Crisis for Computer Street

Financial pressures have finally caught up with Computer Street, with at least three traders said to have fled the market. Given the business model of some resellers, it was an accident waiting to happen.

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By  Andrew Seymour Published  November 30, 2008

Financial pressures have finally caught up with Computer Street. At least three traders are said to have fled the market during the past week following doubts over their ability to meet distributor payments, and those in the channel community are adamant that more bad news is to come. While the finger of blame is being pointed in all directions, the reality is that it’s been an accident waiting to happen given the business models operated by some resellers.

Not since the credit crisis that decimated the Intel channel more than two years ago has the Dubai IT market been gripped by such uncertainty and insecurity as it is at the moment.

It has taken less than six weeks for those who boldly predicted that the regional IT sector would pass through the global economic storm unscathed to be proved wrong. Finally, resellers, distributors — even vendors — are now admitting what everybody has been too afraid to say before: the IT sector has a liquidity problem.

Cashflow is the major concern for players in the Middle East channel right now, there can be no denying that. Unfortunately, the situation is probably going to get worse before it becomes any better.

SM Computers and Green Forest, two sub-distribution outfits that owe money to several large distributors, are unlikely to be the last Computer Street traders besieged with problems in the months ahead.

Distributors I’ve spoken to that are chasing debts remain confident that they will, eventually, recover some of their dues. They claim, importantly, that the companies concerned haven’t got themselves into difficulty through any motivation to make dishonest gains, but because of their failure to manage their way out of the ever-changing market environment.

No less than three channel sources insist the inability to meet payments is self-inflicted. They claim alarm bells have been ringing among the IT trading community for a number of weeks due to the frequency at which product was being sold below cost. Given the increasingly treacherous conditions, it was only a matter of time before somebody got dragged under.

The topic of selling below cost is, itself, sparking fierce debate in the channel over who is to blame. Without wishing to digress too much, the question of whether official distributors — and to a greater extent vendors — should show greater intervention when word of such behaviour spreads has divided the channel.

There is a valid argument for vendors to take more responsibility, in my opinion. But, at the same time, the reality of the situation is very different. Either they don’t possess the resources or authority to be able to act even if they wanted to — or they simply turn a blind eye to it in the hope that it will go away.

Given the amount of surplus stock that is said to be clogging up the channel right now, you could argue that the second option is by far the more popular; a sorry indictment of the fact that addressing dubious practices tends to get placed on the back seat when the pressure to hit sell-through numbers starts to bite.

Distributors and sub-disties are understandably nervous about what is going on — and to a large extent that is fuelled by the uncertainty of not really knowing how financially healthy their reseller customers are.

After all, it is not unheard of for traders in Computer Street to complement their IT activities with additional business interests, particularly in the real estate market.

Let’s take the case of a trader, who, for the purposes of this example, we’ll refer to as Reseller X. Now, Reseller X moves a decent volume of office and PC kit from a range of multinational brands. That business brings in a sizeable chunk of cash, some of which it uses towards property investments.

Reseller X has quite a lucrative arrangement going on. It snaps up a 20% stake in an apartment block and then sells that stake three to six months later for a significant mark-up. Reseller X then reinvests that profit in another apartment block and does the same thing again, perhaps even ploughing some cash back into the IT business to expand its operations so that it can fatten its credit lines. And so the cycle goes.

When it works — as it has done during the last couple of years — the profits are pretty juicy. But what any reseller playing this game wouldn’t have bargained for was that so many factors would conspire against it at once.

The global credit crunch means banks are either refusing to lend money, or offering loans with massive premiums, while foreign real estate buyers have put their chequebooks away for the time being.

If that on its own isn’t enough to leave Reseller X’s business plan hanging by a thread, IT distributors have been scaling back credit. And just to compound the misery, demand has slowed as end-users, like the real estate buyers, take stock of their investments. Suddenly, Reseller X is confronted with a severe cashflow problem that only six months before would have seemed inconceivable.

There is nothing to suggest that the traders named earlier do or don’t have any investments in the real estate sector, but the reality is that some of their counterparts have diversified into other areas that may now put their IT business at risk. And that is contributing to the anxiety felt by distributors.

“Nobody really knows who is struggling or who has 20 apartments somewhere,” explained one distributor. “This uncertainty is the main problem. The only thing we can do to limit ourselves from this is pro-actively reduce exposure. That could mean cutting credit lines so if we do lose money then it is only US$50,000, rather than US$100,000.”

There is also a tremendous amount of channel psychology at work and the ability of this to negatively impact the market shouldn’t be under-estimated either. However, it is difficult to see this scenario changing in the immediate future. After all, who can blame a distributor for taking a cautious approach in the current climate? Like any business, a hasty reassessment of outgoings and financial exposure is the order of the day.

While this show of vigilance isn’t particularly helpful in stimulating market activity, it is perfectly understandable — particularly as the overriding thing to bear in mind here is that this is a channel-wide problem. Computer Street traders may be feeling the heat by virtue of their business, but the corporate reseller sector is under the cosh too.

With enterprise clients beginning to feel the pinch, solutions providers face the very real spectre of running into liquidity problems as a result of customers postponing projects or delaying payments.

A solutions provider might be backed by serious investors, or have other assets to call upon, in which case finding the cash probably wouldn’t pose such a conundrum. But it doesn’t mean the threat is not there.

The longer-term ramifications for the market in the wake of the pressures facing the reseller community are not yet entirely clear. It would appear that the channel still has to overcome plenty more short-term pain before it can even begin thinking about that.

3274 days ago
David

Perhaps this "crisis within a crisis" is reflective of the fact that Vendors and Principals have been "over-stuffing" their channels for the past few years in an effort to meet the huge targets they have to make to ensure juicy bonuses for the people at the top of the pile........the greed factor has clearly not been limited to the banking sector alone!

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