The bigger picture

Vendors, distributors and resellers must work together more effectively to control credit issues within the Middle East channel. It is in everyone’s best interests to prevent problems from arising. Credit insurance for distributors is not the answer. Insurance companies do not welcome claims and will perform rigorous investigations before paying out. Everyone involved in the Middle East channel needs to understand the bigger picture.

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By  Stuart Wilson Published  April 19, 2006

Vendors, distributors and resellers must work together more effectively to control credit issues within the Middle East channel. It is in everyone’s best interests to prevent problems from arising. Credit insurance for distributors is not the solution. Insurance companies do not welcome claims and will perform rigorous investigations before paying out. Everyone involved in the Middle East channel needs to understand the bigger picture.

It is sometimes far too easy to blame the second tier resellers and sub-distributors in the market. Yes, they may well have taken on too much credit, failed to achieve the necessary sell out and ended up with some serious cash flow problems. That’s bad financial management but it is not all their fault.

We need to look at the distributors that happily over-extended the credit in the first place and ask exactly why that happened. Given the spate of runaways that the market witnessed in recent years, many distributors claimed that had now built failsafe credit procedures that would minimise risk exposure — apparently not.

One of the distributors I recently spoke to complained that the channel typically has a very short memory and too often fails to learn from past mistakes. It’s a valid point as resellers and distributors continue to be seduced by the lure of hitting a stretch quarterly target and forget about the long-term implications this short-term thinking creates.

Anyway, I don’t want to blame the distributors or the resellers for problems pertaining to credit in the Middle East market. I place the bulk of the blame on certain vendors that have implemented channel programmes in the region that encourage this sort of behaviour and exacerbate the levels of credit risk. They are the architects of the credit problems yet they are the ones most shielded from the risk (for now anyway). There are some very responsible vendors in the market but by the same token there are also some highly irresponsible ones.

In a market such as the Middle East, which is characterised by complex product flows and contains national markets where channel visibility is low and vendors are unwilling or unable to work on the ground, certain channel policies become recipes for disaster. It beggars belief that certain vendors invest so much in building up an authorised distribution channel and then destroy the whole concept of a two-tier model by handing out ludicrous levels of rebate and MDF to a limited number of second tier players.

If these second tier players were doing what they were supposed to be doing to qualify for these rebates, it would not be a problem. Unfortunately, in this region they are frequently not and everyone in the market knows this is the case. When a sub-distributor pretending to be a reseller or assembler can sell on certain components at almost US$40 cheaper than the authorised distribution price, it is a pretty sure sign that a channel programme is fundamentally flawed.

The craziest thing about this whole situation is the fact that we know why some vendors continue to bury their heads in the sand when it comes to finding fault in their regional channel rebate programmes. It is in their best interests to pretend that everything is fine because it is these channels that allow them to cover the total addressable market in the Middle East — wherever the end user may be located. They know the true situation, the authorised distributors know it and the resellers know it. Anyone that has been working in the Middle East IT channel knows it. The game works when the product goes where the vendor wants it to go.

When market demand was buoyant in this region, many of the unorthodox product flows went relatively unnoticed. Everyone was making money so there was nothing to worry about. It didn’t take too much to upset this joyous balance of mutual moneymaking: a sluggish first quarter, a few geopolitical concerns impacting demand in specific markets and vendors (well, one in particular) stuffing the channel with as much kit as possible in a futile attempt to drag its global first quarter figures towards some semblance of respectability.

I’ve had numerous conversations in the last week with resellers, distributors and vendors. There is a genuine sense of concern in the market and an understanding (below the vendor level) that it is in everyone’s best interests to work together to resolve some of the outstanding issues in the market.

With credit insurers now snooping around the market working out whether or not they should pay out on recent distributor claims and looking for someone to blame, certain vendors need to step up to the plate and start shouldering some responsibility. Corporate governance is all the rage right now and some vendors need to work with the channel to solve the problems rather than trying to wash their hands of the whole affair. A failure to do this could result in them being asked some very difficult questions in the near future.

What are your views on the current credit issues in the Middle East channel? E-mail your thoughts to stuart.wilson@itp.com

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