Grey matter

The extent to which grey market trading is occurring in the Middle East is a topic that continues to split the industry. Having spoken to a range of local channel sources during the past fortnight, there appears to be no conclusive answer to the question of whether grey marketing is as fervent as ever.

  • E-Mail
By  Andrew Seymour Published  October 25, 2006

The extent to which grey market trading is occurring in the Middle East is a topic that continues to split the industry. Having spoken to a range of local channel sources during the past fortnight, there appears to be no conclusive answer to the question of whether grey marketing is as fervent as ever.

The extent to which grey market trading is occurring in the Middle East is a topic that continues to split the industry. Having spoken to a range of local channel sources during the past fortnight, there appears to be no conclusive answer to the question of whether grey marketing is as fervent as ever.

Some are adamant that parallel importing is a phenomenon fast losing momentum; others claim it is actually more prominent than it ever has been. What this difference of opinion does emphasise is that the difficulty faced in assessing and measuring the issue remains one of the biggest drawbacks to tackling it properly.

Interestingly, more than 75% of respondents to our latest online quick poll believe that the Middle East grey market is more prevalent than this time last year – a figure that doesn’t say a great deal for the many vendors that like to publicise the great job they believe they are doing in restricting grey marketing.

Reducing grey market activity comes down to how seriously each individual vendor regards the subject because they are the ones who control the key mechanisms of pricing and availability from the start. It is therefore the responsibility of the vendor to ensure that they get both aspects absolutely right.

If they over-forecast or stuff the channel then excess product will get dumped into markets it shouldn’t. And if they under-forecast, buyers will source products from the grey market because they can’t procure it from authorised routes. Alongside that is price, which remains the primary cause of grey market trading due largely to vendors operating differential pricing structures and compensation models between channels, countries and regions.

Make that element less open to abuse and grey importers lose considerable power. After all, the only thing that encourages a buyer to use the grey market, as opposed to a legitimate channel, is lower price.

In fairness, the likes of HP, Cisco and Microsoft are all cited as vendors that have done a fairly good job in addressing the grey market, although it doesn’t mean they have found the magic formula. Their commonality is that they are all large, global organisations with the ability to pursue the issue aggressively. And as well as possessing huge marketing collateral, they also have the financial resources required to actually follow through with their actions and prosecute offenders, as they have done in markets such as the UK, Germany and Nordics.

Grey marketing is a problem that demands manufacturers to stand up and be counted. And in this region, specifically, it reverts back to a point that emerges time and time again: there is nothing wrong with vendors drawing on their global experiences and business models, but to fight it properly they need to develop dedicated tools that address the issue locally. As one UAE distributor argued this week: “If I have one comment to make to vendors about the grey market, it is not to implement sales and marketing strategies in the Middle East that they use in other regions. The Middle East has a different business mentality, which they have got to work harder to learn more about.”

Grey marketing is a universal dilemma, but that doesn’t mean the ‘square pegs in round holes’ approach is the way to solve it, however hard it is forced.

Sun, sea, sand… and system builders

Question: What’s the difference between Swindon (a small town in England that also happens to be the base of Intel’s EMEA operations) and Dubai during wintertime? Answer: usually about 20 degrees.

That slight distinction surely won’t have been lost on any members of Intel’s EMEA audit team packing their suitcases in preparation for a three-week spell in the Emirates sunshine come the end of November.

Intel’s crack team of numbercrunchers recently spent a period of time in Egypt, performing on-site audits of local assemblers to determine if the CPUs these companies bought were actually being integrated into the PCs they claim to be building. That tour of the local Egyptian assembly scene now looks increasingly like a warm-up gig for the main event - the UAE.

Everybody knows that the UAE is a small market for domestic consumption of IT products, but a large one in terms of export. Intel clearly has to validate UAE assemblers to ensure integration rate targets are being met, but after the outcome of the Egyptian audits – which saw some assemblers suspended from the Intel Inside Programme – there is every possibility that it could be about to open a gigantic can of worms.

According to second quarter PC shipment data from IDC, indigenous PC builders in the UAE assembled around 16,000 units between them. Multiply that by four and you have an annualised locally assembled UAE market of about 64,000 PCs a year.

Let’s factor in the impact of seasonality and boost the annual UAE local assembly figure to 100,000 units per annum. And let’s assume — because we’re feeling generous here — that all these machines have Intel CPUs.

Now, 100,000 units per annum seems quite a modest figure for Intel to go to all the trouble of sending a team of auditors all the way to Dubai for three weeks in our humble opinion.

What about the integration ratios though? After all, if they were less than 100% that means Intel would be selling more than 100,000 CPUs into the UAE channel through its authorised distributors.

Well, let’s look at some hypothetical numbers. And at this point it is also worth noting that before its untimely demise during the credit crisis earlier this year, Fortex-MID had apparently become one of the most important local assemblers for Intel on a global basis.

Now let’s say — hypothetically I must stress once again — that Intel’s authorised distributors were selling 1.5 million CPUs into the UAE assembly and re-export channel per annum — a fairly conservative assumption based on earlier discussions with some of the authorised distributors.

Based on this figure of 1.5 million CPUs being sold in to the UAE channel and a generous estimate of a locally assembled UAE PC market of 100,000 units per annum, we’re looking at an integration ratio of just 6.6%. Now I’m guessing that many of the local assemblers — with the past endorsement of Intel’s team in the region I might add — are claiming a much higher integration ratio.

Swindon, we have a problem!

Intel’s response to our questions has been minimal so far — aside from a written statement saying that the audit in Egypt was a normal and routine part of the procedures it has in place to protect its investment in the Intel Inside Programme. Yet, according to several assemblers in Egypt and UAE, the sort of detailed on-site audits that Intel is conducting have not occurred before.

Intel’s reason for the timing of the audits, the role that local management has to play in them, and details of the next Middle East markets on its hit list, are all subjects that the CPU vendor has so far been unwilling to discuss.

Meanwhile, UAE assemblers are now beginning to understand exactly what a visit from Intel’s EMEA auditing team means as they attempt to compile an exhaustive range of data and records required ahead of the audit. In correspondence seen by Channel Middle East, the chip vendor also asks assemblers to prepare on-site private workspace locations for up to five auditors and provide advise on any licenses that the auditors might need to access offices and facilities.

With such a busy month ahead thanks to Gitex, we thought UAE assemblers would appreciate our top five survival tips for when the Intel auditors call:

1) Give the Egyptian assemblers a call to obtain the inside track on what the Intel auditors are looking out for prior to their visit.

2) Ensure that all employees are walking around in lab coats and carrying screwdrivers.

3) Take the office PCs apart before the auditors visit your assembly facility.

4) Invite the Intel auditors out for a night on the town and take a digital camera.

5) Set up the ‘workspaces’ they require outside (using a wireless network and Intel Centrino laptops, obviously). They won’t hang around too long in the Dubai sun!

Any tips we’ve missed off this list? Contact andrew.seymour@itp.com or stuart.wilson@itp.com

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code