Posing the dreaded question

What if the fourth quarter doesn’t actually turn out to be that good for the channel?

Tags: Channel developmentEconomic crisisITP Publishing GroupUnited Arab Emirates
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By  Andrew Seymour Published  September 6, 2009

It’s the question that’s on everybody’s mind, but most are too afraid to ask out loud: what if the fourth quarter of the year doesn’t actually turn out to be that good?

For most of this year, the assumption in the Middle East channel has been that the final few months of 2009 will provide the respite the market has been desperately craving.

With the summer months labelled a write-off before they’d even begun, a post-September upturn in fortunes has been eagerly anticipated by both the vendor and distribution camps. In fact, rarely has there been such onus on a single quarter to compensate for the mess that has occurred before it.

But while I am reluctant to use that well-worn phrase containing the words ‘eggs’, ‘one’ and ‘basket’ you certainly now have to wonder if some companies have put too much emphasis on a Q4 recovery taking place.

As we edge closer to the period when business activity is tipped to pick up, doubts over the likelihood of a sufficient-enough recovery to breathe fresh life into the market are invariably starting to creep in.

I’m sure many vendors and channel companies will record an improvement in their numbers once the fourth quarter comes around, but whether that will be due to a bona fide correction in the market or simply an indication of just how weak volumes have been in previous months is something that will be extremely important to distinguish.

Most of the top research houses seem to be predicting that a genuine recovery will now take much longer to occur than originally expected — and it is difficult to disagree with them.

What this unfortunately means for the Middle East market is that those who are already financially over-stretched will be left fighting to keep their heads above the water.

Experts have long cited consolidation as a natural consequence of the financial downturn and yet it hasn’t really happened. But the screw would be tightened considerably if Q4 fails to provide adequate relief, potentially signalling the end for traders and resellers that have been encountering severe cash flow problems all year.

After all, if you delve beyond the ever-optimistic sound bites that emanate from the vendor community, tales of difficulty and disharmony continue to expose the fragile position that the channel finds itself in.

From the stories of resellers failing to generate enough cash to pay their staff for two or three months at a time to distributors that can no longer obtain credit insurance for customers with unblemished payment records, it is clear that those who base their argument for recovery on the fact that the Middle East market hasn’t declined as rapidly as other regions are completely missing the point.

At the end of the day, the prospects of an improvement in the channel’s health are inextricably tied to two major factors: the availability of credit through borrowing and the ability to recover accounts receivables.

The first factor is well-documented, but it is the second point which has really squeezed the channel in recent months. 

Vendors might be attempting to stimulate end-user demand by discounting prices, but that doesn’t resolve the cash challenge that has led to pressure building up inside the channel as a result of end-users not paying their bills.

The ramifications of resellers failing to secure money they are owed can soon escalate, especially in the present environment. 

Firstly, and most obviously, they can’t pay their suppliers. That can then lead insurers to pull credit cover, causing the suppliers to freeze a reseller’s account because its payments can no longer be guaranteed. Suddenly, that reseller, which in all probability will eventually get paid, can’t source stock anymore because it’s on hold. Before you know it, one link in the channel chain has been entirely broken.

It goes without saying that the ability of end-users to make payments is closely linked to the availability of credit in the market, but that should not be used as an excuse to ignore the matter. 

In recent weeks I’ve heard growing calls for increased vendor intervention when it comes to this subject. Critics argue that greater vendor assistance with facilitating end-user payments — or at least a more empathetic attitude to the topic — would be far more helpful to the channel than simply knocking US$20 off a product’s RRP to make it more attractive.

Whatever happens in the coming months, the Middle East channel has more deep-rooted problems to address than can ever be corrected by an impromptu spike in sales. And if that’s the case then the question of whether Q4 will fail to live up to expectations won’t really matter at all.

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