New year, old problems

Market stability is still a long way off for the reseller channel, but who's to blame?

Tags: United Arab Emirates
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New year, old problems Credit issues continue to plague the IT trading market. (ITP Images)
By  Andrew Seymour Published  December 30, 2010

This time last year the Dubai channel was under siege as reckless credit management policies administered by suppliers and unethical behaviour from some traders contrived to send a number of computer dealers out of business.

Senior members of the channel called for calm, urging distributors to be less gung-ho in their approach to extending credit and imploring the wider trading community to relinquish support for any parties deemed to be selling below cost (an action that has firmly become one of the immediate signs a company is in trouble).

So, 12 months on from all that drama, how much progress has been made? Absolutely none, it seems.

Seven or eight traders are said to have fled the market in the last three months alone. Some were small shops, typically established to re-export laptops and components, but others were more prominent, including Metropolitan Computers, a company that had been operating for more than a decade.

Those in the know reckon the combined debts of traders that defaulted during the last quarter total US$25m, if not more. 

US$25m might not sound a huge amount when there are several volume distributors in this region doing upwards of US$300m a year in sales, but with today's wafer-thin gross margins and the cost of operations generally assumed to be on the increase, you can be sure that every single uninsured loss hurts.

What is just as significant is the fact that much of this trade debt isn't necessarily owed to larger, authorised distributors, but to the many smaller traders, re-exporters and sub-distributors that form part of such a highly intricate channel ecosystem. When one company fails to collect its money in this market, the danger is that the ripples will be felt far and wide.

The bad news for the trading channel is that it looks like things will only get worse. Credit insurer Euler Hermes, the largest provider of credit management services to the channel in the UAE, recently stuck its neck on the line by predicting that 2011 will witness a greater number of runaways than 2010. Few would argue with that view given the channel's recent history.  

The IT trading community might just be one piece of the bigger channel puzzle, but it still remains vitally important for every manufacturer of PCs, printers, components — in fact any category of hardware you care to think of.  

Let's not forget that without these companies — and their ability to redirect product flow and move stock into under-served markets such as Africa, Iran and the CIS — much of the high Middle East growth that many vendors have dined out on in recent years would simply not have been possible.

Yet while the ongoing instability of this market should be of concern to every tier of the supply chain, it remains incredibly difficult to see who will step up to the plate and take responsibility.

One of the biggest issues facing this market is that it suffers from the blame game.

Criticism has been levelled at traders for exploiting the credit lines extended to them by distributors, especially those that play the system by taking credit from one supplier in order to pay another. Yet traders aren't exactly going to turn down offers of credit when so many of them are facing severe cash flow challenges.

Perhaps, then, it is the distributor's fault for dishing out credit too freely. It is a valid accusation, but then again I suspect distributors would argue it is a necessary tool to do business because if they don't hit their sales targets, they don't obtain their rebates. And if they don't obtain their rebates they face the prospect of relying purely on transactional margins, which is virtually impossible in today's scenario.

So that leads us to the vendors. Are they to blame? They would certainly never admit it (at least not on record!) but there is no denying the pressure they face to constantly improve their numbers results in them exerting a tremendous amount of pressure on the channel to absorb stock, even if there is no obvious demand for it.

At the end of the day, while partnerships are the very essence of what the channel is all about, the harsh truth is that every layer of the channel has its own agenda. That is why the problems that existed 12 months ago, and the 12 months before that, are still evident today.  

It would seem the only way companies can avoid becoming a casualty of market runaways is to stop providing credit together and simply switch to a cash model or only agree to despatch goods once payment has been received. However, while those are actions which have certainly been mooted by some companies, they are neither practical, nor long-term, solutions.

Members of the Dubai channel calling for greater diligence, caution and transparency are certainly right to do that because those are actions which will eventually make a difference, even if just a small one, in the long run. But transforming the market into a more stable place also requires the full, unbridled co-operation of all tiers of the channel, and that is where the real challenge comes.  

Buckle up tightly. 2011 is going to be another rollercoaster ride for the channel.

2533 days ago
Fouad Rafiq Charakla

Great article!
Distributors should consistently make an effort to conduct cash-based transactions and keep credit-sales as the very last resort. Maybe cash-buyers should be offered greater incentives...!!

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