Selling into the CIS

Distributors from the Middle East are turning their attention to the untapped growth opportunities that exist in the CIS markets

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By  Andy Tillett Published  January 29, 2006

Fast developing region |~|cis200.gif|~|The CIS region|~|As its IT markets go from strength to strength, more distributors are looking towards the opportunities the Commonwealth of Independent States (CIS) offers. Estimated by major IT players dealing in the region as a market of US$400m, the CIS holds massive potential for investment from companies in the Middle East who are keen to maximise their share in developing markets. In the early 1990s the collapse of the Soviet Union opened up 11 markets in Central Asia to free trade. These countries are still in the early stages of building independent infrastructures, but their adoption of new technologies shows a very positive attitude towards growth and presents an exciting opportunity for IT companies looking to reap the rewards of a high growth region. This doesn’t mean that the markets of Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and the Ukraine can be tackled as one homogenous market. These countries vary dramatically in their economic growth and development, their addressable market size and the openness of their markets to outside traders. Factors such as oil wealth skew the purchasing power of the CIS countries and Kazakhstan and Azerbaijan have more developed IT sectors because of their oil rich status. In other areas, such as the regions most populated country, Ukraine, the unstable political situation clouds the market making it volatile and difficult to plan investment in. “Turkmenistan and Tajikistan are very late developers, and I compare their markets to that of Kyrgyzstan five years ago or Kazakhstan seven years ago. Kazakhstan is the most developed and stable market with the highest standard of living,” says Vladislav Rogovoy, managing director at CIS specialist distributor Lightspeed, which has sister company operations in both Kazakhstan, employing 20 people and Kyrgyzstan employing 50 people. Lightspeed has enjoyed rapid growth since setting up in Dubai’s Jebel Ali free zone in 2001, and now employs a 15 strong team and has picked up the rights to a number of high profile vendors including Foxconn, Asus, ECS Elitegroup and Micronet along the way. ||**||Strongest markets|~|light200.gif|~|Vladislav Rogovoy, managing director at CIS specialist distributor Lightspeed|~|With a population of 15 million, a stable political structure and a healthy GDP per capita of US$2,180, the market of Kazakhstan is the most common entry point into the CIS for most vendors. The government has committed budget to develop its country’s IT sector, which has in turn encouraged vendors such as Fujitsu Siemens Computers (FSC) to make more solid investments in the country. “Ukraine may be the biggest overall market in the CIS, but Kazakhstan is more politically stable and has more business opportunities and growth. We opened an official representative office in Kazakhstan in Autumn 2005. We have had presence in the country since 1999 and will continue to invest in people and business development in Kazakhstan,” says Ekaterina Krymova, PR manager for CIS and Russia at Fujitsu Siemens Computers. Other A-brand vendors present in Kazakhstan include HP, IBM, Dell, Intel, Microsoft, Oracle, Sun Microsystems and SAP. The Ukraine is the most populated market in the CIS with 47 million inhabitants, and borders with Europe, which makes for better logistics access, but its fragile political status makes it a difficult market to work in. Distributor Elko has a successful in-country operation based in the Ukraine. The Ukraine accounts for around 10% of our overall business, which is mainly in Europe. The growth rate in Ukraine was not as fast as we had expected in 2005 and it has a lot to do with the political changes that are taking place in-country at present. We think that in a year or two, growth will accelerate much faster,” says Jens Hartmann, CEO at Elko Group. Driven by its oil wealth and government’s strong investment programmes to develop its economy, the third largest market in the CIS, after Kazakhstan and Ukraine, is Azerbaijan. Resellers in this South Eastern CIS state, such as Bestcomp, a Azerbaijan based reseller offering computer equipment, peripherals, networking and telecommunication devices, from vendors HP, Acer, Fujitsu-Siemens Computers, MGE and Tripplite have taken advantage of their thriving operations to leverage their business into surrounding countries. “We have been established since 1995 and now have six shops and two service centres. In some countries we estimate the annual growth at 20% to 30%. The Azerbaijani market for our products is around US$40m to US$50m a year. In 2006 we are aiming to boost our sales in the other countries of the CIS where we don’t already have business,” says Saleh Hasanov, service manager at BestComp Group.||**||Oil wealth|~|bestcomp200.gif|~|The team at Azerbaijani reseller Bestcomp|~|It is common to find resellers operating in the CIS dealing with their neighbouring countries, particularly those in the larger nations dealing to their smaller neighbours. It is common for larger resellers in the Ukraine to sell into the markets of Belarus or Moldova, or for resellers in Uzbekistan to deal in Kyrgyzstan or Tajikistan. In many respects the CIS shares a lot of parallels with the Middle East – both are emerging regions, both are made up of a couple of large markets and a number of smaller surrounding markets, and the CIS countries are easily accessed from the Middle East, with well established transport links. “Masses of product comes into the CIS from Dubai. Even some vendors that were working through Russia have tried to move their CIS operations to Dubai, as logistically it is better to take product from here than from Russia or Europe. As areas like Jebel Ali in Dubai are free zones, it is tax-free, so cost wise it is cheaper,” says Nafiset Mami, deputy marketing manager at Empa Middle East, one of the longest serving and largest distributors to the CIS states, headquartered in Dubai. There are presently few distributors based in the Middle East who have significant operations in the CIS: Lightspeed, Empa, Asbis and FDC are the most prominent. As an indication of the level of growth that distributors can enjoy, Lightspeed claims it has been doubling its CIS business year-on-year. Doing business in Central Asia is not simply a case of turning up with a shipment of stock. An operation needs to be carefully planned before it is put into practice. The first pre-requisite is to be able to speak Russian. The CIS countries have their own languages and the common second language of the region is Russian, rather than English, and this is essential for doing business. Planning on the part of any importer is important, as are a number of factors involved in the physical movement of goods into and between CIS countries. “Each state is independent and has borders between them – meaning taxes, which can vary depending on the politics of that country – and the hardest border of all is between Russia and the CIS. We fly in most of our goods to each country direct because of this,” says Rogovoy at Lightspeed. ||**||Region to region links |~|empa200.gif|~|Nafiset Mami, deupty marketing manager at EMPA |~|Dubai has good links to the Eastern part of the CIS through the air, and FSC claims that the markets of the Ukraine, Belarus, Armenia Georgia and Azerbaijan take products imported from the Middle East. However, some governments place levies on who can import or export to them, to protect their emerging economies. “Some countries have regulations which forbid the transfer or exchange of currency, so only large, approved companies can make import and export transactions,” says Mami at Empa. “Only the companies that have been there for a long time can handle logistics issues, we have certain selected forwarders who have been working in CIS logistics for a long time and know the difficulties of the region regarding borders and clearance of products.” The successful distributors in the CIS have been cultivating their links into its countries for a long time. Setting up a distribution chain into the CIS will involve cultivating native links into it. Help may come from A-brand vendors that are present in the region, but this isn’t always the case. “A lot of vendors are investing in these countries and making direct product supply links to distributors in-country. This affects the distributors outside the region that are exporting product into it. The markets are still small for vendors, so there isn’t too much direct investment at present, but we have seen it impact our business,” says Rogovoy at Lightspeed. Mami at Empa agrees with this view, saying that most of the PCs in the CIS are produced through its strong local assembly market and EMPA sells a large amount of its components to integrators who are producing PCs for government tenders. Tahir Takabaev, managing director at CIS wide distributor Asbis, based in Kazakhstan, estimates that 95% of the PCs bought in the region are locally assembled. ||**||Import driven market |~|fjc200.gif|~|Ekaterina Krymova, PR manager for CIS and Russia at Fujitsu Siemens Computers|~|Major vendor investment in the CIS is low. Consumer electronics vendors Samsung and LG have set up factories, and sources in the region say that they believe HP will be one of the first to make a major commitment to the area, but at present there are no major vendors with PC production facilities in the CIS, leaving most stock to be imported to the region. This can become a confusing issue, affected by the central location of the CIS. There is easy access to the region from Europe, particularly through the Ukraine and Armenia. From the East side, there is a route through to the CIS from China and the Far East, and from the North are links with Russia. Takabaev at Asbis breaks down the product coming into Kazakhstan where the Asbis operation is based as 50% coming from the Middle East, 30% directly from the Far East and 20% from Europe. This means there is product flow from nearly every different pricing area that major vendors operate; making a grey market inevitable. Lightspeed says that that it cannot deal in peripherals such as casings, keyboards and speakers as they are undercut by products flowing in from China; though similarly, it has the edge on other distributors when it comes to hard drives, optical drives, VGA cards and motherboards. Although there is a lot of attention on the CIS market, some distributors operating in the thriving markets of Eastern Europe are satisfied to concentrate on the growth and development they are experiencing in their current markets rather than moving out to cultivate the CIS. “We are growing in the nine [European] countries we are operating in, we don’t have any need to expand our region right now, we have to focus on our given territory and strengthen our position in our current markets as much as possible, we simply don’t have the time to devote to moving into new markets at present,” says Jens Hartmann at Elko Group. Another way into the CIS is through the growing solutions sector. Enterprise solutions vendors SAP and Oracle have had success in the region and projects have been kick started by interest in electronic government. Azerbaijan has been the first country in the region to commit to e-government, and is in the process of developing and introducing its first e-government portal, with Kazakhstan following closely behind. “The government of Kazakhstan has a need for automation of its financial and educational institutions, customs agencies, and ministries. In this regard, in 2004, Kazakhstan’s government adopted a program of formation of an electronic government in Kazakhstan for 2005-2007 and allocated US$400m to this project,” states a report on Kazakhstan titled “Information and Communication Technologies (ICT) Overview 2005” by the Business Informtion Service for Newly Independent States (BISNIS). Also scheduled to attract investment to the CIS in 2006 is the 14th annual Kazakhstan International Telecommunications Show (KITEL), which incorporates the Central Asian International Exhibition on Telecommunications and Computer Technologies, scheduled from May 30th to June 2nd 2006. This will provide a great springboard for distributors interested in breaking into the CIS markets. The previous year’s show attracted 20,000 visitors and had attendees from 180 countries. The CIS, like the Middle East, is an emerging region. Those that have built up a business in the Middle East through its recent boom in growth will already be familiar with a lot of the issues that the CIS currently faces. Therefore they are already well equipped to move business into this region. “All of the markets in the CIS have potential and we are definitely seeing the industries picking up. If companies want to start in the region they will have to get into the countries and start to learn about them now, so that they will be ready as the markets grow,” says Mami at Empa. The advantages lie on the Middle East’s side. Distributors moving in from this region have enjoyed success so far and transferred a lot of their skills to the CIS. The Middle East also has the benefit of its tax free trade areas, for getting product to the markets. There is an investment needed by distributors wanting to crack the CIS market to cultivate relationships in the CIS countries, but the more that do, the more mutual benefit there is, as more vendors will establish their primary route to the CIS markets from the Middle East; leading to more business flowing through the region and a more defined trade route for the CIS. ||**||

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