UAE market braced for increase in ‘runaways’
Insurers and distributors expect to see more traders fleeing market with unpaid debts
The UAE channel has been warned to expect an increase in the number of so-called ‘runaways' in the market next year, as resellers struggle to keep their businesses afloat.
Runaways — the term for companies that are effectively insolvent and whose owners typically flee the market to avoid prosecution — have become an increasingly unwelcome fixture of the channel since the financial downturn, with suppliers and distributors losing millions of dollars in uninsured debts as a result.
At a special business seminar hosted by Euler Hermes in Dubai last week, officials from the credit insurer's UAE operation predicted an increase in the number of runaway incidents in 2011 versus 2010, reiterating fears that any long-term market recovery will not happen without further losses.
Anil Berry, regional managing director at Euler Hermes, stresses that although there are opportunities for companies to grow their business using trade credit, several factors could conspire to create further turmoil.
"In Dubai there is still a lot of competition in the market and together with the lack of bank liquidity, we see 2011 to be challenging for the sector - in particular we see SMEs with a lack of access to bank finance and general traders at most risk of failing," he explained.
Berry says the lack of significant fixed assets in the distribution business and generally low market entry and exit costs make the IT channel more vulnerable to failures than other sectors.
"One additional risk is a number of the IT products are re-exported from the region to neighbouring countries and this creates an additional risk as payment issues and delays from some countries have resulted in the failure of resellers closer to home," he added.
AP Rao, credit control manager at Emitac Distribution, agrees with Euler's assessment that 2011 could see a rise in runaways, particularly after a spate of Dubai-based reseller closures in recent months.
"The possibility is there, at least up until March or April," said Rao. "With cash flow issues and the money market becoming very tight, there is a lot of pressure [on traders] to move stocks."
KG Vincent, finance director at another distributor, FDC, suggests more knowledge sharing and transparency between distributors might help avert potential bad debts, but he also acknowledges that things are likely to get worse before they improve.
"We expect 2011 to be very tough," he said. "One issue is that globally things are slow and secondly people want to make easy money. I also think there are a lot of people stuck with real estate investments that they are trying to get out of."
Since the collapse of Metropolitan Computer in September this year, the trade debts of Dubai-based IT traders which have exited the market are estimated to be worth more than US$25m, with a large portion of that sum owed to fellow traders and smaller sub-distribution companies.
Euler's Berry says suppliers need to think about conducting stricter assessments of their buyers in future and not just leave that task to their sales teams.
"If possible, we suggest they undertake a financial assessment of the buyer by reviewing their audited financial statements," he said. "In addition, they should continuously review their payment experience, take trade and bank references, and look at which market and to whom the company is selling to. There are many more factors, but with the market changing there is no guarantee that you will not be caught."