Perfectly poised

Stakeholders in the Mideast IT channel can look forward to an eventful six months ahead judging by the first half of the year.
Perfectly poised
By Andrew Seymour
Thu 05 Jul 2007 01:55 PM

Stakeholders in the Middle East IT channel can look forward to an eventful six months ahead if the first half of the year is anything to judge by. The dynamics of the market are changing rapidly, creating enormous pressure on companies to scale new heights without compromising the bottom line.

With the second quarter drawing to a close last week and companies refining their strategies for the remainder of the year, now is an ideal time to take stock of the Middle East channel following what has undisputedly been a turbulent six months.

You can tell a market is maturing radically when it encounters a series of striking changes over a relatively short timeframe. Whether it's resellers reaching into areas that remove them from their comfort zone, vendors modifying ageing distribution strategies or organisations using acquisitions as a method to fuel future growth, we have seen enough evidence since the beginning of the year to suggest the market is not quite the "emerging" territory that some parties outside the region are keen to make out.

What a six months it has been. The repercussions of new customs regulations in Saudi Arabia have, on the whole, been a positive development for legitimate traders, even if the speed of introduction caught some channel players by surprise. Those distributors who have built meaningful operations in the Kingdom have loudly applauded the decision to axe the 5% customs duty on IT products, primarily because it prohibits some of their more spurious counterparts from under invoicing consignments to steal an advantage.

Tech Data's departure has undoubtedly left a huge hole in the distribution sector and the implications of its exit are still clear for all to see. The company's EMEA management team had repeatedly pledged its commitment to operating in the Middle East, but those words proved hollow when its UAE office was axed in March - a closure that, incidentally, has already cost the company in excess of US$9m. The Tech Data officials who have remained in the country tying up loose ends and fulfilling debt collection duties have had an unenviable task on their hands.

Yet the broadliner's unfortunate withdrawal must be viewed in the wider context. The week prior to its departure saw contracts with a host of hardware vendors scrapped on the basis of profitability reasons. Whatever the situation, Tech Data certainly succeeded in illustrating the point that the very foundation of any distribution company is its ability to operate profitably.

Admittedly, a distributor has to get its own house in order before questioning the business model of a vendor partner. But that doesn't mean the influence that the structure and nature of a vendor's compensation model has on a distributor's health should be underestimated.

In the last week alone, we have seen another example of a distributor backing away from a contract over profit expectations with the news that Mindware will no longer carry Seagate in its portfolio. I am convinced this won't be the last instance of a Middle East distributor agreeing to part with a manufacturer because it realises that volume means nothing if the business doesn't generate the return it desires.

In fact, it could just be the start of a climate where distributors - and to some extent resellers - take a more scientific approach to deciding which brands to partner with. A boss at one large Dubai distributor admitted last week that his organisation had completely revisited its priorities in the past year. "We have started refusing the non-safe orders because volume growth isn't important," contended the source. "It is very easy to double your revenue in this market, but we are looking to minimise our risk and grow our net margin. That has to be done in a healthy way and if that means growing 25% a year instead of 50% a year then that is fine if it benefits the company."

Acquisitions have been an increasing theme since the start of the year too. Spectrum's purchase of Comguard, Source IT's merger with Link Retail Distribution and Fusion Distribution's sale to ComputerLinks reveal a trend set to become even more prominent in the coming years. One plus one rarely equals two in the land of IT mergers, however. The experiences that Aptec-owned TDME has faced in retaining ex-Tech Data staff and convincing certain vendor partners to come on board demonstrates the challenges that can arise during what is often a demanding integration process.

Elsewhere, the face of the retail channel continues to change dramatically in markets such as Kuwait and Egypt, but particularly in the UAE. i2 and CompuMe have joined arms to create a regional force in IT and mobile phone retail, while the long awaited opening of Sharaf DG's destination outlet in Dubai during the first half of the year was just one of many expansion stories within the consumer electronics community.

These guys are riding the crest of a consumer wave at the moment, each trying to out-do the other in terms of developing the most alluring retail proposition. The evolution of the Middle East consumer electronics channel will make compelling viewing in the impending six months and beyond as retailers attempt to differentiate themselves on more than just price.

Will retailers be able to sustain healthy business given the sheer number of outlets springing up in the market? They claim that economic forecasts show there will be a slice of the pie for everyone, but having personally been in some of these stores on several occasions when shopfloor staff outnumber customers I struggle to comprehend how certain retail chains can achieve decent returns from such a cost-intensive model now, let alone in the future!

In an upcoming interview set to be published in Channel Middle East next month, peripherals vendor Logitech's EMEA boss Steve Daverio reveals that the head of Europe's largest retailer recently told him that it made a loss from selling notebooks last year. Clearly the warning signs are there for Middle East retailers if they haven't already seen them.

For the most part, however, the sun continues to shine brightly on the Middle East channel. Yes, the market might be "emerging" in the sense that it still has a long way to go before fulfilling its potential, but in terms of technological capability and appetite for next generation technology it is up there with any other region in the world.

The GCC market alone is tipped to smash the US$8 billion barrier this year, representing a 15% to 20% improvement on the previous 12 months. It is growth of this magnitude that is alerting companies to the opportunity on offer in the Middle East if they have the right business model. A gaggle of the world's top IT services and consultancy firms are quietly building up a solid customer base in the region, while recent Middle East entrant Integralis is one example of a powerful European integrator that decided it could no longer resist the market.

Networking distributor Comstor, too, has got off to a fine start since landing in the region earlier this year and has firmly set its sights on snatching some of the huge share of the Cisco distribution market concentrated in the hands of Logicom.

Just as importantly, we have continued to see more vendors paying attention to the unique needs of their local partners during the first half of the year. This has resulted in partner programmes being better adapted for the Middle East, the establishment of more in-region spare parts hubs and a commitment towards the provision of superior technical and training support locally. What's more, certain vendors are waking up to the fact that the "quality over quantity" approach is a far more effective partnering strategy than simply trying to align with as many resellers as possible.

Make no mistake about it, the traditional challenges exclusive to this region are very much there, but in general these are buoyant times for resellers in the Middle East channel. They just have to accept that more change lies ahead.

For all the latest tech news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.