By Andrew Seymour
The Commonwealth of Independent States (CIS) might not be the first region that springs to mind when identifying possible emerging markets for Middle East companies to explore, but it continues to be a rich source of revenue for those capable of developing the right model. Channel Middle East looks at the intricacies of doing business in this fascinating territory.
|~|AndreyKostevichASBIS200.jpg|~|Andrey Kostevich, Asbis|~|The Commonwealth of Independent States (CIS) might not be the first region that springs to mind when identifying possible emerging markets for Middle East companies to explore, but it continues to be a rich source of revenue for those capable of developing the right model. Channel Middle East looks at the intricacies of doing business in this fascinating territory.
Although it is considered a distant corner of Europe to many, there is plenty of Middle East wholesalers and sub-distributors that have come to realise the financial advantages of implementing a CIS strategy.
Unlike the Gulf landscape, the CIS spans an enormous geographic area that stretches from Europe’s eastern peninsular right across to central Asia, and is home to 280 million people.
The CIS was formed 16 years ago following the split of the Soviet Union and consists of 11 countries including Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine and Uzbekistan. Turkmenistan is regarded as the 12th member of the CIS, but it only holds associate status after withdrawing its membership two years ago.
In some ways, the CIS resembles the Middle East: outsiders often look upon it as a single territory whereas in reality it is a diverse collection of markets with very different characteristics.
“Despite the common Soviet legacy there are considerable differences between various CIS markets,” said Andrey Kostevich, VP of the Russia and Belarus region at components distributor Asbis. “These differences are mostly due to national mentality and traditions. Some markets in central Asia are extremely conservative and isolated, like those of Kyrgyzstan and Tajikistan. On the other hand, there are booming economies in Kazakhstan and Azerbaijan, which thrive on natural energy resources.”
He added: “The Ukrainian IT market is also fairly big and promising despite the ongoing political volatility. The IT market of Belarus has seen some positive transformations over the past few years, driven by formidable GDP growth. We are also observing some attempts to improve Belarus’ attractiveness for foreign investments, including the considerable reduction of tax burdens, which is expected to take effect next year.”
While vendors such as HP and Fujitsu Siemens are directly present in Belarus, they are competing in a PC market that only recently grew to more than 100,000 PCs a year and is heavily dependent on desktops. Local PC assemblers, such as national champion Xorex-Service, also wield plenty of influence in the market, a theme that is consistent across most of the CIS countries. ||**||Contrasting markets |~|jihadyousseffcis200.jpg|~|Jihad Youssef, Genius Computer Technology|~|Peripherals vendor Genius Computer Technology has been doing business with the CIS ever since opening its Dubai office 10 years ago and general manager, Jihad Youssef, claims sales from the region continue to grow between 30% and 35% each year.
“We have a large number of clients in the CIS, especially Kazakhstan and Georgia, which are two countries that have really developed,” he said. “Armenia is a country where we also see a big future and Azerbaijan is picking up fast. Other countries are doing well too, but there are sometimes political situations that stop the progress. The situation is still not very stable in Kyrgyzstan, Uzbekistan and Turkmenistan.”
Russia aside, Kazakhstan and Azerbaijan are cited by several sources as the most compelling markets in the CIS region. The constitutional republic of Kazakhstan, with a population of 15 million people, has become a bigger draw for IT vendors in recent years following efforts by the government to stimulate technology investment.
Improvements in infrastructure, coupled with the dollars it attracts from oil production, are also driving the size of the IT market, although distributors selling into the country say they face challenges.“Last year there was a doubling of transportation and customs duties in Kazakhstan and that is why the sales dropped,” said Vladislav Rogovoy, managing director at Jebel Ali-based LightSpeed, a distributor of products such as Foxconn, Micronet and Toshiba notebooks. “Our customers have to take this cost and they are finding that it is now better to buy some products from other countries.”
Most high profile foreign brands are visible in Kazakhstan, but any company with aspirations of strong growth needs to assemble a proficient partner network. Dell, for instance, uses two authorised service providers in the country — Comel and JSC — and also works with partner L&M Consulting.
Its strategy elsewhere in the CIS follows the same channel-oriented principles with resellers such as Vallex IT in Armenia, Risk Company in Azerbaijan and DAAC Sistem in Moldova operating as official partners.
SDC, a Jebel Ali-based distributor with a strong CIS presence, reckons 90% of business in the region is done in Russian — just one of the many factors that needs to be taken into consideration when endeavouring to cultivate relationships in the region.
“First of all you have to understand the market and the competitors,” observed sales executive Shokh Shomakhmudov. “Product knowledge is important too. The same products, which we are selling in one country, we may not be able to sell in another. For example, we are selling fewer USB flash drives to Uzbekistan than Kazakhstan because consumers are buying from China, which is much cheaper.”||**||Regulatory challenges|~|Lightspeedcis200.jpg|~|Vladislav Rogovoy, LightSpeed Distribution|~|Doing business in the CIS can be an exhausting affair due to bureaucratic complexity and frequent changes in regulations, especially in Russia. This makes the market extremely unpredictable.
“The CIS is just an association, not a union like the European Union where the customs rules and goods movements is easy and smooth among members of the union,” said Mourad Mohamed, marketing manager at PC assembler and distributor FDC. “In the CIS, each country has its own customs rules and regulations and its own law. Therefore, we have to address each country separately, understanding its market situation and needs.”
Indeed, physically getting the product into the CIS and moving it around can be an uncompromising task given the various formalities and barriers that companies face. While retaining the decision-making process and head office locally, many IT companies have actually established logistics and warehouse facilities in the Middle East — most notably in Jebel Ali — to simplify the job of getting product into the market as quickly as possible.
The list of distribution companies that have earned a reputation for building strong channels in the CIS from Dubai include Fire Bird, Empa and Jel Corporation, the latter of which counts IT, mobile phone and photographic brands within its portfolio.
“The logistics from here to Kazakhstan, or the other CIS countries, can be difficult,” said Youssef at Genius. “You have to ship from Dubai to Iran by sea, then from Iran to the Caspian Sea it goes by truck or train, and then from there it goes to the country. The processing of the logistics is slightly complicated and costly — a 40-foot container costs something like US$6,000 or US$7,000. When a container comes from Hong Kong to Dubai it costs us no more than US$2,000. That’s why they need very strong logistics operations here.
Youssef added: “If a client is based in Dubai, the only thing we do for him is a transfer of ownership and he does the rest. If the client is not based in Dubai he will give us a list of shipping companies and we will advise him on which company to take. This is one of our specialities as we have to know who can actually do this service. It is not like the Middle East where the goods can be sent anywhere in three or four days.”
Even when the product is in the CIS region, the work is rarely complete, according to Kostevich at distributor Asbis. “The major challenge we are facing in Russia and other countries is that it is a huge market territory with different time zones, which leads to more complicated logistics and remote work with partners — mainly in online mode. Face to face business meetings are rare.”
The financial dangers of trading in the CIS are also at the forefront of distributors’ minds. “Even today, years after the decentralisation of the economy, the risks are huge and it is still not recommended to do business based on credit terms,” said Mohamed at FDC, which has a direct local presence in the CIS through a company representative.
“It is true that since the inflation of 1998 in Russia, some progress has been made, such as the stabilisation of payments systems. Russia has also taken action which has translated into several laws such as the bank bankruptcy law and bank restructuring law. But the international trust in dealing with CIS customers on a credit basis is still not up to the desired level that guarantees the payment security.”
Distributor Asbis has moved to strengthen its position in the last year by implementing the use of factoring in Russia as an additional financial facility, while Genius says it is more flexible with CIS firms that have a presence in Dubai. “The payment terms of these countries is either letter of credit, bank guarantee or telegraphic transfer in advance,” said Youssef.
He continued: “However, we do deal with the clients who are based in Dubai and we give them credit and facilities. It is not a problem, but until now we haven’t opened any credit facilities for clients who are based in the CIS. They are not against this because they know the situation and I believe all the vendors are doing the same thing. We are working on more facilities now and looking to put insurance on the clients in the CIS market, but the insurance companies are still hesitating a bit. If they want to give you an insurance it’s at a high premium.”
Yet for all its drawbacks, the CIS is a market that IT companies are finding increasingly difficult to ignore. Russia and the Ukraine remain the most developed of all the CIS states. “Russia’s market size for 2007 is estimated at 7.25 million desktop PCs, 175,000 servers and up to 100,000 mobile PCs,” revealed Kostevich at Asbis, which last year added Toshiba notebooks and the entire Dell range to its product portfolio. “The growth forecast for components distribution this year stands at 5% to 10%. In the long run, however, due to global commoditisation trends, this market is going to become more constricted, and will eventually be filled up with A-brands.”||**||Retail boom|~|Mouradmohamed200.jpg|~|Mourad Mohamed, FDC|~|Much of the growth in the CIS is coming from the retail sector, where consumers are showing a strong appetite for technology products offered by leading stores such as Eldorado and Technosila. Unlike the Middle East, there is also a flourishing online retail market place thought to consist of more than 1,500 e-tailers although it is the hybrid distribution-retail model that is beginning to enjoy the most prominence.
“In the CIS the power retailers do not exist like they do in Dubai,” observed Youssef at Genius. “However, the distributors who are playing a major role over there and importing the product now have two divisions — one division for distribution and another division for retail. Before, in the CIS, most of the business used to go for trading and government tenders, but nowadays the business has also shifted to retail. Still, we receive a lot of orders for tenders — we have just received an order for a 20,000 mix between keyboards, mice and speakers for a tender in Georgia.”
Rogovoy at LightSpeed added: “The market overall is getting more mature and there is now a lot of competition from the Russian countries. Convergence of electronics and computer stores is taking place and we are seeing the number of retail networks expand.”
The Ukrainian retail channel has taken off within the last couple of years, emerging as the fastest growing region for digital cameras in 2006.
Falling price points led shipments to climb almost 70% year-on-year to 600,000 units much to the delight of vendors such as Canon, Olympus and Sony, which have carved out the distribution channels that have ensured they represent a vast portion of this US$140m a year market. There is plenty of room for expansion too, according to Alexey Gvozdenko, research analyst at IDC Ukraine.
“Despite the surge in camera sales, the Ukrainian market has a long way to go to catch up with Central European peers,” he revealed. “Only six out of every 100 households in Ukraine have a digital camera.” ||**||