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Tue 27 May 2008 04:00 AM

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The components game

The wholesale trading and supply of PC components still remains an enduring and very much active feature of a Dubai channel that serves the entire MEA region - but for how much longer? Channel Middle East editor Andrew Seymour investigates the state of the components channel and the forces shaping its development.

The wholesale trading and supply of PC components still remains an enduring and very much active feature of a Dubai channel that serves the entire MEA region - but for how much longer?

Channel Middle East editor Andrew Seymour investigates the state of the components channel and the forces shaping its development.

As far as the IT industry goes, it's not the most glamorous or fashionable sector, and it certainly isn't the most profitable - which probably explains why the components field has always struggled to shake off its reputation as an undesirable and unpredictable environment.

Price fluctuations routinely govern the direction of the market, while the sheer volume-driven nature of the products themselves prevents the channel adding little value beyond cost and availability.

Dubai's status as a trading hub attracts swathes of companies looking to prosper from the sale and re-export of IT components, but at the same time it's also the market's worst kept secret that countries restricted by embargoes such as Syria and Iran represent an obliging destination for such hardware courtesy of their proximity.

Mix in the fact that vendors are routinely accused of using the Middle East as a dumping ground for obsolete products or practicing excessive channel stuffing and it's not difficult to see why the components sector is regarded as an unforgiving place.

So what do we mean by IT components? Well, for the purposes of this article, the term refers to any single piece of hardware that is used in the internal assembly of a personal computer or server. This typically includes central processing units (CPUs), graphics cards, hard disk drives, motherboards, mainboards, optical disks and memory.

In most markets, IT components tend to flow through the distribution tier to the systems builder channel, where they are used for PC production, or to the retail channel, where they are resold as standalone items for personal assembly or upgrade purposes. Although that's also the case in Dubai, domestic consumption only accounts for a fraction of the market.

Assessing the size and value of the components channel is an arduous task due to fervent sub-distribution and intra-company sales activity, which means products sometimes pass through four or five conduits before reaching the final user.

Most IT components manufacturers decline to break out revenues below an EMEA level, although anecdotal evidence suggests the MEA region presently accounts for anything between 2% and 7% of a typical vendor's global turnover.

Interestingly, flash and RAM maker Kingston recently revealed that its Middle East and Africa business contributed US$65m in the way of revenues last year, providing some indication of the level of activity taking place in the memory market at least.

Channel Middle East estimates that the 15 largest Dubai-based IT distributors collectively sold in excess of US$900m worth of IT components last year, but if you factor in the level of re-export and grey marketing that occurs elsewhere in the market then the real value of overall components activity passing through Dubai is arguably two or three times larger than that - possibly more.

Abdallah Saqqa, distribution sales manager for the Middle East at chip vendor AMD, believes Dubai plays a vital role in facilitating the dissemination of products throughout the region.

"In some countries in the Middle East customs practices are extremely complicated, which makes the life of vendors difficult had we not had the choice of shipping to Dubai and then re-exporting elsewhere, such as Egypt or Saudi Arabia," he said.

Of course, the same point also applies to markets that most vendors are required to distance themselves from. A source at one distributor admitted: "Vendors cannot approach each and every local market. We do business in Syria, which is not an easy country to enter from outside for banking, financial and embargo reasons. And if we are talking about Iran or some of the African countries then being in Dubai with all the logistics, financial and communications facilities is important."

Al Selsal Trading is a trader on Khalid Bin Al Waleed Road specialising in components. The diversity of its customer base is characteristic of many of its Computer Street-based neighbours.

"30% of my customers are local and 30% are from the GCC," explained general manager Akeel Mahdi. "Another 20% are from Iraq and the rest are from Libya."

When it comes to distribution, playing the components game is vastly different to the finished goods arena, where products hold their price for longer and demand is easier to forecast.

Components distributors, particularly those in the memory sector, typically retain smaller quantities of stock and place more back-to-back orders to counter price volatility.

Many keep stock levels at their regional warehouses for no longer than 10 to 14 days of lag time behind in-country sales. Fortunately for authorised distributors of components such as CPUs, vendors grant price protection to offset any enforced price drops, but sub-distributors and traders of the same equipment aren't afforded this luxury.

All these elements, coupled with the fact that certain sectors are highly aggressive because they are controlled by just a few suppliers, creates an incredibly volume-driven environment.

"The buyers are also resellers - not end-users that are willing to pay the price," said Rahb Hamidaddin, president at Empa, which distributes brands such as Aeneon, MSI and Intel. "Resellers will fight for the price, which creates more of a cutthroat business."

With few vendors putting down meaningful roots in the market, the components channel doesn't enjoy the benefits of local sales and marketing activities taken for granted in the PC or printing space.

Only Intel, AMD, Western Digital and Foxconn stand out as vendors with established local teams, but they are still dwarfed in headcount when compared to other mainstream IT manufacturers.

Pavan Gupta, MEA director at Samsung and Western Digital distributor eSys, says it simply isn't practical for most components vendors to establish local operations. "You have to bear in mind the scale of the market," he reasoned. "There isn't one assembler out there that is producing 10,000 units a month."

Rashwan Arabi, general manager at Dubai-based memory and motherboard distributor Computec Class, wishes more components vendors were present in the market as it would help them better understand sales dynamics more comprehensively.

"Looking at the Middle East in the same way as the US or European market is completely wrong because the consumption and needs are different," he commented. "If vendors are really active inside a country then it is certainly an advantage rather than an obstacle," argued Arabi.

But Hesham Tantawi, boss of hardware components distributor Asbis' Middle East and Africa business, contends that local presence is not needed if components vendors know how to interact with the channel.

"Vendors that have changed from looking at sales-in to supporting the sales-out of the distributors are the ones that will increase their market share and presence in the market," he said.

While the momentum of wider IT market growth is poised to spur the components sector to greater heights, it's clear that channel players face a number of pressures that cannot be discarded. Even making money from the two most classic PC components - CPUs and hard drives - is no easy task.While this is not exactly a new revelation, the increasing globalisation of the market, which sees the region competing with other hubs such as Amsterdam and Singapore, means conditions are uncompromising.

It's no coincidence that Dubai-based market casualties of recent years, from Fortex-MID to Disk and Drive, all plied their trade in the components channel.

Whether the exits have been fuelled by the slipshod credit policies of distributors, the ineffectiveness of vendor partner programmes or merely the brutal cash-consuming culture of the components trading business, the perils of the market are there for all to see.

"You will always have the big volume movers and today we still see them in markets such as Saudi Arabia, but we have got rid of a lot of them," claimed Hamidaddin at Empa.

"Several of them have disappeared because of volume buying. It can work if problems don't emerge, but when a problem does come up they often can't get out of it."

Even highly-established distributors that know the market back to front admit that there is a fine line between success and failure. Sanjaya Adipathy, channel sales manager for the components division at Sky Electronics, says distributors face a challenge to maintain the balance between rapidly-changing technology and sales-out at the same pace: "Due to this and other reasons, the components distribution channel in the region is forced to operate with low profit margins. With operational costs rising to sky-high limits, distributors face an uphill task to invest in the bulk import of components and storage, and to resell them within a minimum timeframe," reflected Adipathy.

Antoine Harb, business development manager for the MEA region at memory vendor Kingston, agrees it is a tough business. "The only category that I think is making any money is retail because the minimum margin requirement for some of them is 20% to 25%," he said.

"Sometimes they'll accept 15%, but this is the minimum they'll drop to, whereas distribution is happy to make 2% or 3%."

Some commentators claim that the battle is becoming so fierce that distributors and traders are now clashing over customers. Muhammad Yaghi, general manager at House of Memory and Processor (HMP), supports that view, and says that the company has started to face competition from the distributors themselves.

"Previously we had the privilege of supplying overseas and it wasn't easy for those customers to get in touch with the distributors in the Free Zone," he explained.

"But the distributors have started contacting them and in some cases even given them credit. We are now having to deal with smaller wholesalers outside Dubai rather than the big ones purchasing containers."

The rapid growth of the notebook market remains a particular concern for components suppliers as the Middle East mobile PC space is dominated by multinationals.

The global brands are able to call upon direct purchase agreements with the primary components manufacturers, which invariably means less business for local authorised distributors and traders. Tantawi at Asbis admits it is having a pronounced impact on the market. "If the expected growth of the components market is 20%, then we are actually only seeing 10% because of the rapid notebook growth," he said.

Vijendra Singh, deputy general manager for IT distributor Almasa's components division, insists those capable of demonstrating a complete component solution will gain an edge over competitors specialising in selected product segments.

"When demand comes from a whitebox PC or an upgrade, the end-user will look for a one-stop solution," he said.

"This is where the components channel will play an important role in configuring the PC as per the customer need. The channel will also be able to offer a value add by providing additional features which the customer may not be aware of, or which can help the customer for his future applications."

One characteristic of the market cited by several sources is the preference for older and cheaper components at the expense of newer technologies being pushed by the vendors.

One hard drive source says that it is still seeing demand for IDE interfaces even though SATA has been introduced in the market at similar price points. "Now we have a situation where people are paying more for IDE than SATA," said the source.

Kingston chief Antoine Harb admits it is common for customers to purchase value RAM to upgrade their branded machines because it is cheaper than buying branded memory, while one components traders bemoaned the number of aging CPU lines it now has to carry just to ensure it doesn't lose business.

Vendor distribution strategies are also poised to have an enormous bearing on the way that the Dubai-based components market evolves. The growing inclination for local, in-country distribution would suggest that Dubai's position as the dominant force in components wholesale could be reduced in the future - assuming vendors bypass Dubai and ship directly to the distributors in these countries.

With the 5% components duty waived in markets such as Saudi Arabia, traders claim it is now just as practical to source components from Hong Kong and Europe.

"Dubai used to play an important role as a regional hub, but the dominance is decreasing," insisted Singh at Almasa.

"With the unified customs in GCC, goods are directly getting shipped to major markets like Saudi Arabia, Kuwait and Egypt. For small markets like Africa, Lebanon, Jordan and Bahrain, Dubai will still play an important role because channels from these countries prefer to consolidate their shipments as per the need."

Kingston employs local distributors in Lebanon, Jordan and Egypt - where a blossoming local PC assembly market still exists - but refuses to admit that it means the role of its Dubai-based partners is diminishing.

"Most of our distributors located in Dubai are doing distribution from Dubai to other GCC countries, which is why Dubai is still important to us," he argued. "This is where the product is flowing from. We cannot ship directly to these countries so all the shipments come from the UK to Dubai, and from Dubai they go elsewhere in the Middle East."

Even when in-country distributors are hired by vendors, Dubai tends to remain in the equation. Egyptian AMD distributor Quest, for instance, requests that its consignments are shipped through Jebel Ali where the company operates logistics facilities.

However, AMD's regional distribution boss Abdallah Saqqa insists that is unlikely to be the case in other territories.

"If we sign a distributor in geographies like North Africa I pretty much doubt that we would ship through Dubai because it doesn't make sense," he said. The future for the Dubai-based IT components channel still looks assured although that doesn't mean it is without its dangers - but that's something which distributors, traders and re-exporters should be well aware of by now.

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