New hope, same problems

This week marks the beginning of a fresh quarter for the Middle East IT market, but while the outlook for the next three months is laced with unbridled optimism there are lingering concerns that inventory build-ups are burdening the channel.

Back at the tail end of August, I wrote that it would be intriguing to observe if vendors adopted a measured and responsible approach towards their forecasting in the run-up to Gitex Shopper or whether their gluttonous tendencies would get the better of them.

Judging by remarks from some resellers in the market, it would appear that evidence of the latter is very much in abundance and the first-tier channel is now feeling the full repercussions of this.

Certainly those in the business of reselling printers, laptops and LCD screens claim that vendors and distributors are really turning up the heat in an attempt to flush surplus product through the channel. Some Middle East sources argue that much of this was soaked up during the last two weeks of September, but others insist that distributors are still trying to force resellers to place significantly higher orders than usual to clear the backlog.

Tales have even emerged of distribution reps marching down to Computer Street in Dubai with the intention of putting traders under pressure to ramp up their volumes. While this may not immediately seem like irregular behaviour, resellers beg to differ. They say the door-to-door endeavours of individuals that normally carry out their work from an office in Jebel Ali is a clear indictment of how desperate the situation is in some parts.So what’s to blame for this unusually belligerent persistence? Some point the finger at the distributors themselves, arguing that they are guilty of making false promises to vendors when it comes to their ability to deliver. Others, meanwhile, accuse vendors of setting excessive targets for their distribution partners — a theory that I have to say contains more mileage than alternatives I have heard.

Several distributors I’ve spoken to in recent weeks have expressed apprehension that vendors continue to over-estimate the capacity of the market, paying scant regard to seasonal trends in the process.

If we follow this second theory to its natural conclusion in the case of the third quarter — when most IT companies acknowledge a general slowdown in sales activity — then it would perhaps explain why dealers now claim to be seeing such strong-arm tactics from distributors. Taking the argument that vendors have been setting targets based on performance during the rest of the year, rather than factoring in seasonal dynamics, it is little surprise that distributors are saddled with surplus stock.

As I’ve said on previous occasions, there is still an inclination for vendors — and, to an extent, distributors — to assume that resellers in this region are capable of absorbing any quantity that is pushed their way. That might be the case more often than not, but it’s a very dangerous view to take for granted.

Market watchers suggest the present scenario threatens to be exacerbated by other aspects that may have been underestimated. For a start, some traders say that customers from certain key re-export destinations, notably Iran, stocked up in advance of Ramadan and therefore do not currently have the appetite the market might have otherwise hoped for. Additionally, there are fears that the absence of some power retailers from this month’s Shopper may hinder orders.

In the current climate of tightened credit terms and the prospect of resellers being swamped with special pricing deals on aging stock, it is only going to take one bounced cheque to create mayhem in the market.

For the sake of channel stability, a buoyant Shopper would undoubtedly ease the pressure, but it won’t disguise the fact that vendors and their distribution partners still need to get a handle on the issues that compromise the channel every time they surface.