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Seagate drops eSys after audit clash

Hard drive giant Seagate has taken the dramatic step of dropping eSys as a global distribution partner following its alleged refusal to co-operate with an audit of point of sale records. The US-based vendor has already ceased shipments of its products to eSys.

Hard drive giant Seagate has taken the dramatic step of dropping eSys as a global distribution partner following its alleged refusal to co-operate with an audit of point of sale records.

The US-based vendor has already ceased shipments of its products to eSys. Singapore-based eSys was previously Seagate’s largest distribution partner and represented 6% of its revenues — equivalent to a massive US$168m — for the three months to the end of September.

Seagate initiated an audit of eSys' point of sale records to confirm the accuracy and completeness of its claims for programme credits under its distribution sales incentive schemes back in early October.

Discussions between the two parties surrounding the timing, scope of work, and selection of third party auditors continued until last week when eSys officials informed the vendor they would deny third party auditors access to its records to perform the requested audit, according to an SEC filing by Seagate. The hard drive specialist claims eSys officials also indicated that an audit would “likely reveal” irregularities in its compliance with the terms of the incentive programmes as well as other unspecified irregularities.

One senior eSys executive contacted by Channel Middle East claimed that the ‘intrusive nature of the audit’ undertaken by Seagate was one of the significant factors behind the shock move to dump its long-term distribution partner. While eSys was prepared to divulge a certain level of sell-out data to Seagate it was not prepared to disclose all of the information that the hard drive vendor requested. eSys is due to issue an announcement on its split from Seagate later today.

Seagate also claims that eSys has so far failed to make full current payments to the vendor and the outstanding balance on its accounts receivables remains approximately US$50m as of two days ago. The figure had been much larger, but eSys made payments of around US$53m prior to the third week of October 2006.

Although eSys officials have indicated to Seagate that it intends to pay all amounts owed, Seagate has recorded an additional US$40m provision for doubtful accounts in the quarter ending September 29th.

“We recorded this additional allowance due to the inherent uncertainties following the termination of the distribution relationships, eSys’ current delinquency in payments and failure to pay amounts when promised, and eSys’ failure to comply with the terms of its commercial agreements with us,” read the SEC filing.

“While we are terminating our ongoing distributor relationships with eSys, we will continue to aggressively pursue our contractual audit rights as well as any claims that may be assertable against eSys as a result of material breaches of the distribution agreements and any intentionally wrongful conduct that may have occurred,” the document continued.

In September 2006, Seagate’s Middle East management team had outlined changes to the channel structure in the region following the completion of the purchase of Maxtor. A total of six distributors were selected to sell the entire portfolio of Seagate and Maxtor branded products in the Middle East.

Gulfem Cakmakci, senior channel sales manager Eastern Europe, Middle East and Africa at Seagate, said at the time: “In terms of distributors there will be six in the [Middle East] region selling both the Seagate and Maxtor product lines. These are Asbis, eSys, FDC, Logicom, Mindware and Tech Data. MAS in Egypt, ESAP in Saudi Arabia and Almasa will sell Maxtor lines only while both Delta and Jarir will operate as retail distributors.”

With eSys now removed from this list of regional distributors, the remaining five — Asbis, FDC, Logicom, Mindware and Tech Data — will look to fill the channel void created by the collapse of Seagate’s relationship with its largest global distribution partner.

eSys had been distributing approximately eight million Seagate hard drives per annum on a global basis before the split and in Seagate’s last financial year accounted for US$460m of its sales. In late September 2006, eSys picked up the ‘Number One Distributor Award’ from Seagate in recognition of its achievements during the vendor’s most recent financial year.

Speaking at the time of the award, Vikas Goel, chairman and managing director at eSys, said: “This is yet another testimony of the enduring eSys–Seagate relationship which has gone from strength to strength since we started six years ago. This award is a validation of the eSys way of doing business and the global pipeline distribution model of eSys, which gives us unprecedented efficiencies.”

Life changes fast in the distribution sector and clearly that relationship may not have been as unbreakable as the two parties suggested in the past.

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