The components game

The wholesale trading and supply of PC components still remains an enduring and very much active feature of a Dubai channel that serves the entire MEA region - but for how much longer? Channel Middle East editor Andrew Seymour investigates the state of the components channel and the forces shaping its development.

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By  Andrew Seymour Published  May 26, 2008

The wholesale trading and supply of PC components still remains an enduring and very much active feature of a Dubai channel that serves the entire MEA region - but for how much longer?

Channel Middle East editor Andrew Seymour investigates the state of the components channel and the forces shaping its development.

As far as the IT industry goes, it's not the most glamorous or fashionable sector, and it certainly isn't the most profitable - which probably explains why the components field has always struggled to shake off its reputation as an undesirable and unpredictable environment.

Price fluctuations routinely govern the direction of the market, while the sheer volume-driven nature of the products themselves prevents the channel adding little value beyond cost and availability.

Dubai's status as a trading hub attracts swathes of companies looking to prosper from the sale and re-export of IT components, but at the same time it's also the market's worst kept secret that countries restricted by embargoes such as Syria and Iran represent an obliging destination for such hardware courtesy of their proximity.

Mix in the fact that vendors are routinely accused of using the Middle East as a dumping ground for obsolete products or practicing excessive channel stuffing and it's not difficult to see why the components sector is regarded as an unforgiving place.

So what do we mean by IT components? Well, for the purposes of this article, the term refers to any single piece of hardware that is used in the internal assembly of a personal computer or server. This typically includes central processing units (CPUs), graphics cards, hard disk drives, motherboards, mainboards, optical disks and memory.

In most markets, IT components tend to flow through the distribution tier to the systems builder channel, where they are used for PC production, or to the retail channel, where they are resold as standalone items for personal assembly or upgrade purposes. Although that's also the case in Dubai, domestic consumption only accounts for a fraction of the market.

Assessing the size and value of the components channel is an arduous task due to fervent sub-distribution and intra-company sales activity, which means products sometimes pass through four or five conduits before reaching the final user.

Most IT components manufacturers decline to break out revenues below an EMEA level, although anecdotal evidence suggests the MEA region presently accounts for anything between 2% and 7% of a typical vendor's global turnover.

Interestingly, flash and RAM maker Kingston recently revealed that its Middle East and Africa business contributed US$65m in the way of revenues last year, providing some indication of the level of activity taking place in the memory market at least.

Channel Middle East estimates that the 15 largest Dubai-based IT distributors collectively sold in excess of US$900m worth of IT components last year, but if you factor in the level of re-export and grey marketing that occurs elsewhere in the market then the real value of overall components activity passing through Dubai is arguably two or three times larger than that - possibly more.

Abdallah Saqqa, distribution sales manager for the Middle East at chip vendor AMD, believes Dubai plays a vital role in facilitating the dissemination of products throughout the region.

"In some countries in the Middle East customs practices are extremely complicated, which makes the life of vendors difficult had we not had the choice of shipping to Dubai and then re-exporting elsewhere, such as Egypt or Saudi Arabia," he said.

Of course, the same point also applies to markets that most vendors are required to distance themselves from. A source at one distributor admitted: "Vendors cannot approach each and every local market. We do business in Syria, which is not an easy country to enter from outside for banking, financial and embargo reasons. And if we are talking about Iran or some of the African countries then being in Dubai with all the logistics, financial and communications facilities is important."

Al Selsal Trading is a trader on Khalid Bin Al Waleed Road specialising in components. The diversity of its customer base is characteristic of many of its Computer Street-based neighbours.

"30% of my customers are local and 30% are from the GCC," explained general manager Akeel Mahdi. "Another 20% are from Iraq and the rest are from Libya."

When it comes to distribution, playing the components game is vastly different to the finished goods arena, where products hold their price for longer and demand is easier to forecast.

Components distributors, particularly those in the memory sector, typically retain smaller quantities of stock and place more back-to-back orders to counter price volatility.

Many keep stock levels at their regional warehouses for no longer than 10 to 14 days of lag time behind in-country sales. Fortunately for authorised distributors of components such as CPUs, vendors grant price protection to offset any enforced price drops, but sub-distributors and traders of the same equipment aren't afforded this luxury.

All these elements, coupled with the fact that certain sectors are highly aggressive because they are controlled by just a few suppliers, creates an incredibly volume-driven environment.

"The buyers are also resellers - not end-users that are willing to pay the price," said Rahb Hamidaddin, president at Empa, which distributes brands such as Aeneon, MSI and Intel. "Resellers will fight for the price, which creates more of a cutthroat business."

With few vendors putting down meaningful roots in the market, the components channel doesn't enjoy the benefits of local sales and marketing activities taken for granted in the PC or printing space.

Only Intel, AMD, Western Digital and Foxconn stand out as vendors with established local teams, but they are still dwarfed in headcount when compared to other mainstream IT manufacturers.

Pavan Gupta, MEA director at Samsung and Western Digital distributor eSys, says it simply isn't practical for most components vendors to establish local operations. "You have to bear in mind the scale of the market," he reasoned. "There isn't one assembler out there that is producing 10,000 units a month."

Rashwan Arabi, general manager at Dubai-based memory and motherboard distributor Computec Class, wishes more components vendors were present in the market as it would help them better understand sales dynamics more comprehensively.

"Looking at the Middle East in the same way as the US or European market is completely wrong because the consumption and needs are different," he commented. "If vendors are really active inside a country then it is certainly an advantage rather than an obstacle," argued Arabi.

But Hesham Tantawi, boss of hardware components distributor Asbis' Middle East and Africa business, contends that local presence is not needed if components vendors know how to interact with the channel.

"Vendors that have changed from looking at sales-in to supporting the sales-out of the distributors are the ones that will increase their market share and presence in the market," he said.

While the momentum of wider IT market growth is poised to spur the components sector to greater heights, it's clear that channel players face a number of pressures that cannot be discarded. Even making money from the two most classic PC components - CPUs and hard drives - is no easy task.

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