Menace Continued
The entry and the quiet exit (with a huge cache of payment defaults) of fly-by-night operators continued in the business. This trend to default and decamp was not just limited to the metros alone but in the year gone by even smaller towns saw a number of such cases. Will it stop in the near future? Not likely, say analysts and distributors in the trade. Despite the fact that all in the industry recognize this real and present danger, not too many results to curb the same have come out in the past. The obvious question was why?

The industry and the trade have been cumulatively responsible for not erecting any barrier to entry. So if scheming minds wish to get into the trade, the financial outlay could be close to zero. Its effect gets amplified for a couple of reasons. One, the fierce competition in the trade and allows for easy access to credit. Two, the concept of geographic exclusivity being granted to a dealer is a concept as alien to this trade as is the African elephant in India. “Whether it is FMCG or consumer durables, geographic exclusivity, even though limited, coupled with some kind of entry and exit barriers bring sanity to the trade,” says an industry watcher.

Tightening the Purse Strings
Distributors developed mechanisms to ward off this danger, as the only way to survive was to learn to live with it, they reasoned. The most oft used mechanism was extremely tight control of credit. Multinational distributors have got down to business without any credit at all. The Indian distributors continue to pass credit, but at much stricter terms. Regular partners get seven days credit and for very special partners the limit extends to 14 days and nothing beyond. The impact on business has been clear. “Business has been better as payment defaults have come down,” says Rajesh Goenka, division head, Rashi Peripherals. Echoing the same sentiment, Sanjeev Krishen, chairman, Iris Computers, says, “The situation has seen a marked improvement.”

Some organizations have adopted techniques beyond just credit limits. Says Neeraj Chauhan, director (global operations), eSys Distribution, “We have a global credit risk insurance policy that covers all our transactions bigger than a certain amount.” While some of these insurance companies don’t operate in India yet, companies have worked out some mechanisms to keep bad debts under control. “A bad debt of even half a percent can erode profit margins by as much as 30%,” says Naresh Kholsa, director, eSys Distribution.

Cellular Phones: A Natural Extension
The HCL Insys-Nokia association is an old, tried and tested partnership now. But there have been others who have taken the cue from it. The biggies of distribution like Ingram Micro and Tech Pac tied up with Samsung and Panasonic for the distribution of their range of mobile handsets. Iris tied up with Motorola for distributing its products in the northern part of the country. eSys claims to have made BenQ one of the five top selling cellular phones in the last six months and Salora also banked on Sony Ericsson to provide it that extra cushion.

The impact of HCL (and Nokia) on distribution is immense. Apart from the fact that over half of this IT major’s revenue now comes from handsets, is the model and the margin. In IT, with a few sub-distributors who then have the volumes to negotiate prices, margins and credit terms, the top-tier distributor retains 2% or less, with another 8-10% being distributed down the line. HCL however works with hundreds of dealers as its second tier. Buying a handful of phones, a dealer has little leverage, and certainly no case for 30-day credits. It’s cash and carry. And that leaves HCL with cash in hand and an estimated 7% or better margin, and just a few percentage points are shared down the line. Another big difference in the handset business is that handset stocks have shorter sales cycles, and need a far greater number of outlets.

Solution Selling: A Panacea?
The other hedging mechanism that distributors resorted to was getting into solution sales in the hope of garnering a larger share of business from the client.

Since the ability to add value in a solution sale is higher, the cash registers are expected to ring louder. But the announcements seem to have captured more media space and mind share than any real activity on the ground, barring a few exceptions. “In reality it has been more talk than work,” says Chauhan of eSys. The foray of distributors into the solutions business is more an aberration from global trends where the main role of their brethren is to enable the supply of material.
“To be able to engage the customer in a consultative selling mode, it is imperative that the understanding about processes and customers’ business needs be immaculate, thereafter the ability to create a value offering that fulfills those needs better,” says Lakshmi Narayan Rao, assistant director (marketing OSS value), Canon India. And this is the precise skill that is in short supply as far as distributors are concerned.

“The distributors’ sales force is tuned to sell products and therefore, they have a product mindset, and it is unlike the service mindset,” says an industry analyst.

Building the skill, either organically or inorganically, is rather expensive. Add to that longer customer buying cycles that make the going for distributors rather difficult. Moreover, the solutions space too is crowded with companies that not only have captive skill but also understand the dynamics of the business better.

“No really successful solution provider has emerged out of a distributor,” notes Chauhan. The ideal way out that distributors have to come to learn is to build skills along a very narrow and focused domain.

This strategy has seemed to work and has brought the much-needed bottom-line relief to a few. Redington, for instance, has done well with its after-sales service initiative. Its service revenue for the last year was nearly Rs 27 crore.

Tech Pacific, on the other hand, is focused on adding value to the Unix boxes it sells, and Iris has built a training division that specializes in imparting training only on Microsoft and Symantec products.

Disti Brands: A Dying Breed
A pair of sneakers emblazoned with Adidas in red earns a premium. While this sounds simple and makes a perfect business case, it’s not as easy as some popular business schools texts make it out to be. And while yearning for some more margins, distributors have burnt their fingers with this one too.

Ingram Micro’s Vesta seems to be keeping its head above waters while the others are sinking. Iris’s foray into the PC market with their Iris PC did not meet with much success either. Says Krishen, “The success and failure is determined by spares. The supply of spares is a huge problem unless you are a manufacturer yourself.” Stocking of spares is a cause of financial drain.

Moreover, with the likes of HP offering a sub-20k PC, the aspect of eroding margins hits the distributor again. Aditya Infotech’s foray into the peripherals market with the launch of its Crusader brand is not much of a success either.

Rashi Peripherals’ RPTech PC is a niche brand of sorts as the company sells it only to the government. An exception to the rule is likely to be eSys Distribution. eSys calls itself a component distributor and looks at the entry level PC as just a packaged bundle of these components. “Our objective is to commoditize the entry-level white box,” says Chauhan. The company wishes to make this Linux-based whitebox the entry PC in developing markets and the second or the third PC for the developed country resident customer.

Working with an ambitious target of a million ePCs by 2004 end, the company has invested in two captive assembly plants, one each in India and Dubai and also works with two contract manufacturers. The initiative, however, is being treated with scepticism within trade circles. “It is unlikely to be a success,” says an official with a rival distributor. The aggressive pricing and promotion efforts of the vendors are eating into the assembled share and therefore ePC will also bear the brunt. “Even a low-cost branded PC appeals to the aspirational self of the customers,” adds an official with a rival distributor.

“And this is something that no assembled or disti brand can offer,” he says. Experts say that a brand clearly stands for a value proposition and most distributors have misplaced priorities in this context. “We will continue to position the ePC as a white box,” says Chauhan. “Our ability to service this white box will come from our global tie-ups for sourcing and this will enable us to extend support to our customers,” he adds.

Another source of likely revenue for the distributors could be by moving their focus from an entry-level box to high-end PCs personalized for very specific needs. For instance the branded PC vendors don’t have an offering for gamers.

Addressing the well-defined of such niches can help the disti-brands keep their heads above the turbulent waters. The survival kit for distributors in the year ahead, therefore, must include financial robustness, market depth and reach, a regional spread, and focus and knowledge to meet the needs of the key customers.

Mohit Chhabra in New Delhi