Penetrating Persia

Ask any vendor which Middle East market harbours the greatest growth potential and the chances are the answer will be Saudi Arabia. But while the Kingdom’s healthy rate of technology adoption and rapidly-growing enterprise segment may be proving difficult to resist, it still plays second fiddle to Iran in terms of size and potential.

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By  Published  November 30, 2006

Iran boasts a population of 70 million people, vast spending power and a growing army of internet users. Sources in the market estimate that the PC sector, including desktops, notebooks and servers is now worth more than 1.5 million units and continues to expand at a rate of more than 25% a year. Several years ago, the Iranian IT sector might have been regarded as a fledgling Middle East market, but it has now developed into a fervent consumer of technology goods and gained a strong reputation for software development.

Yet for all those attributes, the Iranian channel remains somewhat constrained in comparison to some of its Middle East neighbours. “You have got to remember that the Iranian market lacks three major things,” claimed one reseller with a strong Iranian customer base. “International banking and international insurance are not readily available, and there is no real direct logistics route to Iran.” Just as significant as that is the ongoing US trade embargo, which naturally continues to shape the development of the IT landscape and creates an imbalance in terms of the vendors which are able to invest in building channels in the market. Officially, the regulations are designed to prevent specific US products — or devices containing a certain percentage of components — from reaching the market, but in truth a large quantity of technology goods find their way into the Iranian channel on a daily basis. The proximity of Dubai plays a key role in this situation, acting as the primary export hub for Iranian resellers or re-exporters to source product.

In that sense, trade restrictions have made little difference to the Iranian channel as natural supply and demand forces ensure that banned product is more than likely to find its way into the channel via one route or another. “I would say that 90% of the Iranian market is done through business in Dubai,” said a source at one UAE-based reseller. “Some US companies are affected by the regulations and if you go to their websites you won’t find the name of an Iranian dealer. But the product gets into the market — it just can’t be officially reported.”

Results from a recent Channel Middle East quick poll also illustrate the part that Dubai has to play in the Iranian market. A staggering 35% of respondents believe that between 20% and 40% of products sold in Dubai are destined for Iran while a further 35% reckon the figure is even higher.

While many in the Iranian market might shrug off the fact that embargoed product can be easily sourced, it has created a series of implications for those further down the food chain. “The major impact is that many big US companies cannot have a head office or partner channel here and that means there is no direct contact for sales and support,” said Amin Moghaddam, CIO at Iranian government organisation Magfa ITDC Company. As a result, recipients of embargoed products face the prospect of handling goods that do not contain the basic service or warranty support that would he taken for granted in other countries.

The current predicament also continues to foster an environment where vendors selling legitimate product are trying to construct viable partner strategies and channel programmes alongside product that is coming in through the back door. Being able to sustain a workable RMA and warranty scheme in Iran isn’t without its challenges.

For vendors, policing the flow of restricted product into Iran — particularly if it concerns fast-moving volume lines — is understandably regarded as a complex and expensive exercise. Sources cite that as a common reason why some vendors turn a blind eye to the situation, along with the fact that the Iranian market possesses so much buying power. A manufacturer compromised by the embargo is only likely to be reprimanded if it is found guilty of knowingly allowing the product to enter the market.

Indeed, the recent prosecution of Super Micro appears to be the only high-profile case in recent years of a vendor having its wrist slapped for breaking the rules. Back in September, the company was hit with a US$150,000 fine by US authorities after pleading guilty to unlawfully exporting components to Iran. It admitted that it sold 300 motherboards to Dubai-based Super Net in late 2001, knowing that the products were destined for re-export to Iran.

The US trade embargo has been keenly exploited by Asian manufacturers who have used the lack of competition to build powerful brands in the market. Vendors such as LG Electronics, Samsung and BenQ have become recognised names in the market and have even established SKD facilities with local partners in the country to sidestep the steep import duties — some of which are as high as 50% — that are also seen as a barrier to entering the market. “LG has one of the strongest channel strategies because it tries to customise product for the Iranian market and it has a factory line for producing monitors here,” commented Moghaddam at Magfa ITDC company.

Elsewhere, PC vendor Acer claims it is enjoying a strong run of form in the Iranian market although it only has a limited portfolio available to customers in Iran. “We are working mainly in the monitor sector,” revealed Said Keighobad, country sales manager Iran at Acer. “That is the main focus for us, and we are seeing consistent demand for LCDs at the moment — it is a big market.”

Acer is currently in the process of inking a distribution agreement with the wholesale arm of Iranian broadcasting company Soroush and Keighobad expects that to give the vendor additional in-country reach. “The Iranian market is developing very fast and we are confident that with our new plan for 2007 we are going to do very well,” he added.

Acer isn’t the only vendor searching for tie-ups with local distribution partners that know the landscape intimately. Other players such as motherboard specialist Foxconn and peripherals brand Genius have also decided that it is better to appoint local in-country partners than wholesalers working out of Dubai.

The logic behind this mentality is that local distributors can offer greater access to the myriad independent computer and phone resellers that populate the market. “In the UAE you can talk about highly professional showrooms and CompuMe or Carrefour, but those outlets are not available in Iran,” said Waleed Jabbour, business development manager and Iranian sales boss at Genius.

Foxconn has just struck up a relationship with Pishtazane for its branded products, while peripherals outfit Genius has signed METEMF to carry its full product range. The deal completes a dramatic U-turn for Genius, which only recently re-joined the Iranian market after a lull of several years. It claims it originally pulled out because high levels of counterfeiting made it impossible to conduct effective business.

However, backed by parent company KYE Systems, it has returned with a new policy, according to Jabbour. “We’ve done more than US$2m of business in the nine months we have been back in Iran,” he revealed. “Next year we are planning for US$5m and expect to be a number one or number two in the market. If the product is of high quality and you make it available then you can get to the top very quickly.”

METEM-F will sell and service Genius’ products as well as form new channel programmes for the local market, according to the company’s president Hamid Shamshiri. “We are offering two years of warranty for the Genius products, which is a real value addition for Iranian customers,” he added. “We will be covering the entire Iran market and offering new promotion activities.” With many brands in the market offering little more than a one-year warranty, Genius is confident its offer will resonate loudly with customers and give it the credibility to compete against local keyboard, mouse and speaker brands such as Microlab and Farassoo. Coincidentally, Farassoo has just expanded out of the Iranian market by establishing a facility in Jebel Ali and is reported to be eyeing annual sales of US$35m in 2006.

Foxconn, meanwhile, has just hosted a series of seminars for resellers and government customers in Iran and claims its investment highlights the scale of its market ambition. “We previously worked in Iran as an OEM partner and supported a couple of local brands, but we’ve now switched to build a Foxconn-branded channel,” said marketing director Vadim Lisenko.

With the likes of Asus and Gigabyte also understood to be growing their Iranian business as a result of a strong local manufacturing sector and a rising gaming community, Foxconn expects the motherboard sector to be worth more than 700,000 units next year. “It’s the right time for us to sustain a proper channel and work with a real distribution partner. There is a strong demand for quality product — it is not only about cheap price,” said Lisenko.

According to Acer, the corporate market continues to be the largest consumer of technology with the public sector regarded as one of the most prominent vertical markets.

That view is also echoed by Jabbour at peripherals vendor Genius. “Doing business in the government sector is very different to other parts of the market because it is buying a lot of products — the tenders are for 10,000 or 15,000 pieces,” he said.

The role of the government sector — not to mention the seven or eight large computer malls that trade huge quantities of product — means the capital city remains firmly at the heart of the IT market. “I would say about 50% of the market is concentrated in Iran with the remainder spread between the other cities,” said Keighobad at Acer.

The Iranian channel might not have the same kind of freedom enjoyed by the UAE market, for example, but soaring demand for IT products means it can be a very profitable market to operate in. There are many local IT providers which can testify to that.

"Big US companies cannot have a head office or partner channel here and that means there is no direct contact for support."

"It's the right time for us to sustain a proper channel and work with a real distribution partner. There is a strong demand for quality product — it is not only about cheap price."

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