Saudi Arabia has rapidly emerged as the market that no vendor or distributor with genuine pan-regional ambition can afford to ignore. Its strategic importance to the wider Middle East channel has grown enormously in recent years, prompting an unprecedented level of domestic and foreign investment that has made the Kingdom a compelling arena to operate. As the market shapes up for another year of strong development in 2007, Channel Middle East asks what it takes to succeed in Saudi.
When it comes to evaluating the growth potential of the Saudi IT channel the statistics speak for themselves. Hardware volumes outpace any other country in the Middle East by quite a distance and more than 1.3 million PC units are expected to be shipped in 2007 - a 25% jump on the previous year. Saudi is also witnessing similar growth at the high end of the market where it leads the region in enterprise software application spend.
Recent IDC data suggests that 45% of the Saudi market is carved up between just three verticals, emphasising how crucial it is for vendors to construct channels that can provide access into these salubrious customer bases. The communications sector stands out as the largest IT investor in Saudi and is poised to retain its "big spender" status in 2007, especially as the telecommunications market is preparing to open up to more competition.
"In the last two months, a tender for the third GSM operator and the second line operator has been launched," explained Abdulrahman Al-Dossary, managing director for Saudi, Yemen and Levant at ERP and database software giant Oracle. "This alone will create huge opportunities for the IT industry."
Meanwhile, agriculture, construction and mining - including oil extraction - and banking have emerged as the other major verticals investing millions of dollars into technology each year. New banking players such as Inma Bank and Bank Albilad have either opened or are on the verge of opening, while the government is said to have recently approved the entrance of around 12 foreign-established insurance companies to the market.
"The Saudi market is evolving fast due to recent developments such as the implementation of World Trade Organisation policies and free trade agreements with US and Europe," commented Ayman Mattar, regional marketing manager at Xerox Middle East. "It is one of the most important markets in the region for us going due to the increase in government IT spending and the economic boom resulting from the stock markets and oil revenue."
Iran aside, Saudi Arabia is by far the largest market in the Middle East, accounting for a whopping 45% of all IT spend in the GCC region during 2006, according to IDC.
That puts the value of the Saudi IT sector at almost US$3.9 billion, and if the number crunchers have done their sums right then the figure will soar to almost US$4.5 billion during the next 12 months. It is little wonder, then, that technology vendors are clambering to get a piece of the action and exploit a market buoyed by the high price of oil and economic diversity. "Saudi Arabia is a huge market when you look to the population and the level of infrastructure projects," said Jacques Chammas, managing director at distributor Mindware. "It continues to grow and improve technically, and things that were not on the government's plans 10 years ago now require a lot of attention and investment. The market requirements are becoming more complicated than ever before. Demand used to be for PCs and Microsoft products, but today's requirements are more focused on infrastructure and advanced technologies."
Building a channel in Saudi still represents a major challenge for vendors in the region, particularly as the market is populated by small businesses and divided across major cities such as Riyadh, Dammam, Jeddah and Khobar.
"Riyadh, being the capital, gives a focus on the government business and major accounts like banking and telecom, but every region has a different kind of business and you have to take that into account," said a source at one hardware vendor. "For example, Khobar has Aramco, and Aramco could be bigger than a whole city, while Jeddah is more focused on the private and trading business."
Oracle has offices in the three big cities and they perform a much wider function than simply addressing the domestic market. "The main reason to have these offices is to be closer to the customers in terms of technical support," explained Al-Dossary. "In the Eastern province, for instance, we have been dealing with the largest two customers - Sabic and Aramco - plus our eastern office also works closely with Bahrain. We are also leveraging the presence of our locations to cover additional countries. Our office in Jeddah is serving the Yemeni market because it is culturally close and geographically close."
While other markets in the Middle East are largely founded on a two-tier model, parts of the Saudi landscape are built on a three-tier structure. "In Saudi, due to the size of the country and how dispersed some of the smaller cities are, there are some regions where there is very good business happening that is not directly covered in terms of distribution by the big distributors," said Salim Ziade, SPO manager at HP Middle East.
"You would have to lean upon a second level distributor that would cover those regions, such as ICC in the west, PC-Net in the east or Shadady in the central region.
They really act as a hybrid between a genuine reseller with a showroom and a sales force, and sub-distributors that have additional reach to the bigger distributors with direct contact to the vendors," added Ziade.
The Saudi distribution channel is one of the most cosmopolitan markets outside the UAE, with a throng of highly rated in-country distributors attempting to protect their territory from foreign players that have opened local operations.
Distributors such as Aptec, Empa, Mindware and Redington have all demonstrated their commitment to Saudi in recent years by building extensive local teams and establishing proficient sales resources in addition to stocking points.
As well as the financial stabilisation associated with operating an in-country set-up, their view is that they can do a more efficient job than distributors sitting in Dubai by providing much higher RMA support and quality of service.
"Saudi is a captive market," asserted Mathew Thomas, vertical head for IT distribution at Redington. "You have to do everything for the country in the country as there is nothing you can really replicate."
Thomas admits that it has taken "a lot of pain" to recover the investment Redington made four years ago when it put offices in Riyadh, Jeddah and Khobar. However, the results of that move are clear for all to see. Billing has now been converted to Saudi riyals and is done locally, the company employs 80 staff, and sales are estimated to be close to US$120m per year, putting it on a par with local giant BDL.
Thomas claims that Redington's efforts to encourage resellers to focus on the core elements of their business model is paying off too. He explained: "We went to the market and said ‘when your requirement is 10 pieces per day, why do you want to stock 500 pieces? Let me do that.' People started seeing that a just-in-time model could be created and they didn't have to face the risk of price protection or price drop issues, could get a full credit period and have a local contact," said Thomas.
Rival Almasa is the most recent distributor to land in the market, setting up an in-country operation at the start of the year. It has already started invoicing locally and is looking to replicate the model it adopts in the UAE, according to regional director Abdul Rahman Safadi, who is heading the expansion. "Our local sales team will be in-line with Almasa's overall sales structure and customer segmentation," he asserted. "That means the assignment of dedicated sales people for retail, PC assemblers, VARs and large systems integrators. Logistics used to be a bottleneck, but now we operate locally we are able to offer stocks and services to resellers on an in-country basis," added Safadi.
Thomas at Redington believes that distributors which serve Saudi remotely are much more likely to perceive the market as a gamble than those who adopt an in-country model. "If you are inside, operating in local currency, giving local credit and have people across the country talking to the channel everyday you would not see the Saudi market as a risk," he claimed. "We've had a fairly good five-year experience in that market."
It is not just the volume-driven players that have recognised the potential of the Saudi market. Sun Microsystems distributor Tech Access boasts a presence in the Kingdom and strengthened its management team by appointing industry veteran Saleh Al-Mutairi as its country manager towards the end of last year. Security specialist Fusion has just been through the process of setting up in Saudi while HP and IBM enterprise VAD Magirus has stated its intentions to open an office by the end of the year.
With a relaxation of ownership laws making market entrance even more attractive than it used to be, it is likely that an even longer list of organisations will follow suit.
Any newcomer to the Saudi distribution market can be assured of facing a powerful set of indigenous wholesalers that grow stronger by the year. "You can see from the strategies of many vendors that they are really focusing on in-country distribution," said Bassam Abu Baker, group general manager at US$60m-sales-a-year distributor AIM. "It is not always convenient to just use distributors out of Jebel Ali because there is no added value."
In-country specialists, including Al-Jammaz, ICC, BDL and Nahil, possess comprehensive knowledge of the local reseller community and understand what it takes to conduct successful business in the large provinces outside of Riyadh. According to most market commentators, these players occupy an even stronger position following a change in customs regulations at the turn of the year.
Most IT products are now exempt from import tax as a result of the new ruling, meaning there is less chance of authorised distributors being undercut by the importers who used to manipulate the value of their orders to exploit the previous 5% duty.
The impact of this new tariff system is already being seen in end-user prices and distributors are unanimous in their verdict that it will drive overall volumes to an even higher level. "I think that it will make the market larger because the prices will be cheaper than Dubai," predicted Sherif Nasr Khattab, general manager eastern region at Saudi distributor and retailer Al-Jassim Electronics.
The prospect of getting more for less is likely to resonate loudly at SMB level where many companies have yet to realise the fully benefits of technology.
Asim Al Jammaz, VP at distributor Al Jammaz, is calling for technology vendors, local industry bodies and organisations such as the Chamber of Commerce to front campaigns that educate SMBs on the importance of adopting IT and its role in driving productivity. "Lots of small business still do manual invoicing, for example," he said. "One of the main reasons for this is because the infrastructure in Saudi Arabia for connectivity is still not mature enough."
Despite being revered as the largest market in the Middle East there is still a huge discrepancy in terms of the investment that vendors are making in Saudi. HP, Oracle and Microsoft have a long association with the Saudi market, for instance, and this is illustrated by the sales and support resources they have in place on the ground.
Visits to the Kingdom from esteemed names such as Bill Gates reiterate the role that the Saudi market has to play in these vendors' growth. Only last month, Francesco Serafini, managing director of HP EMEA, toured the country and declared the vendor's commitment to increasing its activities there.
Cisco is also a massive investor in the market and CEO John Chambers outlined an ambitious five-year plan to grow its presence in Saudi when he visited the Kingdom last year.
"Many agreements were signed during this visit and he announced that investments of one billion Saudi riyals will be made during the next five years," said Nasr Al Bikawi, regional channel manager at Cisco. "These investments will mainly be in the development of human resources in the Kingdom."
The networking vendor now boasts almost 250 employees in Saudi, including those that work for its low-end Linksys business, but it plans to take that up to 600 staff by 2011. Meanwhile, other manufacturers, such as Fujitsu Siemens and Toshiba, still employ relatively small Saudi teams, but they attempt to scale up by placing plenty of responsibility in the hands of the their partners.
"If you go back a few years, all vendors started with a small team," observed Samer Sayed, regional sales manager at Fujitsu Siemens' Saudi operation. "We have had the same start and want to grow the local team, but at the same time we need to have strong local partners that are able to provide all kinds of service levels to our customers. It's about having the right channels - distribution is the key to growing the business."
FSC added to its distribution network by signing BDL as an in-country distributor earlier this year. That brought its two-tier structure back up to full strength after the collapse of its relationship with distributor AIM in September 2006. AIM stopped ordering notebooks from FSC after claiming it did not receive the support it required when the Saudi IT market suffered a crisis after last year's Gitex exhibition.
Rival Acer, meanwhile, has a dozen people based locally although core functions such as finance, HR and logistics remain anchored in the UAE. It operates the same service model as it does in the Emirates and works with around five distributors to guarantee coverage in the corporate, SMB and retail segments.
"We do not want to under-distribute, but at the same time we don't want to over-distribute," admitted MEA general manager, Krishna Murthy. "We like to manage an optimal distribution number. If you go under that number you become uncompetitive, but if you go over it everybody undercuts each other and you spend too much time trying to resolve channel conflict."
For local channel players, the level of investment that vendors are making in Saudi remains a massive talking point. Many view it as an indication of how serious vendors are about the country and point out that an unwillingness to commit more resources makes it very difficult to manage successful channel programmes.
Security vendor McAfee, which currently operates a two-tier channel model alongside distributor Aptec, Mindware and Redington, is preparing the next stage of its development in the market. "We plan to make the first step of establishing a direct presence in Saudi this year," confirmed Kenan Abou Lteif, territory manager at McAfee Middle East. "We will start by recruiting a technical team as this will be of more value to our customers and partners than starting with a sales team."
The bulk of McAfee's investment into Saudi until has gone towards training partners to ensure that they have the skills to deliver enterprise solutions. It has also set up a Saudi toll-free number that directs calls to its global support centres.
Such is the rate of growth in the Saudi channel that it is difficult to decipher which segment is expanding most quickly. The small business arena is thriving, but the high-end corporate market still remains a major focus for many vendors. Acer, for example, says that the lure of the corporate market was one of the major reasons for its decision to appoint AEC as its local assembly partner in Saudi last year.
"We outsourced our production requirements facility mainly to cater to the ‘PC for every home' initiative, but also to use it as a competitive advantage to penetrate large corporate accounts, such as Saudi Arabian Airlines and Aramco," explained Murthy.
The new tariff that exempts imported IT products from tax means the financial benefits of in-country assembly are not quite as attractive as before, although Murthy argues that it still means Acer can serve local and government customers more effectively, as well as target some of the Arabic speaking countries where bi-lateral trade agreements are in place.
The government sector has become an even more compelling place to do business in this year following a change in the way that IT spending is apportioned. Khattab at Al-Jassim Electronics explained: "This is the first year in the Kingdom that the budget is being allocated for each area separately. Everything was connected to Riyadh before, which meant that if any governments needed to buy equipment you'd have to go back to Riyadh for the approval and PO. This new system will create more freedom and make it easier to place the order and deliver."
While the corporate sector continues to be the focus for many IT companies, it is the rise of the retail channel that has taken the market by storm. The consumer market remains one of the major reasons why an overwhelming 65% of the Saudi PC sector is now reported to consist of notebooks.
"Retail has seen explosive growth in the last two or three years," declared Ziade at HP. "If you look in particular at the notebook part of retail then you'll see that within two years the Saudi mobile PC market moved from 50,000 units a quarter to 150,000 units a quarter. Now the notebook market is bigger than the desktop market, which is a sign of market maturity that even some European countries have not reached yet."
Strong consumer appetite has led to a number of big retail giants strengthening their presence in the market. "The retail business is becoming much more mature and organised," acknowledged Sayed at Fujitsu Siemens. "It used to only be Jarir Bookstore, but now we see players such as Extra, Carrefour, Geant, Best Buy, Plug-Ins and five or six others."
This trend is encouraging many vendors to forge new partnerships in the retail sector as they look to take advantage of consumer purchasing power. "We are in the process of appointing power retailers across the Kingdom to push our new affordable printer line-up targeted at SMBs, ensuring that they are within easy reach for consumers and businesses alike," confirmed Mattar at Xerox Middle East.
Xerox operates through two channels in the Kingdom, including its Saudi Xerox Agencies (SXL) joint venture that focuses on digital office products, printing systems and document management services.
It also uses the services of master distributor CCS-Computer Communications Systems, which specialises in monochrome and colour printer ranges as well as entry level MFPs for the SMB sector. "One of the direct investments made recently via CCS was the opening of a new branch in Jeddah in addition to expanding capacity in Riyadh to have a more dedicated team for channel support and development," said Mattar.
But for all the talk of huge opportunities and soaring growth, the Saudi market faces a number of challenges that could disrupt its development. The financial capability of SMBs to invest in technology and infrastructure is one sticking point, particularly as it isn't always viable for them to source dedicated loans and facilities from local banks.
"What still happens is that if you want to take a loan from a bank you need to give them assets against your loan," explained Al Jammaz. "Banks do not take any risks at all in Saudi Arabia. When you are talking about a small business - someone who is making an initial investment of US$50,000 or US$80,000 - then buying IT that will cost US$20,000 of that investment is a lot. But the SMB sector is definitely a promising market and we are putting a special focus on that in our teams by having special sales manager and account managers," he revealed.
The availability of certified staff, particularly in the enterprise channel, also remains a widespread concern. "The market is demanding more resources, but we face a challenge in finding them," lamented Mohammad Al Shehri, CEO at Saudi integrator Jeraisy Computer & Communication Services. "This is a big problem," he added.
He claims there is a severe shortage of engineers with software application and integration skills. "Good skills can be very expensive, but customers do not always understand that and still want the most competitive price," continued Al Shehri.
Other vendors agree with that sentiment and suggest more emphasis must be placed on ensuring partners are armed with the skills to deliver solutions in areas such as storage or high-end infrastructure.
That's not to say that manufacturers are restricting their investments, however. It is thought that some of the larger vendors could be spending upwards of US$80,000 a quarter on partner training and education initiatives alone. Al-Dossary at software giant Oracle believes more needs to be done to increase the skill sets of Saudi nationals in the IT industry. He claims ongoing government investment will aid the situation, but he also calls on technology vendors to play their part.
"We, as vendors, need to come up with initiatives to try to raise the level of skills," he said. "From Oracle's perspective, we have been investing and signing academic initiatives with the key universities. So far we have educated over 25,000 students."
Building a transparent picture of the Saudi channel's health is also difficult, particularly as working capital pressures make the market a demanding environment to operate. "The largest issue facing resellers is probably the account receivables," said Lteif at McAfee. "Completion of projects tends to take much longer, and so does payment, meaning resellers face liquidity challenges."
The knock-on effect of this in the second tier channel is that the business model for distributors is more cash intensive than other regions, according to Ziade at HP.
"Resellers pay on a longer average time than the UAE, for example," he said. "Whereas you would see payment terms from the customer of 30 to 45 days on average in the UAE, it is significantly higher than that in Saudi."
As the Saudi market continues to fulfil its potential, the strategic choices that vendors make as they attempt to extend their position is set to provide fascinating viewing. But many suppliers will be required to overhaul their current strategies in favour of clear and consistent channel policies that specifically address each sector of the market without causing any conflict.
"The relationships that vendors have with local partners is becoming a very important issue," remarked Al Shehri at Jeraisy. "The Saudi market has opened up to such an extent that it has allowed some major vendors to compete with the local companies. There needs to be clear lines drawn in certain areas of the business," he added.