Runaway Resellers

There has been only one topic of discussion in the Middle East channel during the past few weeks. The financial collapse of three major Dubai-based resellers, heavily involved in the sub-distribution of Intel CPUs, plunged the market into a financial nightmare. Everyone has theories on what caused the crisis, but one point is clear: this must never be allowed to happen again.

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By  Stuart Wilson Published  July 1, 2006

Decisive steps|~|cctda200.jpg|~|The TDA has called on the UAE government to take decisive steps|~|Was anyone really shocked by the latest spate of runaway resellers? The disappearance of Fortex-MID, Micron and MST has left a huge financial black hole in the channel but the warning signs were there for all to see for several months prior to their actual decision to flee the UAE. Now the channel needs to move on and take the appropriate steps to prevent this type of incident from occurring in the future. One of the most vocal organisations calling for change has been the recently formed Technology Distributors Association. The TDA has called on the UAE government to take ‘decisive steps’ in the wake of the latest credit crisis to hit the IT channel, which has left distributors and banks facing tens of millions of dollars in bad debts. The TDA, a trade body made up of leading distributors within the region, has also been quick to express its concern over the ability of company owners to leave the UAE leaving behind unpaid debts. The TDA issued the following statement regarding the current situation: “We call on the UAE government to take decisive steps that would protect the reputation of the UAE as a safe place for business. Some actions may involve: active pressure on Interpol or on police forces in other countries where runaway suspects are known to flee to in order to bring the culprits to justice; instruct the courts to fast-track the cases against runaways; to order an inquiry or to establish a body that would investigate the recent events, recommend actions and ensure legislation that would protect honest businesses operating in the UAE; in the absence of reciprocal agreements, approach the governments of countries where runaways are hiding and request co-operation; help in tracking cash transfers made by indebted runaways,” the statement read. “The recent events of a number UAE IT companies defaulting on their debts and leaving the country for another where the creditors and the law could not reach them has caused a serious crisis in the IT supply channel,” continued the TDA in its joint statement. “The situation will undoubtedly cause losses to some distributors, result in a clampdown on credit by some vendors to distributors, by the distributors to the channel, by lenders and banks (and an increase in lending rates charged), and will most likely increase the cost of credit insurance too. It is time for distributors and vendors to have cool heads and to avoid aggravating the problem by overreacting and forcing even more resellers out of business.” “Distribution’s most senior decision makers must get together quickly to agree on how to manage the immediate dangers that may result from an overreaction and to agree on introducing a UAE credit circle to help minimise the risk of recent events repeating themselves in the future,” the TDA continued.||**||The blame game|~|cst200.jpg|~|Traders on Computer Street in Dubai are adamant that they can put the recent crisis behind them and move on|~|While the recommendations from the TDA are clearly positive moves, it has become evident in recent weeks that the reasons behind the disappearance of the Dubai Three (Fortex-MID, Micron and MST) were complex and multi-faceted. Indeed, Hamid Kutty Shajahan, managing director and sole owner of Micron Computer LLC, broke with runaway reseller tradition by blasting the companies above him in the supply chain, claiming that it was their actions that forced him to flee the market. Shajahan said that his decision to leave the country was not a pre-planned ‘hit and run’, claiming instead that the actions of Intel and its authorised distributors pushed the company into a corner, leaving him with no other option than to flee the market. According to Shajahan, distributors stopped supplying Micron with stock and simultaneously attempted to drastically reduce the credit lines open to the company by up to 70%. This reduction in the credit lines coupled with the non-supply of product meant that the company faced serious cashflow problems. “All of a sudden, 50% to 70% of the credit line is cut — this will impact any organisation,” says Shajahan. “It was difficult to run further without clearing cheques and once the cheques started to return I knew that a police case would come and I would not get the chance to speak out. That is the time when I actually decided to leave the country.” Shajahan claimed that Micron’s cashflow problems began in 2005 when the pressure exerted on his company to move an even larger number of CPUs increased dramatically. “Intel field staff would talk to the distributor and extend the credit line for us without our knowledge,” continued Shajahan. “After that the distributor is demanding for a purchase order or without our purchase order they bill it on our name. When we order for other products, they say that you must take the Intel product and only then can you get the other products. This is the kind of trap Intel and its distributors made. With our stock position mounting and needing to clear cheques on their due date we were forced to sell the product on at a loss.” “Since 2005 Intel and its distributors have called on us every month-end and quarter-end and dumped more stock on our head,” Shajahan explained. “When they dump the stock on the month-end they do not want to give any extra credit days. Ultimately to clear the cheques we have to sell the product at a 10% to 15% loss.” Asked whether it was unfair for everyone to blame the runaway resellers for the credit crisis and label them as ‘hit and run’ cases, Shajahan responded: “It is totally unfair. Nobody was there to listen to the concerns of the channel. The channel is punished so that others can make margins and numbers.”||**||View from the top|~|daniacc200.jpg|~|Dania El-Kadi, Intel’s marketing manager for the GCC|~|Both the runaway resellers and authorised distributors have pointed the finger at Intel, blaming its channel policies for the development of the latest credit crisis. In reality, everyone played a role in creating the conditions that precipitated this painful channel episode. Intel at first moved to distance itself from the crisis that left a number of Intel authorised distributors including Empa, Logicom, Mindware and Tech Data with significant exposure to bad debts and unpaid credit lines. “Intel does not get involved in credit terms between distributors and resellers,” stated Dania El-Kadi, Intel’s marketing manager for the GCC. “Any credit that we provide is to distributors as per the agreements we have between us and our authorised distributors.” Asked whether Intel was concerned that the companies that defaulted on payments to its authorised distributors were all close partners of Intel, El-Kadi said: “The health and prosperity of our channel are very important to us. Intel works with a broad base of channel partners in the Middle East and we try to stay as close to the market as we can, taking our channel’s input into consideration as we continuously develop new initiatives and programmes to support them.” With the runaway resellers accusing Intel of stuffing the channel in the first quarter of 2006 and blaming the non-payment of rebates and marketing for their eventual decision to flee the market, the giant components vendor remains under intense pressure to clean up its channel act in the Middle East to prevent a repeat performance in future. After the allegations from Micron regarding Intel’s involvement, the giant vendor’s wall of silence regarding its role in the creation of the credit crisis engulfing the Dubai-based channel finally cracked.||**||Never again?|~|ccopener200.jpg|~|Hit and run or poor financial management? Whatever the reason, the channel must learn its lesson after the recent crisis|~|Intel issued a statement outlining its position regarding the allegations made by the runaway resellers. The statement, sent from El Kadi, read as follows: “These companies had been part of our regional channel for several years and we regret that they have run into financial problems. However, it is worthwhile noting that in the past these companies have not raised with any us concerns about any potential negative impact that they considered our programmes or activities would cause them.” The statement continued: “As it is our standard practice, all steps are taken to ensure timely payments of the amounts due to all of our customers. As is always the case receipt of these payments will depend on compliance with the terms and conditions of the relevant programme and on receiving appropriate evidence of documentation substantiating co-marketing, each recipient’s banking and financial situation, especially if any bank accounts are frozen.” 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. Every level of the channel needs to step up and take some blame and do everything in their power to prevent this from happening again. ||**||

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