End of the road?

Traders on Khalid Bin Al Waleed Road are facing the biggest challenge in their history as the financial crisis takes its toll on credit terms and buying behaviour among re-export clients. Channel Middle East asks if Computer Street is able to make it through the storm.
End of the road?
By Julian Pletts
Tue 10 Feb 2009 04:00 AM

Traders on Khalid Bin Al Waleed Road are facing the biggest challenge in their history as the financial crisis takes its toll on credit terms and buying behaviour among re-export clients. Channel Middle East asks if Computer Street is able to make it through the storm.

"Only the strong companies will remain." That is the stark warning from Quality Computers' Sunny Menghani about the future of resellers on Khalid Bin Al Waleed Road.

Traders such as Menghani are no strangers to fighting for every last profit margin that they get. Throughout the Street's existence - which spans almost as long as Dubai has been a metropolis and certainly as long as computers have been hot property - Street players have been evolving and adapting.

You have to clear inventory, but some people just want to go and dump their products without actually understanding the market. The market is unstable so we have to be very careful.

Without wishing to go too deeply into the history of the Street, there have been some major milestones that need highlighting to indicate the experience traders have under their belts - experience that will serve them well in surviving the current financial chill.

Over the years, many firms on the Street have developed comprehensive re-export businesses, combining their showrooms with facilities in Jebel Ali to connect to markets all around the Middle East, Africa and beyond.

Sub-distribution is a way of life for many traders, although whether there is a future for such business given the kind of scant margins associated with it these days depends on who you talk to. There are those who claim wholesalers are too willing to take risks by over-extending credit or prolonged payment terms to customers, leaving them exposed.

On the other hand, however, it has been suggested that wholesalers - with their base of long-term customers from multiple markets - might be better placed to ensure trade on the Street continues to flow at a time when larger authorised distributors are unable to take chances or secure insurance for some customers.

Of course, now the financial crisis has enshrouded the Middle East, there is no doubt that it is the time for computer merchants to make the most of the survival and re-invention skills that have served them so well until now. The immediate question is whether they have the capacity to see themselves through the slowdown.

There have already been some casualties. At the end of last year, Green Forest Computer and SM Computers both ran into difficulties, leaving distributors to chase payments.

They aren't the only ones. Vendor sources claim they have seen up to seven traders encounter serious troubles during recent weeks, compounding the nervousness being felt in the channel. Blame the financial crisis, we might, but this is not the first time Computer Street has experienced turbulence.

After all, it was only two and a half years ago that the Dubai channel was gripped by a credit crisis which resulted in Micron, MST Computer and Fortex-MID disappearing from the market.

Though it remains too early to judge if the current downturn will prove as disastrous as many fear, traders remain concerned, pointing out that the longer it persists and dents morale on the Street, the greater the chance of it fracturing some of the long-term relationships that traders have cultivated with each other.

One reseller claims the availability of credit has already reached an unprecedented low, creating a cash-based market where companies simply cannot afford to offer any flexibility on payment terms. The same source admits that in some cases products are being sold for a single dirham margin.

"Sales in the market have gone down by 40% and this has what has affected me," admitted Menghani at Quality Computers. "I can seen in my records that if I have been doing US$10m, I am now doing US$6m."

Mohammed Jaber, CEO at Winning Deal Computers - a trader that is traditionally known for reselling components and wholesale services - insists business has not stopped, but it has deteriorated compared with what it is used to.

There is nothing that has completely dropped off 100%," he said. "With the re-export market and customers from abroad, the number has reduced and it's not like it was before. We used to have people coming from countries from all around the region, but nowadays it is not like that."

Jaber has an outlook on the current crisis in common with many of his Khalid Bin Al Waleed Road peers. He thinks it is inevitable that more companies will leave the market during the next few quarters, ones that do not have the liquidity to survive the slump.

"So far we are not hearing any screams, but believe me, if after a few months the situation gets worse, companies will go out of business," warned Jaber, pinpointing smaller and less- established names on Computer Street as those who are most vulnerable. "Some traders can take the loss for three, four, even five months, but after that it becomes a case of enough is enough. They have everybody to pay - rent and sales people cost money."

Tarun Nandi, the boss of one of the largest and most recognised players on the Street, Bluebell Computers, says that thanks to the fact everybody is being incredibly cautious in the way they are doing business, this period might actually serve to absolve the Street of any fringe or backdoor dealing.

"What will survive after this is clean business," predicted Nandi. "Because what will happen is that a cleaning up of the business will take place." As long-term incumbents, traders such as Bluebell are best placed to take the temperature of the Street.

Nandi is pragmatic in his stance, almost to the extent of being hard. "Local people have to pay cash. I only give insurance to people I have known for a long time - I'm not even giving credit to people I have known for two or three years," he admitted.

Having said that, he acknowledges that there needs to be some concessions made in the ‘cash-only' lock-down mentality that seems to be taking hold. "Supporting regular customers is important," reflected Nandi. "If I don't support them they will go bust in three months."

As with most channel eco-systems, what happens at any level of the chain has a direct impact on all the other links. That is particularly true at the moment as the dynamics between master distributors, sub-distributors, resellers and re-export are all influenced by the caution being shown by the banking community and insurance providers.Distributors complain that the safety net has been pulled out from underneath their feet, with some senior sources alleging that up to 70% of credit insurance has been rescinded.

"Cancellations that we are receiving from our insurance companies are very high," said Hesham Tantawi, regional VP at components distributor Asbis. "Last week, for example, we received more than 100 cancellations. That means we then have to work again with the insurance companies and ask the customers to present their new financial statements so we can study those companies again."

Not only do cancellations force distributors to take extra caution when it comes to their financial dealings with the channel, it also means they are increasingly forensic in their approach to resellers' business accounts and sell-out figures, adding to the fear that the current situation might create tension in the market.

Local customers have to pay cash. I only give insurance to people. I have known for a long time — I’m not even giving credit to people I have known for two or three years.

But this could also be a positive approach given traders such as Winning Deal insist that stock abounds in the market and channel stuffing is a persistent problem.

Sky Electronics, a distributor that has an office on Computer Street and boasts years of experience dealing with Street customers, is among those calling for even greater levels of communication, and furthermore honesty, between channel players at this time.

"Information is not shared across the board with everybody," said Manoj Kisani, director of Sky Electronics. "Some people just want to go and dump their products without actually understanding the market. The market is unstable so we have to be very careful.

Yes you have to clear inventory, but products shouldn't just be dumped. It needs to be done in the right way because a sales person at a reseller will always take it as a challenge that they have to clear all of the inventory."

With many Computer Street players taking a conservative approach to stock holding, and cases of product being returned to distributors when it doesn't get sold rising by the day, it is clear that traders are under immense pressure. So what is the best advice for businesses on Computer Street to ensure survival?

"They [resellers] have to take stock of the current situation and look into their actual strengths in terms of sales-out and focus on those areas," counselled Sky's Kisani. "They must also make sure that the bottom line is maintained in terms of profitability."

Reducing expenses is going to become something that needs to be seriously considered by traders and wholesalers, if it isn't already. "Do less - minimise expenses for at least three to six months, sustain the market and do not make any investments at this time," advised Menghani.

"Whatever you do, do it minutely, and carry out steady business until the summer. The next one or two quarters will be very difficult but then you will become accustomed to it," he said.

With thinning margins only adding to the woes of traders, there are those who suggest that the computer repair business might hold more appeal to the end-user right now, particularly as customers are more inclined to consider refurbishment rather than replacement when times are tough.

Interestingly, a few stores are looking to capitalise on this with the smallest investment possible and diversify the skills of their staff at the same time. "We repair laptops now," explained Winning Deal's Jaber who said the store's previous focus was wholesaling computer components.

"This is an initiative that we have taken since the financial crisis because before we didn't have the time for these things. We were very busy with components, but the problems have opened a small windows for us. We are now repairing laptops and making good business from that."

From Jaber's perspective this little foray into the servicing domain is not counteracting the assumed knowledge that it is the best time to batten down the hatches and stick to core business areas. It is merely an extension of the laptop components business set up prior to the extent of the financial crisis becoming known.

Jaber sums up his suggestions for fellow traders: "I have two sets of advice. First, try and work smarter and find new opportunities and diversify. The second is don't just give up - you are in Dubai and it is a very dynamic place. It will come back to vitality.

Asbis' Tantawi claims Street traders could also do with reassessing some of their approaches to the market. "Resellers have to divert their focus on business and they have to go to the real market, which is retail and added value. Their business may have gone by 40% or 50% - this is what they feel but it is not real. It is because the internal trading between them has gone down. They need to look to the real users of the products that they are selling."

In terms of advice for survival, the Dubai Computer Traders Group (DCTG) - set up last year by a contingent of Dubai-based computer traders to trumpet the rights of traders and offer cohesion to its members - is well placed to propose methods of survival and comment on the health of the Street.

"I think traders on Computer Street should really think about what they want to achieve this year," said Shailendra Rughwani, CEO of Experts Computer and president of the DCTG.

It is better to consolidate and focus on the core specialties. Even if you are not going to focus on high volume or high quality, it is better to concentrate on higher margins. After just a few months we will come to better understand where we stand. But for the first three months we should be very careful."

Times are undoubtedly among the hardest they have been for a long time. Talk of a hiring freeze among companies, and even lay-offs, is not something that traders have been accustomed to, but it is adding to the fear that even if the Street survives in its current format it may not hold the same level of influence in the market that it has built a reputation for.

It has to be said that most traders are taking a mature and measured approach to the difficult times they face. The majority are more than aware of both the importance of safeguarding profit margin and the dangers of taking unnecessary risks at such a volatile time.

They will emerge from the current climate to maintain their standing in the market place and reinforce Computer Street's position as a major hub for regional IT sales. In the meantime, however, it is likely that there will be more bad news first. As one IT hardware trader admitted: "The financial crisis is here, and it is here to break bones."

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