One of the key management figures involved in sanctioning Tech Data's dramatic withdrawal from the Middle East earlier this year has spoken openly for the first time about the reasons that led to the decision.
Tech Data sold most of its Middle East operation to rival distributor Aptec Holdings during the first quarter in a move that signalled its complete exit from a region where it was the clear number two player. At the time of the departure, the US-based company blamed profitability issues and "changes in market conditions" for its decision to pull the plug on the US$300m-a-year operation.
Andy Gass, managing director of Tech Data's UK Computer 2000 subsidiary (pictured) - into which the Middle East office reported - has now shed further light on why the company no longer saw a future in the region and felt the business could not be turned around.
Although the closure of the UAE arm was not linked to the recently-completed European restructuring programme that Tech Data initiated, the decision was taken in relation to the company's overall growth strategy in EMEA. In a candid assessment of its regional priorities, Gass admits that when the distributor analysed potential areas for capital investment it found the greatest benefit would come from exploiting its pan-European warehousing and IT infrastructure.
"We could actually see a lot more future benefit of investing in the growth in Eastern Europe than we could in the Middle East where we were incapable of leveraging that IT infrastructure," Gass told Channel Middle East. "We were running a completely separate IT platform here so it was difficult to manage that through. The business had been loss making over the last year or so and we were struggling to see the right way of turning that around to a profitable situation, which was also part of that. So it was a strategic decision semi-tied into a European strategy, but ultimately our investment comes down to where we see the future return on capital."
Recent filings made to the Securities and Exchange Commission reveal Tech Data has had to take a hit of nearly US$9m as a result of shutting the Dubai-based office, although most of that figure relates to euro-to-dollar currency translation losses. The Middle East arm also suffered an operating deficit of around US$5m in its final quarter of operation as the business slowed down ahead of the closure.
Tech Data's failure to build a local presence in markets outside of the UAE has been commonly cited by rival distribution sources as one of the contributory factors to its downfall. Gass accepts that suggestion and admits the company paid the price for not establishing local subsidiaries prior to a "swing" in the market that saw several leading vendors switch from a regional distribution model to an in-country approach.
"I think we may have missed opportunities around in-country," he said. "There were potentially times when we should have gone harder towards that, but what we reached was a situation where we weren't in-country. We were a sort of regional distributor and I think the market had moved past that. It wasn't a ‘keep doing the same thing and squeeze a bit more out of it' situation. Whether to invest heavily or pull out was the decision we eventually got to. The things that were going against investing heavily were confidence in making a return on the capital that we'd have to employ and invest. Secondly, the minority ownership relationship we'd have had to have in most of the end-user territories was not the sort of ownership structure that we'd like," he confessed.
Channel sources in the region also argue that Tech Data's NASDAQ-listed status called for it to maintain a level of transparency that simply wasn't conducive to the realities of business in a market where virtually all its competitors were not bound by such obligations.
Gass is unwilling to be drawn on that issue, but acknowledges the depth of compliance did change over a period of years. "The whole bid management is part of it, but the other side of it is the restricted territories. There are huge business requirements for us around that which I'm not sure our competition took quite as seriously as we did," he said.
Tech Data expects to officially close the Middle East operation within the next few weeks as soon as remaining assets have been realised and it has settled all payments with suppliers. The company also has to finalise some of the legal impacts of closure, according to Gass, who was in Dubai earlier this week to oversee the situation.
He hails the wind-up process a success: "There are bits and pieces still to clear up, but we are certainly ahead of where we would have hoped to have been at this stage and it's been professionally done. I think we've kept customers and suppliers onside. That's particularly important on the supplier side where we've got continuing international relations with almost all the key vendors," he concluded.
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