Customs capers

Now you see it, now you don’t! Saudi customs authorities may literally have scrapped the 5% import duty on computer products overnight, but those who were caught on the hop are now beginning to comprehend the long-term implications of this landmark decision. I believe it can only serve to make the Middle East channel a more open environment and even strengthen the position of the ‘little guy’ in the process.
Customs capers
By Andrew Seymour
Thu 15 Feb 2007 04:00 AM

Now you see it, now you don’t! Saudi customs authorities may literally have scrapped the 5% import duty on computer products overnight, but those who were caught on the hop are now beginning to comprehend the long-term implications of this landmark decision. I believe it can only serve to make the Middle East channel a more open environment and even strengthen the position of the ‘little guy’ in the process.

The new tariff, which was suddenly brought into play last month, renders the vast majority of computer equipment that passes through Saudi customs free from import tax. It’s still too early to predict how radically this will reshape the dimensions of the regional channel, but it’s fair to say that the short- and long-term implications will be strikingly different from one another.

One immediate impact of this ruling is that some distributors who hold stock inside Saudi have been heavily penalised. The reason? Saudi authorities implemented the ruling with such stealth that wholesalers with several weeks’ worth of stock in their warehouse are trying to flog products that were purchased for a higher price than is now being commanded in the market.

These guys invariably purchased the product in December, or earlier, when the goods were subject to a 5% charge.

Any distributor in that position has clearly been handicapped during the opening period of the year as they have had to face up to the challenge of moving products that competitors are bringing into the market for 5% less.

At least one vendor I have spoken to in the past week admits this situation has caused tension with distribution partners who believe they are entitled to some compensation and handholding in order to manage their way out of a potentially loss-making predicament. This particular vendor admitted its strategy was simply to judge each partner on a “case by case” basis rather than promising to protect everyone.

But the long-term impact of the new tariff system is what really matters. As far as I see it, the impact at vendor level is minimal. After all, the cut is across the board and doesn’t distinguish one vendor’s product line from the other.

Yes, it will reduce an awful lot of bureaucracy and make it much simpler for manufacturers to drop ship product straight into Saudi, but it won’t significantly alter their cost structure. The 5% charge was always absorbed at channel and end-user level anyway.

For me, the full implications of this revised system will be seen in the distribution and reseller tiers. For a start, it challenges the stature of Jebel Ali as a highly powerful hub as product can be shipped straight into Saudi with no apparent cost disadvantage.

Of course, the reality is that Jebel Ali is too big and established to be completely undermined by the ruling, but I firmly believe we will see a lot more inventory held in Saudi from now on. Any distributor with a local warehouse will reap the benefit of their investment, safe in the knowledge that unsold stock can be moved around a lot easier in future.

At the first-tier level, it is likely to prevent the market from being completely dominated by a handful of powerful sub-distributors, resellers and re-exporters. Until now, larger Saudi resellers have had free reign in terms of being able to bring products into the market from outside and sub-distribute to smaller resellers who don’t have the capital to perform this role themselves.

With the 5% tariff removed, the economics are far more favourable for these ‘smaller guys’ than they were in the past. There is a further factor than can only seek to even the playing field. The modified import system makes it a lot more difficult for the tax cheats to profit from under-invoicing and other dubious tactics.

It has been said that this new ruling might make it less important for companies to develop in-country operations in Saudi; an ironic opinion given it remains such a prominent issue these days. I strongly disagree.

Whether the tax rate is zero, 5% or 50%, the simple fact of the matter is that a local office generates a value of its own. Distributors, in particular, with an on-the-ground sales, marketing and technical presence enjoy far more credibility in the local market than those who don’t.

Let’s not forget that the new import rules in Saudi will also be replicated in the other GCC countries. They too have agreed to it, even if they haven’t implemented it yet. When this happens it will make the Gulf IT channel an even more intriguing place to play, regardless of whether it catches the channel by surprise again.

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