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Mon 22 Dec 2008 04:00 AM

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Inside Iran

The prospect of reduced exposure from the global banking sector and an enduring lack of vendor-led channel development activity would send most markets into meltdown, but for Iranian IT dealers it's all part of life in the region’s most testing channel.

The prospect of reduced exposure from the global banking sector and an enduring lack of vendor-led channel development activity would send most markets into meltdown, but for Iranian IT dealers it's all part of life in the region's most testing channel.

When it comes to pure IT consumption, Iran unquestionably deserves to be placed in the same bracket as other large and all-encompassing regional markets such as Egypt and Saudi Arabia.

The country's population - which now stands at more than 70 million people - is just one reason why the local IT sector can look forward to strong double-digit growth during the years ahead.

Business is done in cash and if credit is extended then Iranian dealers will be given a very high price. That is why small and medium companies that remain financially weak will suffer.

It is perhaps inevitable that the scale of the market is reflected by the magnitude of the channel community as well. Unlike other countries in the Middle East region, Iran's IT market doesn't depend on one location to drive the bulk of its sales activity.

The capital, Tehran, undoubtedly retains a dominant position as the political, commercial and industrial hub, but with 30 provinces in total, cities such as Isfahan, Shiraz and Tabriz are all places where high numbers of IT dealers can be found plying their trade.

One hardware distribution source says the sales chain in Iran can often be quite extensive. "A master reseller will sell quantities into sub-distributors and they will sell to smaller dealers," explained the source. "There are several medium-to-large distributors in Iran that distribute to a further 6,000 or 7,000 dealers."

It is therefore something of an irony that while Iran is home to a burgeoning IT channel and regarded by many as the largest IT market in the region it remains a no-go area for many vendors - at least officially.

Ongoing trade embargoes prohibit US technology companies from conducting business in Iran, a directive that has prevented some notable industry heavyweights with in-country offices throughout the region from establishing any formal local presence. Household names such as AMD, Intel, Cisco, Dell and Microsoft are all affected by the ban.

This scenario has its constraints for the Iranian IT market although it's not necessarily as destructive as you'd perhaps expect due to the high level of re-export activity that takes place.

IT kit sold into the UAE channel remains the primary source of supply, with products often passing through several conduits prior to being absorbed by the Iranian market. Subsequently, Iranian buyers have access to most of the brands available elsewhere.

"90% of the Iranian IT market is provided by Dubai dealers or distributors," claimed a source at one trader, emphasising Iran's reliance on the re-export market.

"What has changed in the past two years is that the business has become more official and regular in terms of Iranian rules and regulations. That means smaller dealers are disappearing or merging, the smuggling is decreasing and the official way of importing goods into Iran is improving."

Still, onlookers predict more volatility ahead for Iranian IT traders, particularly as channel creditworthiness remains a topic that is ringing in everybody's ears.

European and global institutions, such as Deutsche Bank and Standard Chartered, have reduced financial support for companies with Iranian ties over the last year following US pressure and as a result Iran finds it difficult to obtain foreign currency, hold assets offshore and raise loans. That has created anxiety for an IT sector where 60-day credit terms are not unheard of.

Dubai-based suppliers are also said to have taken a conservative view on extending credit to Iranian clients given the lack of insurance cover and this is placing additional weight on the channel.

"Business is done in cash and if credit is extended then Iranian dealers will be given a very high price," confided one source. "That is why small and medium-sized companies that do not have enough cashflow or remain financially weak will suffer."

Indeed, while anecdotal evidence suggests the Iranian market is growing at a reasonable rate, there is disappointment from some quarters that the channel hasn't developed at the rapid pace expected of it a year or two ago.Those who blame this on stagnant purchasing power - even though the number of first and second-generation IT purchasers has risen - say that it has restricted distributors and dealers from expanding their businesses.

While US vendors find their hands tied when it comes to addressing the Iranian market, Asian rivals are bound by no such regulations so long as their products do not contain a certain proportion of US-made components.

Several Korean and Taiwanese brands have seized their chance to exploit the lack of competition by cultivating in-country partnerships and, in some cases, sanctioning the final production of goods inside the country to avoid heavy import taxes.

Many vendors who try to manage the Iran market from overseas fail because they don’t have proper local support from partners. Selecting distributors and partners in Iran is not an easy task.

Last year, for instance, the Maadiran Group, one of Iran's largest IT firms, began the mass production of LG phones, adding to existing contracts for the assembly of LG monitors, Epson dot matrix printers and Olivetti bank slip printers.

Consumer electronics giant BenQ, meanwhile, employs Iran Nara to carry out SKD assembly of its monitors in Iran, while it uses wholesaler Farzanegan to distribute products that aren't burdened by steep customs duties, such as notebooks, cameras and projectors.

"This particular modus operandi has been going on for the past three or four years," explained Manish Bakshi, general manager at BenQ's Middle East and Africa operation.

"During the first two years we were doing quite well and our sales were on an upsurge, but in the last one and a half years business has slowed down a little due to trade embargoes, especially on the banking side."

Bakshi says the situation has improved considerably since the beginning of the year, but admits the company has been forced to change its financial collection methods, such as requesting customers pay through UAE-based banks, in order to offset any risk.

"Some of the channels are converting LCs from the local banks to foreign banks accepted by vendors like us because once we get the LC from the foreign bank we have no issue," said Bakshi.

"Secondly, because of our loyalty to partners, they have started issuing guarantees from the banks in UAE, which we are fine with too. We can provide the products against that."

It is not clear if BenQ's move to protect itself from running into any financial issues with Iranian customers has been repeated by other brands serving the market.

Commentators speculate that vendors with offices in Iran, such as LG and Samsung, may be more willing to accept payments from local banks given they have an in-country infrastructure and personnel on the ground.

"Vendors who haven't invested in building a big presence are probably more inclined to shy away a bit more even though it could almost certainly affect their business," reflected one channel source.

That said, manufacturers are still optimistic about what the market has to offer. Components vendor Foxconn, which serves customers through in-country distribution house Darya Computer, claims to have recorded "solid volumes" on the back of escalating desktop PC demand this year.

"We are targeting three very key segments in Iran - government projects, private gaming communities and private companies that can benefit from our high-class range of digital life products," explained Anish Rahman, territory sales manager at Foxconn, who has been handling the company's activities in Iran for several years.

"As well as that, we're supporting in-country OEM projects with chassis, coolers and motherboards," he revealed.

Rahman also says the company is in discussions to arrange seminars in Tehran to support Iranian retailers during the high winter season and announce the launch of a range of new motherboard and chassis products.Although figures on the size of the Iranian market are hard to come by, BenQ estimates that the local PC sector, including desktops, notebooks and servers, is worth between three and 3.5 million units annually.

Considering commentators valued the market at a little over one million units just three years ago, it would seem that PC hardware sales are as buoyant as anywhere else in the Middle East.

Meanwhile, the 1,500-strong Maadiran Group recently revealed plans to manufacture 850,000 LG-branded LCD and CRT monitors this year and a further 940,000 units in 2009. It is also licensed to annually produce 14,000 wide-carriage dot matrix printers for Epson.

Some of the channels are converting LCs from the local banks to foreign banks accepted by manufacturers like us because once we get the LC from the foreign bank we have no issue.

Given the apparent appetite of the market, it is conceivable that other vendors will attempt to strengthen their engagement with partners as the market expands in value.

Vendors such as Acer and Cyberoam have expressed ambitious plans for the Iran market in the past, although both were unwilling to discuss their Iranian business when contacted by Channel Middle East for this article.

Clearly long-term success in the Iranian market comes down to fostering an established and well-connected partner network. Foxconn's Rahman admits that this is easier said than done, however.

"Many vendors try to manage the Iran market from overseas and end up failing because they don't have proper in-country understanding or local support from partners," he observed. "The selection of distributors and partners in Iran is not an easy task to deal with and it has to be based on many complex factors."

One of the more noticeable reasons for this is that the market lacks the structure of some of its neighbours. "Organised retail is not yet present so the market isn't like the UAE or Saudi Arabia where there are groups with retail chains," commented Bakshi at BenQ.

"What some of the vendors are doing is identifying key players in cities such as Mashhad and Tabriz and then creating marketing activity in the form of things like sales programmes on a quarterly or six-monthly basis. Another factor that you have to take into account is that local channels dominate the market, while service expectations are also different. If vendors are incapable of putting in service points then they should appoint channel partners who can."

Channel development remains one of the areas most impacted by the embargoes as Iranian dealers have been starved of the services and benefits afforded to their counterparts elsewhere.

Although the sheer dynamics of supply and demand ensure constant product flow, Iranian dealers don't enjoy access to local programmes, sales incentives and RMA procedures from US-based vendors.

Dealers are even reported to be carrying out the role of the vendors themselves when it comes to tasks such as taking training seminars and developing services capabilities to keep customers satisfied.

For vendors restricted by the embargo the prospect of not being able to conduct any form of channel development or management would appear frustrating, although not everybody agrees with that view. One source alleges that some vendors are quite content with the situation as their products are invariably making their way into the Iranian market without them incurring any costs.

"At least 40% of all Middle East local office sales are going to Iran, but as long as there is no official document showing that they sold it there they cannot give that MDF or rebate to the market," said the source. "Sometimes you will see some strange movements because of this."

There are also claims that some vendors are inclined to use Iran as a dumping ground for obsolete or aging products, flushing the stock through traders that re-export to customers in the market. This way the vendor can dictate market consumption indirectly.

Regardless of the more dubious tactics that persist, Iranian IT distributors and resellers have been used to dealing with any scenarios that confront them for almost two decades now.

While questions still remain over how detrimental the lack of vendor-led partner development will be to the local channel's health over the long term, Iranian IT companies continue to have a huge say in the shape of the wider Middle East market.

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