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In-country coverage has long been cited as a necessity for companies that want to achieve success in the Middle East market. But is it really practical for vendors and distributors to have permanent resources in multiple countries, especially in today’s uncertain economic environment? Channel Middle East asked different tiers of the channel how they interpret the situation.

Tags: DespecHewlett-Packard CompanyRedington GulfUnited Arab Emirates
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By  Andrew Seymour Published  September 11, 2009 Channel Middle East Logo

We spoke to SM Hussaini, general manager at Almoayyed Computers and Ahmed Ashadawi, CEO and president at Al Falak, for the VAR view; Raj Shankar, CEO at Redington Gulf and Faisal Jamal, COO at Despec for the distribution perspective; and KV Narayanan, distribution manager at HP Middle East and Thierry Chamayou, business development manager for the Middle East, Pakistan and Turkey at APC by Schneider Electric, for the vendor lowdown.

A lot of vendors still serve the Middle East market from a single office in Dubai. What are the advantages and disadvantages of this approach?

SM Hussaini: From our perspective as a systems integrator and VAR it is an advantage for the major MNCs to have some sort of local in-country presence because visibility matters and customers want to see the companies and products that they are eventually going to deal with. In terms of the disadvantages of basing everything out of Dubai, we have been seen a lot of travel restrictions this year due to the recession, swine flu or other things, and at times that doesn’t really sit well with the business demands. Most of our partners today only seem to be travelling if there is a strong business case involved.

Faisal Jamal: If vendors are forcing distributors to go in-country then the logic should apply that they also need to go in-country. This doesn’t mean that logistics need to be in-country because a lot of the time there are distributors to play that part. But they do need to have people on the ground to visit end-users and resellers. The hands-off approach — or the approach from Dubai — can be difficult because an end-user wants to speak to the vendor to feel comfortable that the product or solution is right. A lot of the vendors are making plans to go in-country, whether it is Epson, HP or Samsung. They are looking at in-country clusters or regions that feed out of a regional office, which in the long-run is good.

Thierry Chamayou: The advantage of having a single office in Dubai is that when you start hosting everybody under the same roof you tend to get quicker implementations of associate decisions. It is also more cost-effective because one set-up is always going to be less expensive than four or five. Coming from a sales and distribution background, I would say the disadvantage is that you are not close to the customers, apart from the Dubai-based ones, and this is something they require. If you don’t go for local presence then your strategy is not entirely addressing the potential or expectation of the market.

How important is it for a distributor to have an in-country presence? And what constitutes a true in-country presence?

SM Hussaini: If distributors handle logistics properly then it hardly matters whether or not they are based in-country. If a good distributor has a strong supply chain and availability of products in multiple locations then we don’t see a reason why they should be present in-country. Having a distributor in-country would be much more relevant for companies who have small operations or who are into fast-moving products for the SMB sector, but for larger players it does not really make a huge difference. For example, in our case we generally deal with the principal directly, although there is a role played by the distribution channel and the channel development partners.

KV Narayanan: If you look at the overall growth of the market and the various route-to-market segments then the dynamics vary between Dubai and some of the other countries, so in-country investment becomes critical. In markets like Kuwait and Qatar the enterprise portion of the business contributes quite substantially to the overall revenue gained from these countries so to address this space effectively you need to have a local presence. In the volume space, products tend to have a faster turnaround, which calls for in-country stocking. If you are not carrying the right product at the right time you are missing an opportunity, so from that respect it is critical to have an in-country investment although it may not have to mirror a complete regional presence. People have the bandwidth to multi-task. A product manager could also become a sales manager as and when required, but the operation should not be a one-man structure. Support, finance and credit management functions should be done locally, and you should be in a position to transact business in the local currency where required.

Raj Shankar: If you want to get into a business that is long-term and sustainable then it is extremely important to have in-country operations. In the past it probably made more sense to operate out of Jebel Ali — and I’m not referring to Redington but the market in general — because wherever there are high duties and taxes there is a general tendency to arbitrage. Now, with more countries getting into lower taxes and uniform duties, there is a clear merit in having stock in-country because there is no other serious arbitrage that can happen. It is all about operational excellence and supply chain efficiency.

Are there any areas or functions that are better centralised? Or should vendors and distributors always look to develop fully-fledged subsidiaries in each country?

Ahmed Ashadawi: A distributor’s job is to serve a need between the vendor and the end-user. The old model of being an agent, sitting down and receiving commission is disenfranchised. If you have no value add sitting between the end-user and the vendor, you have no job. That means you must have soldiers on the ground that do a lot of what the end-user needs. There is also continuous market creation to think of because there are new products coming out that you need to create a market for and you cannot do that remotely. ‘Centralised or not centralised’ depends on the nature of the business and the maturity of the customer. In distribution you have got to have one central store that you ship from daily and along with that you need to have the HR and the finance functions centrally.

Raj Shankar: Each distributor is different. We feel it is best to manage some of the back-office functions, such as order management, out of a centralised function. Having one central order management team but delivering the products to different locations would make a lot of sense. Similarly, it makes sense to drive what we call the back-end management — or the receivables management from the vendor — centrally. Marketing campaigns or programmes can be kept central though these are implemented for each country, according to the need. We simply look at in-country as a sales office that gives us close proximity to the customer, while the operation out of Dubai gives us close proximity to the vendors. That is why our business managers and product managers are based in Dubai and our channel sales teams are located in each country.

Thierry Chamayou: It is up to each company to figure out what is best for them, but there are some functions that you want to have at a regional level because they are more sensitive, such as marketing and finance. If you talk about sales and logistics then I believe those functions have to be close to the customer. If you are a distributor that is into retail then you definitely need to have stock so that you are capable of replenishing overnight. Some distributors have opted to work with 3PLs and then have ‘virtual stock’ which is managed by a logistics company, but the important thing with functions such as logistics and sales is to be extremely close to the customers by operating in-country.

Is enough regard given to the so-called ‘smaller’ markets such as Bahrain and Oman? How should these markets be addressed by vendors and distributors given their size?

KV Narayanan: If you take Egypt or Saudi Arabia then it has to be a fully-fledged subsidiary because the size of these countries means you can turn around the operational cost that is involved in around 12 to 18 months. In some of the satellite countries, like Qatar or Kuwait for example, you may not need a fully-fledged operation because people can multi-task in those countries. But captive markets do demand a certain focus to understand the local dynamics and to work efficiently, so yes, it possibly would give you a certain incremental margin if you are present in-country compared to a centralised operation. Given the size of these markets, there is generally a good opportunity. Typically we don’t insist on having a local presence in some of the smaller markets, but we insist on people visiting regularly or having a resident sales force that can locally interact with customers.

Faisal Jamal: It depends on the product range. For certain products you need to have all the functions locally, but those markets are also small. If there is already one established player it doesn’t make sense to have two or three more established players in the same market because the market size and the number of units are small, whether it is printers or laptops. Certain markets like Oman and even Bahrain are easy to commute to, transportation is good, customs issues are not so prevalent, and you can justify it. Right now it doesn’t make sense to go in-country, but that doesn’t mean that the model won’t change in three or four years time because the economic landscape of those territories could change. It is a slightly different case in a market like Saudi Arabia, for example. The market is far bigger, the terrain is far bigger and it is not easy to ship goods into Saudi Arabia.

Ahmed Ashadawi: The attraction is definitely there for a bigger market, but telemarketing and the internet can make a small market accessible to vendors today. You don’t really have to go there physically every day, maybe just when you have a contract to sign or something to deliver. In terms of marketing, a small market today is available to vendors cyber-space-wise so I don’t agree that the smaller markets are being neglected. If you are talking about setting up a presence in a small market, nobody is going to stay in a market if they see that the expenses are more than the income at the end of each year.

The current financial situation is making every company think twice about the investments they make. Are there any in-country areas or functions that vendors or distributors can reduce without hurting the local channel?

SM Hussaini: The travel restrictions are happening and that is affecting the way our partners work with us. Many companies that came to Bahrain and opened up their own operations now only have a skeletal team. Before the financial crisis they were a bit lavish in terms of in-country resources, but it is only the much-needed resources that now remain. For instance, post-sales technical staff are not always needed so they are not based in the country, but we still get great help from our partners when it comes to pre-sales. They support the partner with demand creation and conduct POCs.

Faisal Jamal: A lot of the marketing functions can be done centrally. Yes, you need to know what is happening on the ground, but you have got your sales team for that. We looked at having finance, credit control and product management in-country, but decided that given our model and type of business it made sense to do it centrally and not duplicate resources. In terms of vendors, they may not need to have warehouses in-country if the distributors are going to have that facility. We don’t need to duplicate the resources between each other. There is no point in a vendor investing in a third party logistics hub because they have the added cost of transferring it from their central hub to the local hub and from the local hub to the distributor. All of a sudden you have got added cost. Vendors and distributors are setting up local offices and subsidiaries, but we need to make sure that we don’t all do the same investment otherwise we are just going to add more cost that ultimately results in end-user prices going up.

KV Narayanan: We have seen some of the distributors in the smaller countries who used to have their own warehouses move towards third party warehousing because of the financial situation. They are trying to ensure that it doesn’t become a burden on them, while still addressing the market efficiently. If you go deep into the markets outside of Dubai they are corporate markets — the majority of the captive consumption happens through institutions so a local presence is still needed.

How influential is in-country presence when it comes to a reseller deciding which vendor or distributor to partner with? Do resellers value in-country presence or do they only care about price and availability?

Ahmed Ashadawi: I think that to sell in markets such as Bahrain and Qatar you have to be in-country, although the office size will depend on the market size. After all, what’s the difference between me having 80-plus centres in Saudi Arabia because I target every city and having offices in Qatar, Bahrain or Kuwait — shouldn’t they be considered large cities? The issue here is trust. 30 years ago products used to be sold that weren’t updated for two years. Now there is an upgrade every month so you really need people on the ground that can provide value add and fill the gap between the vendor and the end-user.

Raj Shankar: Initially there is more conflict than co-operation because some of the bigger boys in-country prefer to be the sub-distributor by taking the products out of Jebel Ali and into the country themselves. So when you go in-country the issue is always whether you do business with them or compete with them by taking away their customers. Over time that sense of conflict changes though because resellers definitely come to value in-country stocking as they don’t have to hold as much. Secondly, depending on the transit time, they no longer have to keep buying that much more inventory and block up their capital as products are available locally, and in certain cases any currency risk is taken by the distributor too.

Thierry Chamayou: I believe it is very important for vendors to have a local presence and would say that it is becoming even more mandatory in certain aspects of the SMB and large account business because it is not about selling, but about reinforcing the message that you are here to stay. It shows that you are not just there to catch an opportunity, but that you are putting in place a long-term plan and working with end-users and partners to forecast how the market will evolve.

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