Home truths

In some respects the Middle East channel could be accused of existing inside a bubble. Sky-high unit growth, soaring penetration rates and customers with seemingly bottomless pockets distinguish a region where opportunity appears to know no bounds.
Home truths
By Andrew Seymour
Mon 30 Jul 2007 01:14 PM

In some respects the Middle East channel could be accused of existing inside a bubble. Sky-high unit growth, soaring penetration rates and customers with seemingly bottomless pockets distinguish a region where opportunity appears to know no bounds.

So it was enlightening to hear this week from a senior management figure at a company that ruled all of the above unworthy of preventing it from axing their Middle East operations earlier this year. I'm talking, of course, about ‘global' distribution heavyweight Tech Data.

While Tech Data's withdrawal from the region can arguably be classified as old news, the repercussions of its exit are still being felt in the market, particularly when it comes to relationships between vendors and distributors. As a company making revenues of around US$300m a year, its departure naturally continues to be one of the most emotive talking points in the market. I recently spoke to a sizeable European reseller lacking any real intimate knowledge of the Middle East market, but with a gameplan to launch in the region within the next 18 months. The first thing they said? "So, we heard about Tech Data. What happened?"

Fortunately, that question can now be conclusively answered and at the same time go some way towards dispelling the myth that you only need to open an office here for the dollars to come rolling in.

At the point of pulling the plug four months ago, Tech Data tiptoed around the cause of its departure, citing profitability issues and "changes to market conditions" as the rather ambiguous justification for its decision. But in a refreshingly candid interview with Channel Middle East, Tech Data's managing director for the UK, Ireland and Middle East, Andy Gass, detailed, for the first time, the principal factors that ultimately shaped its fate.

He also confirmed that, contrary to market speculation, the decision to close the UAE office was an action initiated by the local Middle East and EMEA management teams - not an order dished out by the corporate suits at Tech Data's Florida HQ.

According to Gass, Tech Data's reasons for ending its association with the region boiled down to three crucial factors. The first was the return on investment - or rather lack of - that the company believed could be generated from the Middle East. When weighed up against Eastern Europe, where the company is in a stronger position to exploit its pan-European infrastructure, the Middle East came off a distant second best. I'd also assume that for a US-based distributor with comprehensive European operations, ploughing money into the new EU states is regarded as a much safer bet.

Secondly, and the point that most accurately reflects the challenge of being able to align corporate strategy with the direction of the market, is Gass' frank admission that Tech Data probably missed the boat when it came to anticipating the trend of major vendors migrating from pan-regional to in-country distribution models. That is especially pertinent of the all-important Saudi market where local regulations effectively compromised Tech Data's internal stance on subsidiary ownership.

It is far too late to question whether Tech Data could have shown more flexibility when facing such predicaments, while the suggestion that its exit was too premature - especially if vendors come to decide that the in-country model is not as manageable as they initially expected - will only be revealed over time.

Finally, and I suspect one of the most telling factors for its departure, is that the increasing level of compliance Tech Data faced simply put it at a tremendous disadvantage. Gass declined to elaborate on the subject but acknowledged that the depth of compliance confronting it had "changed over a period of years." Clearly, the sobering obligation of having to act whiter than white is not necessarily conducive to the competitive realities of the market.

Of course, all of the reasons outlined by Gass have to be taken into context with Tech Data's own performance and organisational issues. The firm's Middle East operation had been loss making for at least a year, which ostensibly contributed to the decision-making process as well. Had the distributor been triumphantly fattening its bottom line then I'm sure that topics such as how to establish in-country operations would not have proven quite so pivotal.

And before interpreting any of Gass' comments as an indictment of the Middle East channel, it is also important to consider how the region fitted into Tech Data's wider corporate model. At the end of the day, the Middle East IT market is one-eighth the size of its equivalent in Germany, for example, and for a NASDAQ-quoted organisation with sales totalling US$5.4 billion in the last quarter alone, numbers mean everything. The Middle East may have been an important market for Tech Data in the past, but in the grand scheme of things it simply wasn't significant enough to justify a loss-making existence and limited guarantee of a return on future investments.

The explanations for Tech Data's exit certainly offer a fascinating insight into the challenges confronting any channel players exploring the market. Incidentally, they also come during the same week that compatriot Avnet's enterprise distribution arm potentially took a giant step towards Middle East entrance by acquiring Magirus' HP and IBM infrastructure division. Avnet will inherit a modest team from Magirus' Dubai operation as a direct result of that deal, pitching it headfirst into a territory that it knows got the better of its broadline counterpart.

The demise of Tech Data Middle East will undoubtedly be referenced as a case study by other distributors and resellers wondering what challenges await them should they expand into the region. Avnet bosses could do a lot worse than giving it the once-over if they are serious about avoiding the pitfalls that claimed Tech Data.

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