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

While this is not exactly a new revelation, the increasing globalisation of the market, which sees the region competing with other hubs such as Amsterdam and Singapore, means conditions are uncompromising.

It's no coincidence that Dubai-based market casualties of recent years, from Fortex-MID to Disk and Drive, all plied their trade in the components channel.

Whether the exits have been fuelled by the slipshod credit policies of distributors, the ineffectiveness of vendor partner programmes or merely the brutal cash-consuming culture of the components trading business, the perils of the market are there for all to see.

"You will always have the big volume movers and today we still see them in markets such as Saudi Arabia, but we have got rid of a lot of them," claimed Hamidaddin at Empa.

"Several of them have disappeared because of volume buying. It can work if problems don't emerge, but when a problem does come up they often can't get out of it."

Even highly-established distributors that know the market back to front admit that there is a fine line between success and failure. Sanjaya Adipathy, channel sales manager for the components division at Sky Electronics, says distributors face a challenge to maintain the balance between rapidly-changing technology and sales-out at the same pace: "Due to this and other reasons, the components distribution channel in the region is forced to operate with low profit margins. With operational costs rising to sky-high limits, distributors face an uphill task to invest in the bulk import of components and storage, and to resell them within a minimum timeframe," reflected Adipathy.

Antoine Harb, business development manager for the MEA region at memory vendor Kingston, agrees it is a tough business. "The only category that I think is making any money is retail because the minimum margin requirement for some of them is 20% to 25%," he said.

"Sometimes they'll accept 15%, but this is the minimum they'll drop to, whereas distribution is happy to make 2% or 3%."

Some commentators claim that the battle is becoming so fierce that distributors and traders are now clashing over customers. Muhammad Yaghi, general manager at House of Memory and Processor (HMP), supports that view, and says that the company has started to face competition from the distributors themselves.

"Previously we had the privilege of supplying overseas and it wasn't easy for those customers to get in touch with the distributors in the Free Zone," he explained.

"But the distributors have started contacting them and in some cases even given them credit. We are now having to deal with smaller wholesalers outside Dubai rather than the big ones purchasing containers."

The rapid growth of the notebook market remains a particular concern for components suppliers as the Middle East mobile PC space is dominated by multinationals.

The global brands are able to call upon direct purchase agreements with the primary components manufacturers, which invariably means less business for local authorised distributors and traders. Tantawi at Asbis admits it is having a pronounced impact on the market. "If the expected growth of the components market is 20%, then we are actually only seeing 10% because of the rapid notebook growth," he said.

Vijendra Singh, deputy general manager for IT distributor Almasa's components division, insists those capable of demonstrating a complete component solution will gain an edge over competitors specialising in selected product segments.

"When demand comes from a whitebox PC or an upgrade, the end-user will look for a one-stop solution," he said.

"This is where the components channel will play an important role in configuring the PC as per the customer need. The channel will also be able to offer a value add by providing additional features which the customer may not be aware of, or which can help the customer for his future applications."

One characteristic of the market cited by several sources is the preference for older and cheaper components at the expense of newer technologies being pushed by the vendors.

One hard drive source says that it is still seeing demand for IDE interfaces even though SATA has been introduced in the market at similar price points. "Now we have a situation where people are paying more for IDE than SATA," said the source.

Kingston chief Antoine Harb admits it is common for customers to purchase value RAM to upgrade their branded machines because it is cheaper than buying branded memory, while one components traders bemoaned the number of aging CPU lines it now has to carry just to ensure it doesn't lose business.

Vendor distribution strategies are also poised to have an enormous bearing on the way that the Dubai-based components market evolves. The growing inclination for local, in-country distribution would suggest that Dubai's position as the dominant force in components wholesale could be reduced in the future - assuming vendors bypass Dubai and ship directly to the distributors in these countries.

With the 5% components duty waived in markets such as Saudi Arabia, traders claim it is now just as practical to source components from Hong Kong and Europe.

"Dubai used to play an important role as a regional hub, but the dominance is decreasing," insisted Singh at Almasa.

"With the unified customs in GCC, goods are directly getting shipped to major markets like Saudi Arabia, Kuwait and Egypt. For small markets like Africa, Lebanon, Jordan and Bahrain, Dubai will still play an important role because channels from these countries prefer to consolidate their shipments as per the need."

Kingston employs local distributors in Lebanon, Jordan and Egypt - where a blossoming local PC assembly market still exists - but refuses to admit that it means the role of its Dubai-based partners is diminishing.

"Most of our distributors located in Dubai are doing distribution from Dubai to other GCC countries, which is why Dubai is still important to us," he argued. "This is where the product is flowing from. We cannot ship directly to these countries so all the shipments come from the UK to Dubai, and from Dubai they go elsewhere in the Middle East."

Even when in-country distributors are hired by vendors, Dubai tends to remain in the equation. Egyptian AMD distributor Quest, for instance, requests that its consignments are shipped through Jebel Ali where the company operates logistics facilities.

However, AMD's regional distribution boss Abdallah Saqqa insists that is unlikely to be the case in other territories.

"If we sign a distributor in geographies like North Africa I pretty much doubt that we would ship through Dubai because it doesn't make sense," he said.
The future for the Dubai-based IT components channel still looks assured although that doesn't mean it is without its dangers - but that's something which distributors, traders and re-exporters should be well aware of by now.

RELATED LINKS: Kings of components

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