Business ethics

Regardless of how you apportion blame to each channel tier for the recent flurry of Dubai-based runaway resellers, there is no getting away from the fact that the owners of these companies made a conscious decision to flee the UAE, leaving behind huge unpaid credit lines in their wake. In terms of business ethics, their decision to run leaves a great deal to be desired.

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By  Stuart Wilson Published  June 21, 2006

Regardless of how you apportion blame to each channel tier for the recent flurry of Dubai-based runaway resellers, there is no getting away from the fact that the owners of these companies made a conscious decision to flee the UAE, leaving behind huge unpaid credit lines in their wake. In terms of business ethics, their decision to run leaves a great deal to be desired.

Accusations have been flying around the channel in recent weeks. Some have claimed that reckless channel stuffing by vendors played a major part in driving the market towards its current crisis. Others have been quick to point out that the distributors must take responsibility for overextending credit lines to risky resellers — albeit because of significant pressure from their vendor partners.

I have no doubt that these are all valid points but let us never forget that it is a few resellers that transformed this situation from an unhealthy financial mess into a genuine credit crisis, which left numerous channel players facing millions of dollars of bad debt. When these resellers took the decision to run rather than face up to their financial and moral responsibilities to both their business partners and also their own employees, they also took on the bulk of the blame.

Admittedly, they should not have been allowed to get into a position whereby they could leave overnight without paying back credit lines. The channel as a whole needs to take collective responsibility for creating the current credit crisis, but the runaway resellers themselves are the joint-winners of the Channel Middle East ‘Hear No Evil’ Three Wise Monkeys Award.

Let me explain the thinking behind this one. For several years now, distributors have been warning those that will listen about the activities of some of the powerful sub-distributors in the market. Some had even approached the resellers themselves to raise their concerns. Their worry — and a worry shared by some of the vendors — was that many resellers lacked the financial skills to cope with the rapid growth that their business was experiencing.

This meant that some resellers diversified too quickly, failed to maintain proper accounts, were unable to work out whether they were profitable or not, and in some cases were simply growing too fast. When the stock markets were soaring, property investment pretty much guaranteed a healthy profit, IT demand was rocketing and margins were healthier, you can forgive some of the resellers for believing that the good times would go on forever.

They were incorrect in their assessment; and as soon as they hit a couple of bumps on the road to riches, it all started to go horribly wrong. Rather than slow down or pull off on to the hard shoulder and assess the damage, some companies put their foot down thinking that if they were going fast enough, they would somehow be OK.

The runaway resellers did not listen to advice about the underlying fragility of the businesses they had created. They did not listen to valuable advice from the distributors and vendors where it was available. At the same time, they probably did listen to the sales people at the vendors and distributors that massaged the egos of the runaway resellers in the lead-up to their exit from the market, telling them how fantastic their business was and encouraging them to purchase even more stock.

From a business ethics perspective, their decision to run must be condemned. A company going under is part and parcel of any mature business sector. How the company owners handle this is the big difference between the Dubai channel and more mature markets in the world.

The Elonex example

In the UK recently, a well-established PC builder called Elonex hit serious financial problems. Did the company owners liquidate all the stock for cash and run off to another country leaving suppliers, creditors and employees in a state of limbo? No they did not.

After one distributor (Computer 2000, which is part of Tech Data) filed a winding-up petition against Elonex, the company went into administration and Deloitte and Touche were appointed as administrators. The administrators are currently contacting the creditors, dealing with the remaining employees and attempting to sell the business as a going concern.

The idea is that the company is given every chance to salvage something from the business and the creditors can rest assured that as much as possible of their outstanding debts will be repaid. Until we get to a situation where this sort of process becomes the norm in Dubai, the risk of extending credit in the market will remain crazily high.

There’s been the usual talk down on Khalid Bin Walid Street in Dubai (more commonly knows as Computer Street) about the formation of associations and credit groups to try and keep an eye on the levels of risk in the market.

It is a step in the right direction but the composition of companies looking to form the group and the nature of business areas that they plan to look at is a cause for concern. We’ve already got the Technology Distributors Association (TDA) in place and now the resellers (and a few distributors) are looking at their own credit circle, which they hope will eventually be fused with the Dubai Computer Traders Association (DCTA).

The credit problems in the Dubai channel will not be solved by the creation of an association. Complex product flows, re-export and sub-distribution activities, grey marketing and the famed ‘washing machine’ effect, which characterises the Dubai-based channel and involves resellers selling product many times between themselves, will all undermine the potential for financial clarity in the market.

I applaud both the TDA and the DCTA for any efforts that are taken to minimise credit risk in the market, but when all is said and done, sharing information will only go so far and without fundamental changes to the regulation of business activity within the market, this risk will continue to exist — and in all probability grow even further.

The desire to change needs to start at the top. Vendors need to have realistic expectations in the market and work with the distributors in a constructive and positive fashion. Likewise, the distributors themselves need to follow similar policies in terms of dealing with the resellers.

Intel update

In the last few eChannels we have examined the actions of each layer of the channel. Last week Logicom bagged the Channel Middle East ‘See No Evil’ Three Wise Monkeys Award. As a quoted company on the Cyprus Stock, Exchange, Logicom was forced to announce its US$6m-plus bad debt exposure with three Dubai-based resellers. It could have gone to any one of the authorised Intel distributors hit by the crisis, but I gave the award to Logicom because it failed to learn its lesson (Logicom was one of the worst hit distributors in previous runaway cases a year or so ago).

Two weeks ago, Intel grabbed the Channel Middle East ‘Speak No Evil’ Three Wise Monkeys Award for its complete failure to admit the part it played in creating the current credit crisis gripping the Dubai-based channel.

Comments from the runaway resellers themselves and Intel’s own authorised distributors raised numerous questions about the vendor’s behaviour and channel policies in the run-up to the current credit crisis. These questions and areas of concern have been put to Intel and the vendor has had the right to reply every step of the way during recent events. Last week, following on from a brief telephone conversation, I received an e-mail from Chuck Mulloy of Intel corporate communications group in the US, outlining the vendor’s response to the latest set of questions posed:

“As said in our conversation, Intel is looking into the various reports concerning resellers in the Middle East,” read the e-mail. “As a result we will not be answering the follow-up questions you sent to our agency last week. Our communication with our customers are confidential in nature and so any public comment would not be appropriate.”

Hmm, well that clears that up then. Actually, it doesn’t. The word in the Dubai channel is that Intel investigators are already on the scene, looking into what happened at a local level. They won’t be the first investigators from a major vendor to descend on Dubai. It’s not so long ago that Microsoft’s crack team landed in town for a distributor audit. And who can forget the Cisco saga a couple of years ago that culminated in the termination of contracts with two authorised distributors.

Why am I harking back to those incidents? Well, these vendors got it right. They came in, identified the problems in the channel, held their hands up where necessary and took steps to rectify the situation. They also informed the channel every step of the way. I sent a reply back to Mr. Mulloy saying that I would like to do an interview with Intel about recent events in the Dubai-based channel as soon as they were ready to do so. Here’s an extract from the response I received from Mr. Mulloy:

“We have said what we are going to say to you on these stories. Our position is that the list of ‘questions’ you sent to us via Hill & Knowlton [Intel’s PR agency] are not appropriate for response. You should not expect anything further on this list from us.”

Ouch. I must admit that having covered IT channels for seven years, this sort of response to a list of questions is somewhat out of the ordinary — especially from a vendor the size of Intel. Here’s the list of questions and topics that are ‘not appropriate’ for Intel to respond to:

1) Explain the non-payment of outstanding rebates to IPPs.

2) Explain how Intel calculated systems integration ratios for IPPs.

3) Explain why Intel’s sell-in data for CPUs never matched PC sell out figures for local assemblers from major research houses such as IDC.

4) Explain why all the recent runaway resellers were big Intel sub-distributors.

5) Explain how Intel ensures that non-integrated CPUs are not funnelled to other global markets through grey channels.

6) Explain how Intel intends to support its longstanding authorised distributors in their hour of need.

7) Explain how Intel will change its channel programme to prevent this from happening again in the future.

8) Explain what happened to the credit insurance programme Intel spoke about for distributors last year.

9) Explain how Intel calculates the TAM for the Middle East region and if they plan to reassess these estimates.

10) Explain why Intel stuffed the Middle East channel to breaking point at the end of the first quarter.

11) Explain how Intel plans to fill the void left behind by the departure of these major Intel traders/sub-distributors.

12) Explain what immediate steps Intel is taking to help the channel through the current problems they are experiencing.

13) Explain why the channel should keep working with Intel as opposed to switching to a rival vendor.

Appropriate or not appropriate? However you label them, these are the questions that authorised Intel distributors, sub-distributors, assemblers, re-exporters, resellers and VARs that are hurting as a result of the current credit crisis want answers to.

As always, your feedback and comments are more than welcome. Please feel free to contact me on stuart.wilson@itp.com or telephone +971 4 391 0882

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