Kuwait uncovered

Kuwait has always played host to an intimate channel landscape, where local distribution companies and resellers remain at the heart of IT activity. But what does the future hold for the Gulf's third largest market as the downturn takes its toll?
Kuwait uncovered
By Andrew Seymour
Thu 18 Jun 2009 04:00 AM

Kuwait has always played host to an intimate channel landscape, where local distribution companies and resellers remain at the heart of IT activity. But what does the future hold for the Gulf's third largest market as the downturn takes its toll?

Like everywhere else in the region, the term ‘credit crisis' has quickly become a central theme in conversations among Kuwaiti IT providers. Local channel players have grown accustomed to steady expansion over recent years, but the harsh economic climate has left many wondering how long it will be before business is again as brisk as it used to be.

The self-contained nature of the Kuwaiti IT sector appears to render it slightly more protected from the impact of the global chill than other markets in the Gulf. Commentators argue that the growth expectations of IT companies are kept in check by the modest size of the market, while the lack of any meaningful re-export business has created a degree of stability not necessarily evident among its neighbours.

There was a time when the Kuwait market was regarded as a major channel for its Iraqi counterpart, but that business is said to have dried up. Iraqi customers find it just as easy to procure from Dubai or Jordan these days, while vendors have begun establishing authorised distribution channels for the country now that the market has opened.

For Kuwaiti channel players, the major issue is how dramatically the market will be impacted by the downturn. Distributors and VARs have certainly had to revise their forecasts in recent months.

"I recently met with the local distributors for companies such as Toshiba and Acer and what these guys were telling me is that they have actually budgeted 15% to 20% less for this year compared to last year," admitted one prominent hardware reseller, offering a glimpse into how the channel's expectations have rapidly changed.

Roger El-Tawil, channel and marketing director for the MENA region at Avaya, agrees that the slowdown in Kuwait has been noticeable, but insists there are signs to suggest the market will bounce back. "There is no doubt that the market has slowed down over the last quarter due to the current global crisis and Kuwait has felt this impact, but we are seeing projects on hold rather than cancelled and people are revising the projects to look at a stronger ROI. We still see this as a focal market for Avaya and feel that we are at the bottom and on the way up."

Quite how long the downturn will last for is anybody's guess, but it has clearly reached to all sectors of the market. "Under the current financial turmoil, and for the security and surveillance market, it is difficult to forecast the short-term challenges," conceded Baraa Al Akkad, country manager at network cameras vendor Axis Communications. "We are seeing some positive and potential activities which I believe will transform to real projects soon," he added.

While the anxiety that has crept into the market is indicative of the new environment that the Kuwaiti channel finds itself in, there are enough statistics to reassure local players that the market is likely to emerge from the downturn in relatively healthy shape.

Industry research house BMI estimates that Kuwaiti IT sales soared to US$774m last year, outlining why some vendors and distributors have been so keen to invest in a market that has prospered from buoyant oil sales and heavy government investments. If forecasts prove correct, the market could be worth US$1.3 billion within the next four years.

Current economic challenges aside, Kuwait's ascendancy in the Gulf IT stakes over recent years is even more remarkable when you consider the country is inhabited by fewer than three million people. On the surface that would seem to present limited opportunities for IT providers, but Kuwait's relatively wealthy and IT literate population has ensured just the opposite.

For many vendors, the process of reaching Kuwaiti customers - at least logistically -invariably involves Dubai. It is routine for vendors to fly in staff to oversee projects, as well as make use of distribution partners based outside the country, often in Jebel Ali.

Projector vendor Optoma is one company that admits its prospects in Kuwait are just as likely to be influenced by partners outside the country as those within it.

"We have local distribution partners, however their focus is primarily on the tender business," explained Adam Dent, territory manager for the Middle East and Africa region. "At this stage we are currently looking at various opportunities such as Dubai-based broadline distributors, although we remain keen on speaking to potential partners in the Kuwaiti market," he revealed.

Dent says the company has encountered more success in the enterprise sector than the consumer space, endorsing the much-held view that commercial customers remain the driving force behind local IT sales.

"We have had some success in local government tenders and are continuing to work on some big opportunities with the Ministry of Education in Kuwait," he said. "The retail sector has been more challenging to penetrate, however we are now looking at recruiting new partners for this channel."

One reason that the retail space remains notoriously difficult to crack for incoming vendors is that the market has traditionally been dominated by a handful of players.

Local IT group Alghanim is regarded as the largest power retailer with around 12 electronics stores, including its X-Cite chain which was launched last year and offers hundreds of IT, consumer electronics and communications brands.

Eureka is cited as another major player in the volume retail channel, along with Andalus Trading, the local Samsung and Motorola agent, which also carries a wide portfolio of IT equipment and appliances.

It lays claim to more than 65% of the local LCD market as a result of its Samsung tie-up, although it faces stiff competition from other brands. Last year, BenQ set its sights on gaining 16% of the monitor market after appointing Active IT Distribution to market its range of LCD panels in Kuwait.

Anand Krishnan, operations manager at Andalus Trading, believes the market reached its nadir during the first quarter, but expects retailers to continue slashing prices as they look for ways to entice customers. "What's been affected is the credit market and people who buy on credit because the banks are very careful in terms of giving and approving loans," explained Krishnan. "That represents a fair portion of the business - especially for the top three companies as we all provide credit facilities for customers to make purchases. But everyone is having to be cautious and we are following a stricter policy in terms of the people we give credit to."

Some of the more prominent faces of the Middle East retail channel cannot be found in Kuwait, although Jumbo Electronics, Emax and Plug-Ins are all rumoured to have given the landscape a close inspection.

One source claims there is talk in the market that Jumbo is shortly preparing to launch its electronics retail format locally.

Irrespective of the taxing conditions, the Kuwaiti market still appears capable of attracting outsiders. "Everybody considers Kuwait a wealthy market and wants a share of the cake so the competition is becoming tougher," observed Amrit Sodhi, country manager at BDL Kuwait. "Geant is starting here next month and Japanese electronics firm Best Denki is coming. The number of competitors is greater than the needs of the country and everybody is competing on price, which means the only people getting the benefits are the end-users!"

What is certain is that Kuwait remains a difficult market to crack, particularly with Alghanim exerting such a strong grip on the market. Even Carrefour is said to have come off worse in its endeavours to grab share from the organised IT retail channel. Its attempts to undercut the market - a tactic that other players such as Lulu and City Centre have so far resisted - has not worked, according to Krishnan at Andalus.

"Carrefour made the mistake of selling below cost a few times and that created a big issue because most of the distributors here have an agreement with companies like Alghanim and others that if somebody else sells the product cheaper they have to give price compensation," he said. "That became a big issue."

Dubai-based distributors continue to make their presence felt in the Kuwaiti market, with several developing comprehensive local operations and stocking facilities. Redington and Almasa both have sizeable in-country teams, while Logicom and Jumbo Distribution - the latter trading locally as Solvin - are both visible names. Volume distributors BDL and Metra Computer have also moved in on the market in the past year.BDL's Sodhi - who has served in the Kuwaiti channel for more than 11 years having previously worked for Almasa - offers an insight into the strategies required to prosper in a market where the level of competition exceeds the market opportunity.

He says that rather than trying to sell to everybody and risking the possibility of companies fighting over margins, BDL's policy is to identify a couple of key customers to purchase stock. "The kind of pressure we have from vendors doesn't allow you to sell to everyone. If we did, then the market would shrink and we wouldn't get our share because a lot of other distributors are there and the reseller wouldn't get any advantage buying from me," said Sodhi. "If they buy from me they will have the advantage that I will probably take a SKU and give it to them. I will do a good deal on that so that they can sell it."

Local dealers and sub-distributors claim to have seen more Dubai companies approaching them for business in the wake of the downturn although it is common for Kuwaiti traders to source products from outside the country.

Krishnan at Andalus Trading says this is an aspect of the business that companies have to manage carefully if they are to stand any chance of making money. "If you are bringing in laptops, for example, the best way to do it at the least cost - because it is a price-sensitive item - is by road. That would take about a week to 10 days maximum including payment and all the formalities. The other way, if it is a smaller quantity, is to get it by courier, while air shipment would be feasible if it was a larger quantity," he commented.

With many wholesalers operating as resellers or sub-distributors it can be difficult to discern a multi-tier structure, while credit availability has become more constrained since the turn of the year. Dubai distributors, especially, are said to have dramatically pulled back credit facilities as they take stock of their exposure in the market.

Even local distributors such as Al-Sarraf, an Acer, Epson and Creative specialist, admit to taking a more cautious attitude to extending credit. "You cannot trust some of the companies due to the current situation so you have to be careful in giving credit - it is not like before," said Ghassan Badran, dealer channel manager at Al-Sarraf. "The terms have not necessarily changed, but we are very careful in who we are giving credit too."

Although the government, oil and finance sectors have been the driving forces behind the market's growth, the SMB sector is rapidly emerging as an equally attractive area for IT suppliers.

Avaya - mainly present in Kuwait through tier-one partners Al-Alamiah, Alghanim, Computer Data Networks and Universe Computers - is keen to ramp up its existing coverage of the SMB sector.

"On the enterprise side we have the right partners to grow our business and the volumes are bigger, but the SMB segment is the fastest-growing segment and we see that opportunity in the market," explained El-Tawil. "How we address that market in Kuwait is through distribution and the smaller resellers that have the relationship with those customers," he added.

A spike in SMB sales will also be welcome news for the trading segment of the reseller channel. Bin Khaldoon Street in the Hawalli part of town continues to serve as the recognised hub for hardware trading, although there is no denying that the market has faced intense pressure of late.

"Those companies that are big or financially strong seem to be surviving, but the weaker ones or those that have just one or two employees are not able to survive longer than four or five months so they are closing down," insisted Badran at Al-Sarraf.

There are believed to be anything between 200 and 400 companies plying their trade in Hawalli, according to local commentators. "It remains a prominent place where people go to buy IT-related goods, but you have to understand that it is completely price-driven, many of the shops don't offer warranty on the products," explained one observer.

One issue that threatens to harm both the commercial and consumer markets is software piracy. Its prevalence has led to a piracy rate of more than 60%, the worst in the Gulf.

Microsoft - under the leadership of new boss Ehab Mostafa who took over in February after joining from the vendor's Egyptian operation - has traditionally been the most vocal advocate for eradicating piracy.

There are now signs that other industry counterparts are also taking the problem seriously after CAD software vendor Autodesk entered into a co-operation with Kuwait's Intellectual Property Department to promote copyright protection locally.

"Our plan is to prepare for a long-term agreement and campaign with the IP department, which is aimed at significantly curbing design applications piracy in the country," stated Asdaf Al Khalidi, IPR and license compliance executive at Autodesk Middle East earlier this year.

Such efforts will no doubt contribute to making the Kuwaiti IT sector a more attractive place to do business and reinforce its reputation as an important destination for vendors and suppliers building a pan-Gulf business. But it also stands out as one of the most competitive markets in the region - as any local IT provider will testify.

Services sellThe Kuwait IT sector still remains dominated by hardware sales - due to demand for classic infrastructure equipment such as PCs and servers - but a prominent services market is also springing up.

BMI data shows that IT services currently represent around a third of overall IT spend, placing the value of the market at US$232m. Within the next four years that figure could rise to US$415m.

"Telecoms, banking and retail verticals all provide strong demand," states BMI. "There has been a recent trend towards larger deals, particularly from the government. Meanwhile, a more volatile environment for the oil industry is encouraging companies to look for solutions that will increase operational efficiency and boost overall business agility."

Investments and upgrades in e-government initiatives and inter-departmental IT systems have created a strong source of revenue for software providers and those capable of providing advanced integration services. According to BMI, the Social Ministry, Defence Ministry and Finance Ministry have all accelerated IT infrastructure projects during the past year.

"The government is hoping to drive IT development with its new broadband access initiative," states BMI. "Alcatel was chosen by Kuwait's State Ministry of Communications to supply a gigabit passive optical network solution that will serve about 60% of access areas involved in the ministry's present roll-out. MOC's access network is gradually being upgraded by replacing the existing copper access with a passive optical fibre infrastructure. Even so, there will only be slightly more than 100,000 broadband subscribers by 2013."

The VAR and systems integration market is home to several powerful names that have an established presence in the market, such as Diyar United Company, NCR, GBM, Kuwaiti Danish Computer Company, Universe and ZAK Solutions. All serve as Cisco Gold partners in the country.

Arabesque Group, founded as the first Microsoft Direct Large Account Reseller in Kuwait, is a major Symantec partner and provider of infrastructure and ERP solutions, while ITS specialises in EMC, Sun and HP. Elsewhere, Future Technology is a key networking and security provider, while Axis Solutions has developed competencies around Microsoft, IBM and Epicor.

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