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Mon 1 Jan 2007 06:57 PM

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Exploring Egypt

These are exciting times for the Egyptian channel. The IT market is blossoming and many of the industry's largest vendors have cottoned on to the fact that, if addressed properly, Egypt can become one of the most significant markets in the region in terms of technology spend. Whether it's Western Digital, Juniper or Lexmark, a number of manufacturers have invested in new offices and service centres in Egypt during the past 12 months. Channel Middle East profiles a market in demand.

Egypt's rise to becoming a powerhouse market in the Middle East and North Africa was given a large boost two years when Egyptian Prime Minister Dr. Ahmed Nazif's government took steps to boost foreign direct investment, implement tax reforms and privatise several large enterprise organisations. In many cases, the knock-on effect of those moves has trickled down into the channel and provided a far more wholesome market for vendors and resellers to get their teeth into.

Hafeez Khawaja, senior regional director for MEA at Western Digital, believes the government continues to play a pivotal role in stimulating the local IT sector. "In Egypt, demand comes mostly from government tenders," he said. "A lot of investment is going into infrastructure for the government sector, which is financed either by countries in the region or world banks."

This demand is generating much optimism for the future amongst those in the industry and Shashank Sharma, newly appointed country manager for KSA, Egypt and East Africa at Acer, claims to be seeing robust growth across several segments of the market. "In Egypt, we have seen many changes over the past three years," he said. "There was always a lot of promise in this market - it was set to boom - but it did not move as fast as it is now. We have seen healthy growth in this market and we're bullish about it happening again this year."

Ziad Abou Rahal, MEA channel manager at Seagate, is also confident about the market's prospects in 2007: "Egypt is full of promise," he said. "Seagate used to have a very small market share in Egypt due to the lack of focus and regional presence. But after two years of focusing on the market, sales are picking up and we expect revenue from Egypt to become the highest in the region, after the UAE."

Plans by the government for the industry to develop a cohort of young, qualified IT professionals have also been fruitful. There are currently over 140,000 individuals in Egypt receiving basic IT skills training, and a further 25,000 receiving professional training.

However, the one downside is that the economy has not been strong enough to keep this talent loyal to the country. "Keeping those skilled people in the country is proving to be a major challenge," said Yasser Al Kady, managing director at Cisco Middle East and Africa. "They are usually attracted towards other countries in the region where they are paid more."

Along with plans to increase the level of foreign investment into the country, the Egyptian government has implemented an array of initiatives to boost the IT sector. "The initiatives are working on three different fronts," said Wael Amin, president at IT Worx, a software and services outfit in Egypt. "Firstly, it is increasing the use of IT within the government and secondly it is promoting the accessibility and availability of IT resources in the home and education and professional organisations. Thirdly, there are schemes that are designed to build capacity amongst IT firms in the country, and provide training and support to channel partners."

The government has also recently formed the Information Technology Industry Development Agency (ITIDA) which, among other things, focuses on establishing training, advice and financial programmes to help IT companies penetrate the local market. Funded by the state, ITIDA is also expected to increase the flow of currency into Egypt by opening new channels for export.

One high-profile initiative that the government has implemented is a drive to put a PC into every home. According to Khawaja at Western Digital: "Low income and mid-range budget families get support in financing to ensure that a PC is made accessible to them in their home. This is really increasing the PC penetration and creating opportunities in the market for IT firms."

As a result the desktop PC and notebook channel in Egypt is booming. Demand for hardware is at an all-time high and a glance at recent data on the market reveals the overall Egyptian PC sector is worth more than 90,000 units a quarter. The desktop PC market - which accounts for 60,000 of those units - is even growing at a rate of over 15% a year. Resellers that can supplement the sale of PCs with complementary products, such as printing products and accessories, are well poised to profit from the current up-tick.

Waleed Khalil, executive manager at Egyptian distributor ECS, said: "Most of the demand is still on the low cost PC. This is the biggest market segment and it's huge. Due to the ‘PC for Every Home' initiative, people have got this perception of buying a PC on credit as no different to any other home appliance."

Egyptian buying behaviour is changing in more ways than one. Consumers and even government institutions are taking bold moves, and this is particularly evident in the mobile PC space where sources say an increasing amount of first-time buyers are skipping a desktop purchase in favour of a laptop. Acer's Sharma commented: "The notebook market has been one of the segments that has experienced over 100% year-on-year growth, with projects in education fuelling this growth. New government initiatives may drive growth even further next year so we're very optimistic."

Mobiles aren't the only hot product area, however. Manish Bakshi, general manager MEA at electronics vendor BenQ, claims demand for all manner of consumer and business devices is giving the company ample opportunity to demonstrate the full breadth of its offering. "We're offering our entire portfolio - everything from LCD TVs to optical storage products - and that's something you seldom find in an emerging market," he revealed.

With a population of 70 million - the largest in the Middle East - Egypt has all the ingredients required to create a healthy consumer market, especially as 50% of the country's population is under 24 years old. This demographic quirk naturally has an impact on demand and means trends in buying behaviour are stacked heavily towards the consumer entertainment sector. Notebooks, mobile phones, cameras and PDAs are all cited as product areas where it is normal for the retail channel to see double-digit growth. "The third generation here is driving demand for young, trendy and fashionable products which incorporate the latest technology. Any product that has an element of fun or enjoyment is gaining faster acceptance in the market such as notebooks, TVs, digital cameras and PDA's," said Bakshi at BenQ.

Meanwhile, government initiatives and the activities of ITIDA have been driving demand in the SMB sector which, along with the retail sector, is experiencing huge growth. Karim Ghoneim, general manager at Egyptian distributor KMG, said: "Today, we are seeing the SMB sector developing quickly and it's already become one of the fastest growing segments in the market."

Sharma claims that Acer has been making the most out of the opportunities created in this thriving area of the market, where it has seen its sales double year-on-year. "The SMB segment has been experiencing very strong growth over the past 18 months to two years. We need more partners on the ground to carry more stock because one of the worst things that you can do in an emerging market is not have enough stock to satisfy demand," he added.

With a host of vendors trying to tap the potential of the market, Egypt is becoming a primary market for many manufacturers in the Middle East. That's not to say it is an immature market, however, as most of the large vendors already have a long-term affiliation with the market.

"In the hardware market, Toshiba, HP and Acer are the leading players," said Ghoneim at KMG. "In the printer market, it's HP, Epson and Canon. Microsoft and IBM dominate the software market whereas Logitech is heading the accessories market, along with some other non-branded Chinese products," he said.

Ashraf Sabry, CEO for the IT line of business at local giant Raya Technologies, added: "IBM, Microsoft and Oracle are the big software vendors we see in the market, along with Cisco in the networking space. In terms of distributors, I'd say that Raya's top competitors are Mantrac and Metra."

Despite the strong position of A-brand vendors in the PC sector, the Egyptian market is also notable for its prominence of local whitebox assemblers with the likes of Better Business, IBS, MAS, Metra, EMAK and Centra Technologies all recognised names.

In a growing market with such a vast population it is imperative for vendors to ensure that channel partners receive adequate service and assistance. Printer vendor Lexmark, for example, recently opened an office in Cairo, while Acer's Sharma suggests the prospect of making a similar move will need to be considered further down the line. "It's possible that we may open up an office in Egypt at some stage, but we have no plans as yet. I think that it is 100% beneficial for any vendor to have an in-country office. Having a local presence and feet on ground enables you to make real business decisions," he said.

ECS' Khalil believes that any vendor that does not set up shop in Egypt is spurning a huge opportunity. "It's very important for a vendor to have in-country presence in Egypt. In a country with over 77 million citizens and the fastest growing IT market demand in the Middle East, it is vital to put someone there," he said.

However, KMG's Ghoneim disagrees. He reckons that a vendor can quite comfortably manage Egyptian operations remotely if it chooses an efficient distribution partner. "Selecting the right distributor behind the brand is more important than having in-country presence," he insisted. "A vendor won't miss having an in-country presence if it has a distributor that achieves targets and has representatives on the ground offering sales support to channel partners and giving good feedback to the vendor," added Ghoneim.

Western Digital's Khawaja agrees with that view. "We don't have an office in the country, but what we do have is everything that an office can do. We have a local sales person stationed in Egypt offering support to distributors and channel partners. We don't have our own building with 20 people sitting there, but we take care of our channel partners and for them, we are there." One issue that has been causing a headache for those operating in the Egyptian market is the instability of the Egyptian pound. It had been traditionally overvalued until 2003 when the currency was floated and it has been experiencing eccentric movement since.

As a result, all transactions in the IT market are made in US dollars. This has had an impact on the pricing strategies employed by Egyptian resellers, as it has not always been possible to buy US dollars when the strength of the Egyptian pound becomes very weak for a period of time.

Adding to the problems arising from the instability of the pound is the seemingly unfounded pricing decisions made by certain resellers in the market. "One thing that is affecting pricing strategies is ignorance of the competitors," commented Khalil from ECS. "This is a good thing for us sometimes but not when they are hurting themselves and the others by implementing unstructured pricing policy," he continued.

The currency situation also makes it difficult for local players to reach into international markets. Egyptian vendors are struggling to make their presence felt in other markets as the Egyptian pound is not stable enough for them to comfortably do business with other resellers in the region. "Access to international markets is not very high compared to other markets in the Middle East. It's definitely a challenge for us to go and expand our presence regionally, due to the nature of our currency," said Amin from IT Worx. That said, IT Worx has still been able to open an office in the Saudi market during the past three months, while other big hitters, such as Raya, take a significant portion of their revenues from other Middle East territories.

Another issue facing resellers in Egypt is the availability of credit insurance. Currently it is virtually impossible for distributors to insure themselves against bad debt from resellers, with only the largest organisations able to afford an adequate level of private insurance.

Ghoneim is dismayed by the lack of credit insurance options in Egypt: "The government cannot provide us with guarantees and they seem to have no intention of changing their position on this. The only option available is recruiting the services of specialised credit insurance companies from abroad as there are none in Egypt."

The grey and black markets are also an emotive subject in Egypt and one that appears to divide the channel into two camps.

BenQ's Bakshi believes the problem is not as pronounced as in other Middle East countries and plays down the topic of unauthorised channels in Egypt. "We have not seen one incident of grey or black market goods in Egypt for the past six years," he said. "The level of security at customs is very high in Egypt. And in any case there are too many value-added benefits that resellers in Egypt receive that it is not worthwhile for them to import grey market goods."

Acer's Sharma takes a slightly more doubtful view and reckons grey activity still poses a problem to the channel although he does concede that levels of grey marketing are "substantially less" than in the past. However, distributors refute claims that the market is, or is even on the verge of being, a black and grey-free zone suggesting that just because a vendor doesn't see this improper activity, it doesn't mean it is not happening.

Ghoneim actually reckons the problem is as serious as ever. "The grey market is a big issue in Egypt. Grey imports from Jebel Ali in Dubai are impacting the market negatively and bringing profit margins down."

Khalil agrees with this sentiment: "The grey and black markets are having a huge impact on the Egyptian market," he said. "When a product comes into the most penetrating phase of its life cycle, profit it is usually killed by grey marketers and smugglers."

Another hurdle facing IT providers in Egypt is the geographical structure of the market. "85% of the market's demand is coming from Cairo," said Bakshi at BenQ, who acknowledged that this makes life difficult for any reseller based outside of the capital and creates a congested marketplace.

A challenge for resellers in Egypt is to disperse demand into other areas of the country in order to serve the rest of the country's vast population efficiently and in return create a better opportunity to grow and penetrate the market for themselves.

Processor giant Intel claims it is attempting to spread demand for IT products to rural areas. Its Wi-Max technology is a new rival to Wi-Fi, but whereas the coverage of the latter only reaches a matter of metres, Wi- Max "spans several kilometres", according to Khaled Al Emrawy, general manager at Intel Egypt. This creates a perfect opportunity to target the large residential populations outside of Cairo. "The way I see it, one billion people in the world have sufficient access to broadband internet and that leaves five billion who aren't being serviced adequately," he said. "We see the next wave of demand coming not from the big cities, but from the rural areas. With Wi-Max we are taking steps to stimulate this demand," he added.

The future for the Egyptian market looks bright, particularly as the current spike in consumer demand is expected to be supplemented by increased investment in the retail sector by foreign investors. Such trends are all underpinned by what is going on at government level.

"The government is actively launching programmes to increase capacity building in Egypt in order to develop it into a hub for services and meet demand in this thriving sector," said Raya's Sabry.

Egypt was hailed as the rising new star of the Middle East IT sector a few years ago, but never really got into its stride. However, there are clear signs that the market is finally developing into a true pace setter and that puts the local IT channel in a healthy position.

“Most of the demand is still on the low cost PC. Due to the PC for Every Home initiative, people have got this perception of buying a PC on credit as no different to any other home appliance.”
“A vendor won't miss having an in-country presence if it has a distributor that achieves targets and has representatives on the ground in Egypt offering sales support to channel partners.”
“The government is actively launching programmes to increase capacity building in Egypt in order to develop it into a hub for services and meet demand in this thriving sector.”

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