Intel Inside... your PC factory

The Intel auditing bandwagon has already made its mark on what some believe could yet turn into a full-fledged tour of the Middle East. But where is it planning to pull into next? That is the question the channel is pondering after Intel’s recent exploits in Egypt where it spent July and August visiting the factories of numerous system builder partners.

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By  Andrew Seymour Published  October 11, 2006

The Intel auditing bandwagon has already made its mark on what some believe could yet turn into a full-fledged tour of the Middle East. But where is it planning to pull into next? That is the question the channel is pondering after Intel’s recent exploits in Egypt where it spent July and August visiting the factories of numerous system builder partners.

That voyage resulted in several leading assemblers – including IBS and Better Business - having their status in the Intel Inside Programme put on hold after they failed to meet the ‘integration rates’ that Intel expected of them.

Integration rates, for anybody not familiar with the term, is the metric that Intel uses to ascertain whether assemblers are actually integrating the CPUs they buy into a PC. If an assembler purchases 500 processors and uses each one to build 500 PCs then it has an integration rate of 100%. In the Egyptian market, however, Intel’s audit showed that some partners had integration rates of less than 40%, suggesting that excess product was being bought and then re-sold into the market. That naturally creates a recipe for disaster, particularly if the product is being sold at a price that undercuts authorised distribution partners.

Intel’s actions have already spurred some partners to defect to rival AMD and protest their anger at what they maintain was an unfair and incorrect assessment process. The fact that some have also been instructed that they will not be refunded marketing cash that they have already spent has clearly done little to quell the feeling of bitterness.

To even find itself in this predicament highlights the weaknesses in Intel’s channel programme, if only because of the unique make-up of the Middle East market. In Europe, the Intel Inside Programme is used by the very group it has been constructed for: PC assemblers which integrate the CPUs into full systems and ship them onto customers. It’s that simple.

In most cases, pure hardware assembly companies in Europe are easily identifiable and the boundaries between each category of the market are far more visible. In this region it is not that clear cut and that is one of the reasons why Intel finds itself in this mess. Multiple layers of sub distribution tiers, hybrid go-to-market models and high levels of re-export create a hazy trading landscape. Clearly the programme cannot be expected to operate with the smoothness and control that Intel might enjoy elsewhere.

Intel declined to answer a list of specific questions about the decisions it has taken in Egypt, but in a written statement it suggested that the audits were designed to protect the value of the Intel Inside Programme – a tacit admission that the scheme remains open to abuse. Rola Zaarour, communications manager at Intel Middle East Turkey and Africa, stated: “Intel conducts regular audits of all Intel Inside Program licensees as part of our normal business procedure. These audits are part of the terms and conditions of the programme. The Intel Inside Programme is one of the world’s largest branding and cooperative marketing programmes. Intel and its customers have invested billions of dollars in the programme to create a recognisable mark of quality, and, as such, inherent value for our customers. The company has an obligation to both customers and shareholders to protect that investment.”

Many important questions remain unanswered, however. How long had partners been missing their integration targets? What prompted Intel to take such measures now? Why didn’t local management – who are supposed to work closely with these guys – not know that the targets weren’t being hit? Of course, assemblers hurt by Intel’s actions remain up in arms and insist they have done nothing wrong. They play the innocent victims, but it is possible that both sides have a role to play when it comes to determining who is to blame.

The decision Intel has taken in freezing these assemblers from the scheme certainly sends out a strong message, but it has also set a precedent, which is likely to be reflected in its Egyptian sales figures over the coming months. When you have an assembler like Boraq - which is part of a group that builds more than 3,500 PCs a quarter – shifting its loyalties to AMD in response to Intel’s actions, you wonder how the vendor is going to recover its numbers.

Should the vendor audit much larger markets, such as the UAE and Saudi, there is a high risk that it could destabilise its entire Middle East operation. The UAE remains a small market for domestic consumption, but a large market for export. Therefore any assembler ordering unusually high volumes of components will draw attention to itself. It will be interesting to see how Intel addresses this issue.

Meanwhile in a country like Saudi, which is five times the size, the process will be much tougher. If Intel is unable to establish which local partners have false integration rates then the Saudi channel could quite easily become a hub for excess inventory.

However, picking on and punishing certain assemblers still doesn’t address the bigger picture, which is that Intel must develop a specific channel programme to meet the unique needs of this region. It needs to recognise that the Middle East has its own set of traits and characteristics, which, however hard it tries, does not necessarily fit its global template.

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