Grey Days

The Middle East is fast becoming a global hub for grey market product flow. Are major IT vendors really doing enough to address the problem?

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By  Stuart Wilson Published  September 19, 2005

Fighting the problem|~|tghoul200.jpg|~|Tarek Ghoul, regional channel manager at Cisco|~|Grey product flow remains a global headache for the IT industry. Talk to the vendors and they will tell you in unison that the problem is under control and they have been putting in place the appropriate mechanisms to stem the flow of grey product. It all sounds pretty convincing until you start talking to distributors and resellers operating on the ground and witnessing firsthand the impact of grey product on their business. Nowhere is this truer than in the Middle East where grey remains a major issue impeding the development of genuine in-country second-tier reseller channels. Some vendors understand that grey product flow is still a problem and are not afraid to admit the fact. While most have standard policies for dealing with persistent grey traders, Middle East distributors believe that too many are still prepared to turn a blind eye to the problems caused, preferring instead to prioritise their quarterly sales targets. It is the vendors selling high-end IT infrastructure and networking kit that have actually been most aggressive in tackling grey trade. “The secondary and grey market is an industry-wide issue that we have been dealing with for years,” said Tarek Ghoul, regional channel manager at Cisco. “Our primary concern is that our customers feel secure with the quality and support available for the Cisco products they purchase, and therefore we proactively monitor the secondary and grey market to ensure this result.” Vendors are prepared to take a hard line approach disciplining distributors that find the allure of grey trade just too enticing to turn down. Hard drive vendor Seagate’s policy is crystal clear. The first time a channel partner or OEM is caught engaging in grey trade the vendor reserves the right to fine them up to US$50,000; second time offenders find the penalties climbing to US$100,000 and third time offenders risk a range of additional punishments including the dissolution of their direct buying relationship. The factors that create grey product flow are widely agreed upon: differential vendor pricing policies, stock availability issues in specific regions, currency fluctuations and abuse of special pricing discounts. In addition to these factors, there is also an important distinction to be made between inter-regional grey product flow — from Asia Pacific to the Middle East for example — and intra-regional grey flow between countries within a defined geographic theatre. ||**||Policing the channel|~|rajeevmukul200.jpg|~|Rajeev Mukul, general manager for Maxtor Middle East and Africa|~|“Cross regional product movements have been reduced considerably in the last year due to stronger policing efforts,” said Gulfem Cakmacki, senior channel sales manager at Seagate Eastern Europe, Middle East and Africa. “Dubai is still a crossroads for much of this activity though. Special pricing abuse is an issue in all regions, but less so in the Middle East than other theatres.” There is still a discord between the main grey market worries experienced by vendors and distributors. Rajeev Mukul, general manager for Maxtor Middle East and Africa, explained: “For the regional channel, the main concern is grey products entering the region. For vendors, both incoming and outgoing grey goods are a matter of concern or action.” The hard drive vendors talk a good game but many channel insiders still believe they are not taking enough action to actually combat the problems that remain horribly visible to major components distributors. Ali Baghdadi, CEO at regional distribution giant Aptec, said: “I am certain that within the components market there is a very large proportion of outgoing grey leaving the UAE and going to other regions. I think that if you talk to the hard drive vendors about how many units they sell into specific countries in the Middle East it is laughable. They are turning a big blind eye. There are distributors with stocking hubs that have access to markets such as Iran and India yet claim they are selling the product into Saudi Arabia.” When you are talking about grey channels it is very hard to ignore the impact of Iran. This is a country where US products are still under embargo yet you don’t have to scratch too far beneath the surface to realise that pretty much all products are finding their way into the market. In fairness, major vendors such as HP and Cisco have put in place stringent measures regarding end-user verification for high-end products, but replicating this type of policy in the volume space is nigh on impossible. The question that needs to be asked is whether grey is a necessary evil in a region where some markets are embargoed? Those sitting outside the Middle East tend to have a very different view to those inside the region. “No, that’s ridiculous,” was the unequivocal response from Woody Taylor, senior manager global market integrity at Seagate to the question. “That sentiment is unethical: corporations have an obligation to adhere to the political decisions of their home countries, for better or worse. Consciously deciding parallel imports to an embargoed country are ‘necessary evils’ is, at a minimum, intellectually dishonest.” ||**||Phones and software|~|gulfemc200.jpg|~|Gulfem Cakmacki, senior channel sales manager at Seagate Eastern Europe, Middle East and Africa|~|While this will always be the corporate line, it remains common knowledge to all those in the Middle East channel that embargoed products are freely available for purchase in Iran. The massive IT malls in Tehran are testament to this fact and once again it raises the issue of whether some vendors continue to turn a blind eye to some grey channels. One major components distributor operating out of Dubai painted a slightly different picture of this thorny issue. “Products easily flow to embargoed markets through channels. Vendors and distributors are aware of this. Grey is necessary for vendors to sell into embargoed markets,” he said. It is not just components vendors that face problems with the grey market and the issues apply equally well to other sectors of the market. Jebel Ali’s rapidly rising position as a global technology stocking hub is identified as a major factor in the growth of this activity. While Jebel Ali’s rise in prominence is undoubtedly beneficial for the development of regional IT channels in the Middle East a few teething problems appear inevitable. Mobile phones is one area that the channel believes deserves close scrutiny when it comes to identifying grey trade. “Mobile phones find their way to the Middle East, particularly Dubai, which has emerged as a hub for redistribution,” continued Baghdadi. “What we have also discovered is that a number of the mobile phone VAT carousels that used to operate in the EU have moved shop to the Middle East. It has been a nightmare scenario for us as a mobile phone distributor because we cannot sell to any company suspected of being involved in that activity. Nokia has blacklisted many companies in this region because of that activity, but not all vendors have been as vigilant.” Components and mobile phones display similar characteristics inasmuch as they are relatively small and expensive items that can be moved quickly around the world. Volatile pricing and availability also plays its part in boosting the channel’s propensity to engage in grey trade in these products areas. The grey problem also exists in the software sector. ||**||Vendor issues|~|alibaghdadyaptec200.jpg|~|Ali Baghdadi, CEO at regional distribution giant Aptec|~|Earlier this year Microsoft launched a court case in the UK against a reseller it claimed had illegally sourced product from the Middle East channel. A distributor audit followed and the ramifications of this affair continue to rumble on in the Middle East market. Many of the problems stem from software vendors pursuing discounted pricing policies to stimulate growth in one particular region without paying enough attention to the global implications of this strategy. “Let’s take Microsoft as an example,” continued Baghdadi. “If it wanted to go into China and combat pirated software, it could cut the price and that would be fine as long as the product only operated in Chinese. The same applies in the Middle East. If it comes up with Arabic products, that’s fine. However, launching a cut-price product in the Middle East that has a UK part number and also operates in English and then asking why it is flowing back to the UK is laughable. Of course it will flow back to the UK. Vendors have to be realistic and cannot just wield a big stick to the channel unless they do their homework and put their own house in order first.” More than two-thirds of respondents to a Channel Middle East quick poll believed that the amount of grey product entering the Middle East IT channel had actually increased during the last year. The market is now reaching a critical mass in global terms where it is becoming impossible for vendors to ignore the problem or write it off as insignificant in the wider global context. Vijendra Singh, manager 3C group, graphics and display division at Almasa is in no doubt: “In spite of tough measures taken by some of the vendors, grey trade is flourishing in the region. However, the situation has started to improve lately because of the increased local presence of most of the vendors. Rebate and incentive schemes are also starting to drive channel loyalty to the authorised distributors and helping to lower the price differentials.” ||**||Currency fluctuation|~|cschellhp200.jpg|~|Christoph Schell ISE SPO manager at HP|~|Major vendors with advanced channel programmes are now laying the groundwork to truly combat the problem. HP is working closely with its distribution partners in both the Middle East and Africa on strategies that address the issues of differential pricing policies and the abuse of big deal discounts. “In terms of controlling grey, HP now has strong control of standard pricing and promotional pricing and increased the levels of communication between the Middle East and Africa,” said Christoph Schell ISE SPO manager at HP. “Now it is about big deal control and currency fluctuations — especially when you have partners in North Africa buying in euros and Middle East partners buying in dollars.” HP had encouraged its Africa distributors to set up in Jebel Ali allowing the vendor to drop ship product to them in the free zone even if its final destination was eventually Africa. As part of this strategy, HP initially agreed to cover the shipping costs associated with moving the product from Jebel Ali to Africa up-front. However, it soon became apparent that these distributors were discounting the logistics cost into the price and pushing the product into the Middle East channel instead. “We are now asking for physical proof that the product has entered Africa before paying out,” said Schell. “This is an additional administrative burden but it is preferable to a distributor saying they are selling to Africa and the product ending up in Saudi Arabia or Dubai at 5% less than the authorised distributors for those countries can sell at.” Vendors need to keep a much closer eye on the activities of companies operating out of Jebel Ali, and it is their responsibility. “There are resellers that have been set up in Jebel Ali by a partner from a country outside the region whose main purpose is to identify purchasing opportunities in the Middle East. There are many IT and telecoms companies whose very existence and purpose for being there is questionable,” concluded Baghdadi. ||**||Wake up call|~|vijendra200.jpg|~|Vijendra Singh, manager 3C group, graphics and display division at Almasa|~|Vendors understand they can never totally eradicate grey product flow on a global and regional basis, given the constant factors driving it such as tax and duty regulations and currency fluctuations. Nevertheless, they need to do as much as possible to limit the problem. “Grey can only be controlled through constant monitoring from vendors,” concluded Singh. “Timely action in terms of prices and promotions can erode grey operators margins.” With channel players throughout the supply chain operating on wafer-thin margins, it is inevitable that they will always look for (and most probably find) a few creative ways to boost their profitability levels. Grey is not going to go away anytime soon, but that is no justification for vendors operating in the Middle East to bury their head in the sand, make their quarterly targets and pretend it just is not happening. For Middle East IT channels to truly develop to the next level of sophistication, vendors need to stand up and be counted, stop passing the blame on to channel partners and accept that it is their actions and policies that are ultimately responsible for creating grey market product flow. ||**||

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