Open season

What’s really the motivation for Intel’s new distribution policy?

Tags: EMPA Middle EastIntel CorporationLogicom DubaiMindware
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Open season Intel has changed its distribution policy in the region by allowing authorised distributors to sell into all MENA markets.
By  Andrew Seymour Published  April 22, 2010

Intel's revised distribution model - allowing authorised distributors in the region to sell into any MENA market they want - is unorthodox to say the least, especially for this part of the world.

Given the variances that exist throughout the different markets that make up the Middle East region, the channel is more accustomed to distributors being governed by territorial contracts that specify the exact countries in which sales are permitted.

Only in instances where the relationship is exclusive does a distributor normally have free licence to go where they please. For a model involving multiple distributors, however, it is very unusual indeed.

So what should we make of this strategy? On the one hand Intel insists it will enhance regional product availability by giving resellers and integrators access to more purchasing points, as well as encourage distributors to grow in additional markets, rather than being constrained to the Gulf countries or Egypt, as they might have been before.

I can certainly understand the logic behind that. I would also guess that MENA distribution will become a whole lot easier for Intel to manage if it doesn't have to worry about cross-border trade and whether a distributor is selling into a neighbouring territory that isn't stated in its contract.

Who knows, perhaps it will lead to a reduction in the amount of auditing that Intel is notorious for in the channel. For example, if a distributor takes shipment of stock in Jebel Ali - which under the old model might have been meant for Egypt - it no longer matters if it ends up elsewhere in MENA. That's instantly a lot less police work for Intel to do.

On the other hand, certain things don't stack up. Intel says the new model is a way of meeting the budding growth opportunities it claims exist in the Middle East. Yet that's a sentiment I rarely hear shared by partners, especially in the distribution segment.

The word from the channel is that business is tough, more of the market continues to be taken by MNCs and the general appetite for components has dulled. Look at Intel's three main distributors in the Gulf - Empa, Mindware and Logicom. Out of those three, Mindware saw its turnover fall last year, while Empa and Logicom registered modest single-digit growth, and I'm pretty sure that didn't come from Intel lines.

The second point is that Intel claims its new policy will open up more sources of credit for channel customers. That's all well and good, but it assumes one thing: that its distribution partners are actually willing to take on more credit risk than they already do.

From my discussions with distributors, and not just Intel ones, most are attempting to do the opposite of that right now. They are already over-exposed due to the credit insurance situation, so taking on additional risk is unlikely to be an attractive prospect, even if it is accompanied by an initial spike in revenue.

Even Intel itself concedes that some resellers are "maxed out" when it comes to credit. Is it really wise, then, to promote a situation where more distributors are lending them credit? Surely that just increases the risk of resellers running into financial problems. And then guess who gets stung? The distributor of course.

Assuming the most extreme scenario - which is that all of Intel's existing MENA distributors take the opportunity to court customers in markets that were previously outside their remit - there is also the very real danger of over-distribution.

That is an issue which has got other brands in this market into serious trouble and it rarely does anybody any favours because it usually ends up in price wars and lower profitability.

So why would Intel want to encourage this? One theory doing the rounds is that the vendor is preparing to eventually cut the number of authorised distributors that it employs in the Middle East. That is not a step that can be easily taken at this point in time because if Intel simply axes a distributor serving a particular market, it would potentially leave it with a sizable hole in its coverage.

However, by introducing a model where everybody can sell where they want, it opens up the territories to more distributors, which should then result in the stronger ones taking share from the weaker ones. By adopting this approach, Intel theoretically gets to see who steps up to the plate and performs well before making the necessary adjustments further down the line.

As one industry source remarks: "Financially weaker distributors will get crucified in the new processor race and Intel will be left with fewer overall, all the while increasing their market share and lowering their own costs."

If this does prove to be a reason for the recent shift in strategy then Intel certainly won't be the first to resize. Hard drive vendor Seagate reduced the number of distributors it worked with last year in recognition of the changing market dynamics, thereby ensuring healthier margins and sustained revenues for the remaining partners.

Some channel players speculate that Intel could trim regional distribution numbers towards the latter half of this year. For now it's a matter of watch this space.  

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