Making margins

Ezy Infotech is the entity that acquired certain assets of eSys Group earlier this year, including its PC assembly and distribution businesses. With 1,400 employees in more than 25 countries, the company remains an important player in the global market. Vikas Goel, advisor to the board of Ezy Infotech — and a well-known face in the IT channel — reveals where the company sees opportunities for growth and explains why the distribution sector is on the cusp of massive change.

Tags: EZY InfotechUnited Arab EmirateseSys Technologies
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Making margins
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By  Andrew Seymour Published  December 8, 2009 Channel Middle East Logo

Contract assembly for IT and consumer electronics has become a larger part of the group’s business in recent years, and you now have manufacturing facilities in Asia and the CIS. Is that the case in Dubai as well?

Yes, what we do is assembly or disassembly depending on which country [the product] is going into and the logistics requirements for those countries. We have cemented our footprint quite a bit in terms of product line and physical presence in countries such as Sri Lanka, Bangladesh and Pakistan.

Those three countries typically get clubbed as the Indian subcontinent, but they consist of 500 million people and they are huge, growing markets. In India, of course, we are in quite a dominant position, especially for our own-branded goods. What we have done with the strategy globally is moved higher up the value chain into high-margin products, whether it’s software, own-branded products or manufacturing.

Where does distribution fit into your IT portfolio these days?

We have consolidated distribution to a certain level — US$700m to US$800m — and we are not consciously pushing it beyond that, but what we are doing is pushing our manufacturing and other businesses higher so that the average margin goes up. In distribution, the fundamental problem during the last one and a half years has been credit exposure. The insurance limits on the customers are being withdrawn everywhere, whether it is Latin America, the Middle East or Eastern Europe, so your ability to give credit is limited.

And if you can only give X amount of dollars to a certain customer, it is better for you to give credit on products which give you higher margins. The components business is typically only a 3% or 4% margin business, and the systems business is 4% or 5%, but when you get into solutions, software or your own-manufactured products, you are talking about double-digit margins. Our average gross margins from, say, 2006, when we were a purely components distributor have grown from 3.5% to 7.5%.

What about the Middle East? Are you still committed to serving the region?

Yes, we are definitely fully committed to the Middle East market and, in fact, our local Dubai operation — in line with our global strategy — is focusing on the components distribution portfolio to the extent that it was previously, but we have also expanded more into own-branded products and manufacturing, including contract manufacturing. We do that for a couple of major MNC brands.

Apart from that, we have focused quite a bit on the CIS and adding a footprint there, as well as Egypt. We have a joint venture in Uzbekistan, where we are one of the largest components distributors and the largest PC supplier. With Uzbekistan we are also getting into Turkmenistan.

A lot of other distributors in the Middle East have expanded into the Saudi market over the years, but that’s not something Ezy Infotech, or the eSys Group before it, appears to have done. Why the reluctance?

We didn’t want to waste resources in a market that is already saturated. The credit cycles are much longer, everybody has payment issues over there and every distributor is sitting there and fighting with one another over cents and pennies. If you want to be a significant player in Saudi, it requires, let’s say, 10 X of resources.

But you can be a significant player in the smaller markets with 1 X of resources — so a tenth of that. It is better to be a king in 10 countries than a marginal player in one country. When you deal in Saudi you may make 3% on a product, but when you deal in CIS or the African countries the margins we are talking about are 5% to 10%.

There is a perception that the contract manufacturing business has suffered more than distribution in the downturn though. What are your thoughts on that?

You have to pick and choose your battles. If you are doing contract manufacturing in China or Taiwan then all the big boys are there and you won’t be able to compete with them if you don’t have economies of scale or any niches.

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