The blame game

The Middle East channel needs to take collective responsibility for the problems associated with wafer-thin margins, dodgy deals, smuggling, grey trading and even backhanders that continue to hamper the ability for channel business to truly evolve in the region.

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By  Stuart Wilson Published  October 19, 2005

The Middle East channel needs to take collective responsibility for the problems associated with wafer-thin margins, dodgy deals, smuggling, grey trading and even backhanders that continue to hamper the ability for channel business to truly evolve in the region.

There is still a blame game in full swing between the various channel tiers operating in the Middle East. Vendors point the finger at distributors accusing them of not having enough focus, not developing real in-country presence or channel breadth, and not paying enough attention to the significant opportunities that value-add activities offer to enhance margins.

More worryingly, some vendors also accuse the distributors of actively engaging in dubious transactions, programme abuse and certain channel activities to boost margins, regardless of the wider consequences of their actions.

It sounds pretty nasty doesn’t it and undoubtedly there’s no smoke without fire. But the distributors themselves are giving as good as they get in the battle of words currently taking place in the region. For them, the vendors themselves need to step up and take responsibility for their failure to police the channel properly, their failure to identify the dodgy deals and their failure to take action against the distributors and resellers engaging in this activity.

Distributors (and vendors) will also point the finger at resellers, accusing the second tier of engaging in trading tactics that undermine the regional channel’s ability to develop. The resellers themselves will turn around and quite rightly point out that both the distributors and the vendors are more than happy to turn a blind eye to these issues if it means they make their sales targets.

Channel watchdog?

Here’s what the former boss of one regional distribution giant — now working outside the Middle East — had to say on the role that vendors should take in the regional channel and the problems regarding financial transparency in the market.

“I am growingly convinced that the real fix is for vendors to finally police their channels and ensure only bona fida resellers procuring through official channels are supported and keeping a high profile check over these channels. Given that vendors typically have low levels of staff on the ground then maybe a central channel watchdog — BSA type of approach — funded by vendors committed to the region would work,” he stated.

In theory, it sounds like a good idea, but the problem is that many vendors’ activities in the Middle East are still ruled by the need to hit aggressive quarterly sales targets. In fact, many vendors have become a victim of their own success in the Middle East region. Sales figures have gone through the roof — originally through genuine organic growth — but now increasingly through substantial re-export volumes and the dodgy deals that prop up the market.

As the region reaches a critical mass in terms of size, these vendors are being ordered by global bosses to maintain the current rates of sales growth while simultaneously cracking down on grey, re-export, and sales to embargoed countries.

To achieve both is pretty much impossible and it takes a brave vendor employee to pick up the phone to his or her EMEA bosses and tell them that Middle East sales will actually fall 25% but they can take comfort in the fact that this will be due to the fact that grey trade and re-export kit leaving the region will be stamped out. I expect that those who do make this call will be looking for a new employer pretty rapidly.

The only way this sort of change in attitude and mindset can happen is for EMEA and global level vendor executives to understand that enforcing this type of policy in the Middle East would not reduce their global sales — it would just give them greater visibility of where the actual sales were being made. It’s not happening yet and major distributors reckon the conditions are ripe for even more dodgy dealings to occur in the Middle East moving forward, not less.

Here’s what our channel insider had to say: “Perhaps finally vendors will take real responsibility for their sales channels and blacklist the bad in order to promote and support the good. After five years in the market, I see little progress and actually feel the vendors continue to fuel the challenges with local channel stuffing and pricing inconsistencies that lead to the confusion — maybe it’s the only way they can hit their local quotas.”

Who cares?

Do the vendors care where their sales are coming from? Do the distributors care whom they are selling to? The answer to both questions is an emphatic ‘no’ at present in the vast majority of cases. This sloppy attitude towards corporate governance pervades down to the second tier reseller community as well.

“I do wonder if the reseller community really cares, perhaps best illustrated by the constant grey and fake channels that damage true market making and ultimately brings unnecessary stress and financial risk to a market too consumed with earning a fast buck,” commented our channel source.

“The real losers here are the true distributors, VARs and systems integrators in the market who see their good work undone by opportunistic and often fake or programme abusive reselling activities,” he added.

It is frequently a case of hear no evil, see no evil, speak no evil in the Middle East IT channel. Vendors, distributors and resellers have all played their part in creating the current channel conditions in the Middle East. Maybe it is partly a symptom of the region’s status as an emerging market, but that is really no excuse.

Governments need to play their role in pushing for financial transparency and the channel must start looking at their collective bottom line profits, rather than being constantly seduced by top line growth. We still have Middle East channel players selling below cost, killing margins for everyone in the process. Many vendors have created a situation where products are over-distributed and their expectations of sales growth are hyped way beyond the reality on the ground.

In all honesty, the current problems afflicting the Middle East IT channel will probably get worse before they get better. We have seen resellers run off in the past and hurt channel financing, but the real wake-up call that is required to stop this unhealthy fascination with growth over profits has not yet occurred in the Middle East.

What will it take? A couple of major distributors going bankrupt may do the trick, leaving the vendors themselves facing significant bad debts in the region. Believe me, this could happen very soon unless the current market conditions and attitudes at all levels of the channel change.

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