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Thu 1 Feb 2007 04:44 PM

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Pole position

Not only is Bahrain home to the Middle East's only Grand Prix racetrack, it is also a driving force behind the region's technology growth. Channel Middle East takes a pitstop to assess if the Bahraini channel can maintain the pace.

Despite a population of less than 700,000 people and a geographic size that makes it the smallest Arab nation, vendors are revving up their engines and racing to penetrate the deceptively mature and sophisticated Bahrain market.

The Kingdom of Bahrain has grown steadily to become one of the most significant countries in the Middle East from a technology perspective. Bahrainis are, by and large, well-versed in IT, with the country's PC usage on a par with many markets in Europe.

Hafeez Khawaja, senior regional director for MEA and South Asia at hard drive giant Western Digital explained: "PC penetration in Bahrain is almost equal to some of the western countries. It is currently about 40%, which is similar to Dubai. In comparison, Saudi Arabia is less than 10%, which means Bahrain has a big consumer market."

It is this sort of statistic that is encouraging vendors to pay attention to Bahrain, particularly as the country's proximity to the Eastern Province of Saudi Arabia can provide an added bonus. Sumit Kumar, regional sales manager MENA at networking vendor US Robotics, admits the Kingdom has climbed steadily up the vendor's list of priority markets. "Bahrain was not high initially, but it's now competing with Qatar and Kuwait for the number three position of focus for our Middle East operations," he claimed. That view is echoed by Amr Hassan, general manager IPG at HP Middle East who labels Bahrain as one of the "key" markets within his remit.

The maturity of the market outweighs the fact that an average of around 15,000 to 20,000 PCs and notebooks are shipped in Bahrain per quarter. Interestingly, some vendors compare the Bahraini market to Europe, rather than Saudi, when it comes to conducting business and claim that this maturity provides an appealing prospect for IT players looking to penetrate the Middle East.

Whilst its size may be a limiting factor, the Bahraini market is widely considered as tech savvy and exhibits mature purchasing behaviour. Phil Blower, sales director at SAP Arabia, claims that the level of complexity in the implementations that the vendor is carrying out proves just how mature the market is. "They're not just core finance or a bit of HR, the implementations that are being carried out are really solutions addressing the management of the assets of the complete business. It's a very sophisticated market," he said.

Purchasing trends in the Kingdom therefore veer towards cutting edge hardware and software, and products that utilise new technology quickly prove popular. "It's a high end market - the computer literacy rate is higher than other markets and this makes it attractive from a technology point of view," acknowledged Khawaja.

This kind of market maturity reveals why Saudi PC assembler Arab Values decided to set up a new laptop assembly plant in the country last year. The US$92m manufacturing facility is expected to make use of the local workforce by recruiting 260 specialised IT staff. Not only will this plant serve the needs of the Bahraini market, but Arab Values has confirmed that it will use the Kingdom as a hub to export laptops to the entire Middle East.

This purchasing trend is also apparent to Kumar at USR, who claims he has noticed a significant alteration in consumer behaviour over the past six months. "Nowadays, consumer will start off by asking resellers about range, speed, reliability of wireless and DSL products," he commented. "Price is no longer the primary factor. That makes us feel very happy because a consumer is getting a product for at least two years so it needs to be reliable."

At 7%, Bahrain's real economic growth makes it one of the fastest growing economies in the Middle East. This has increased the market's reliance on dependable financial institutions and consequently demand for secure and reliable banking solutions. According to HP's Hassan: "Bahrain is being promoted as the financial hub of the Middle East. You have all these financial institutions which represent a huge opportunity for us and this is what we've been monitoring. However, all the verticals are doing great business with us."

Printing solutions vendor OKI is also seeing a considerable rise in demand from financial institutions with regional head honcho, John Ross, citing education and real estate as other key sectors driving technology growth. Resellers currently selling into these verticals are therefore in a prime position to market their products and services to a highly-receptive audience.

However despite placing considerable importance on the market, most vendors do not deem it necessary to set up offices in Bahrain. Few have chose to follow the example of US-based software provider Webmethods which chose Bahrain as the location to set up its regional headquarters. Vendors perceive the country's small population and low level volume as barriers to setting up shop in the Kingdom. "We haven't felt a need for in-country presence in Bahrain, but then it's never been ruled out either," reflected Blower at SAP. "If it was needed we'd open up an office in Bahrain, but it's pure economics - what we need in terms of sales or ongoing support from a customer can't be provided by one or two people, it needs a team. There are only certain places where you get a critical mass to support that team, and Bahrain doesn't quite get to that critical mass," he explained.

The imposing presence of Dubai-based distributors in the market naturally has an impact on indigenous players operating in the Bahrain market. Not only do most vendors decide not to set up office in the country, some also choose not to appoint a local distributor, opting for a regional distributor to serve Bahraini resellers remotely. "Bahrain is a small market so we have no local distributor based there. They all buy through regional distributors based in free zones like Jebel Ali," claimed Khawaja. "We will consider appointing a local distributor when we find one who can satisfy our criteria," he added.

As with any maturing market, Bahrain is exposed to savage price wars between vendors. Ross at OKI admits that local partners are forced to operate in a highly competitive environment where end-users have come to expect the best prices: "Bahrain is a price sensitive market and most of the time the prices keep going down due to stiff competition resulting in erosion of margins," he said.

In contrast, Pavan Gupta, EMEA director at components distributor eSys, argues that current pricing levels in the components space have actually been relatively stable in Bahrain. "Price tends to decrease gradually at the moment and margins get eroded somewhat, but overall it is okay and just sliding very slowly," he reflected.

That trend could be closely connected to changes in the hard drive vendor landscape during the past 18 months, according to Khawaja. He reckons that Seagate's acquisition of Maxtor has left its mark on the Bahraini channel. "That consolidation has made pricing more stable for us because with fewer people in the industry there is less competition so fewer factors put pressure on our prices. Obviously when pricing is stable, there is an opportunity to make higher profit margins for us and our channel partners," he said.

Kumar claims that USR enforces strict control over its pricing in the region and doesn't take lightly to resellers trying to pollute its strategy. "We keep very strict control of pricing so that everybody - all the distributors and resellers - know what is the selling price is and what is the buying price is," he asserted. "We apply a transparent formula and therefore have no issues regarding pricing. If we find a partner consistently selling below this price we blacklist them so that no distributor is allowed to sell products to them, because it is not fair to the other partners and our own profitability ultimately suffers too."

Recent news that two Bahraini resellers had been reprimanded by the Business Software Alliance brought attention to the more sinister side of the market. Issues such as piracy appear to divide the market into two camps, however. While at least one vendor proclaimed to see "hardly any" cases of piracy in the channel these days, others said that the need to police the market remains as strong as ever.

Ramesh Poojary, office automation division manager at local distributor Fakhro Electronics, believes the market has improved for the better, however. "[Bahrain] did have some problems regarding piracy," he admitted. "But we have now cleared that up with end-users. We ran education and awareness campaigns across the country and now it is no longer a problem for us. However, I do think that some brands still have problems." Poojary also claims that the maturing of the market is making it much more attractive for new brands to build up Bahraini channels. "Beforehand, only known brands were in demand in Bahrain and now demand is growing for newer brands in the market. End users are ready to invest in unknown brands, especially those that are supported by local companies," he said.

Due to the size of the market, the Bahraini channel retains an insular feel that has become a significant characteristic of the market. "Bahrain is perhaps geographically the smallest country OKI operates in, in this region, and in small markets most people end up knowing each other," confided Ross. "If you have a good reputation, you do good business, if you don't have a good reputation, you don't."

Gupta at eSys agrees with Ross' synopsis of the market. "Bahrain is a close knit market," he said. "The IT community is very close so as a big distributor we just remain transparent and the channel takes to us. What I mean by that is that hanky-panky doesn't work in Bahrain. You just need to be up front and honest and things will work," he claimed.

Local players insist that to survive in the Bahraini market you not only need to develop a strong proposition, but maintain a solid reputation. "It's quite tough to make a mark on the Bahraini market, but because of the relationships and the contacts that we have established, we have a large customer base and that's what really gives us an edge," claimed Fakhro's Poojary.

Fakhro Electronics has not only established itself as a major provider for Cisco, 3Com and OKI products, but it also owns the franchise rights for the Bahraini arm of IT power retailer CompuME. Other local players who remain synonymous with the Bahrainin market include local reseller Mass Computers, Mars IT Distribution, an HP, Acer, IBM, Intel, Microsoft and Symantec provider and Capital Group IT, another local distributor which has made its mark on the industry through selling HP, Intel and Symantec products.

In such a confined marketplace, maximizing profits may seem a monumental task for the local channel. However, those who can develop a strong services-oriented offering that provides differentiation from competitors will prosper, according to Gupta at eSys.

"Resellers basically need to have people set up to talk to the end-user, people to talk to the corporates, government sector, retailers and so on. As the market is very small, resellers in Bahrain should have around six to eight people and each one should concentrate on a vertical of their own. This is how they can increase sales because in isolation a single worker is not enough to cater to the demand."

Of course, the future health of the Bahraini channel also hinges on how much on-the-ground support vendors can provide to their partners. "We're empowering our partners and encouraging them to be resellers rather than simply implementers," claimed Blower at SAP. "We have a number of initiatives with partners where they will manage the whole sales cycle for us. We will still have direct contact with the customer, particularly for maintenance. We have a local support capability so we can look after our people, even on Saturday and Sunday, and we also offer support in Arabic." He adds that the vendor aims to focus more aggressively on resellers in the small and medium market this year. "We've just put an education programme in place that is only just being rolled out right now where those resellers will learn more about these products," he concluded.

The trends that are being played out across the entire Middle East market, such as the strong shift towards notebooks, are just as visible in Bahrain. The market may never attract the kind of investment that vendors are ploughing into Egypt or Saudi, but Bahrain can still prove a lucrative market for those who get the model right. A growing consumer market and economic stability more than make up for the country's relatively small population. Its close-knit IT community might make it a challenging market to break into, but those who have done so insists that they are reaping the benefits.

“Nowadays, consumer will start off by asking resellers about range, speed, reliability of wireless and DSL products. Price is no longer the primary factor.”
“Only known brands were in demand in Bahrain but now demand is growing for newer brands. End users are ready to invest in unknown brands, especially those that are supported by local firms.”
“Resellers need to have people set up to talk to the end-user, the corporates, government sector, retailers and so on. As the market is very small each person should concentrate on a vertical.”

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