonuses can lead to a blitz of channel stuffing in order to make the numbers. With vendors stuffing the distributors, they in turn are forced to come up with the offers and promotions that stuff the resellers. Then the resellers find that there are no end-users for the product, and that the market is actually slowing down (see the seasonality point above).

The third reason, and I like this one, is that some resellers — especially those originating from overseas — do not fancy the idea of working through another scorching hot summer in the Middle East. So they pack their bags and jet off to cooler climes with a briefcase full of cash that they really should have used to pay back their suppliers.

In reality, it is probably a combination of all of the above. But the message to resellers is a simple one: if you can’t stand the heat get out of the kitchen.

Just pay your debts before you go.

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