Value addition has become the name of the game in the struggle to get bigger
and better in the distribution business, a surefire strategy to get that edge
over the rest
Four years ago, when Tech Pacific, now part of Ingram Micro, created a value
division within its organization-the first of its kind for any national
distri-butor-the feedback was more sceptical than positive. Some characterized
the decision as the company's "moving away from its core expertise".
However, with falling prices and margins, there was no better way for the
distributor to ensure profitability. Others didn't take long to follow suit in
setting up their own value divisions: Micro, SES Tech, Neoteric, Iris and Rashi
Peripherals.
The last few years have seen IT distribution take on a new avatar as pressure
on margins increased: the entire channel right from Tech Pacific at the top to
the smallest reseller at the bottom of the distribution chain, took another look
at their business model. The result was the transformation of few top national
distributors into value-added national distributors.
Today, of the 12 truly national distributors, at least eight are into
value-added distribution. "Distributors are seeing the benefits of this
model and trying to build one that has higher margins," said K Jaishankar,
CEO, Tech Pacific. For some, it is adding a basket of products that ensure high
value addition. For others it is providing pre-sales and after-sales support and
technical know-how on integration of the products.
Yet others specialized in specific product categories, while a few have
chosen to provide industry vertical expertise. Setting up proof-of-concept
centers and engaging certified personnel within the organization are other ways
of how distributors have added value to their business.
"A value-added distributor enabled systems integrators in providing the
right solutions to customers. It is in no way com-peting with the solution
provi-der by doing direct business with buyers," said Jaishankar.
"Selling value products as a business is surely growing. The market is
demanding value proposition in every products they buy. In coming years, selling
value will play an important role than selling the products," said Krishna
Prasad, CEO, SES Technologies.
Moving away from the traditional "push" approach of a box mover to
the pull app-roach is not an easy task.
According S Narendran of TVSE, most distributors have not taken up
value-added busi-ness consciously, but have been forced into it because of the
nature of the products and principals they have tied-up with.
Some traditional solutions providers, who usually don the role of a value
provider, have their doubts about following this model though. Gaurang Bhat,
Director, CDP India, a Mumbai-based solutions provi-der informed, "There is
no doubt that 'value-addition' is the need of the hour. But doing both
volume distribution and value distribution is not easy."
While vendors evaluate a distributor on the basis of his reach, logistics and
financial capabilities, there are many companies who do not have their official
presence in the country. For such vendors it becomes all the more impo-rtant to
have distributors who will do that extra bit to push their brand. In such cases,
distributors are the ones on whom systems integrators can depend on for the
know-how, and who can in turn pass it on to customers.
Integration to Provision
While distributors wear the value provider hat, another trend that has
emerged in the last couple of years is the shift in the business of systems
integrators. Just like the "value-addition" part that happened in the
distribution business, smaller systems integrators have scaled up to become
end-to-end solutions providers (SP).
The strong SIs with the right people and financial strength have
metamorphosed into giant companies with thoro-ugh ICT expertise. These include
Allied Digital Services, Ontrack Solutions, Orient Technologies, Omnitech
Info-solutions, SK International, Wysetek Technologies, Sai Info Solutions,
Accutech, SK Inter-national, KayBee Infotech, Team Computers, Nirmal Data-comm,
Lauren Technologies, and many others who have created a niche in providing
end-to-end solutions; be it networking, storage or security solutions.
"The thin line that diffe-rentiates a systems integrator from a solution
provider will soon disappear," said Rajeev Mittal, Director, small and
mid-market solutions and partners, Microsoft. According to him, the entry of the
latest techno-logy is bringing in newer players to the market, thereby
increasing competition. This is also making existing players invest in the
skill-up process. "However, what will drive each one's business is how
efficie-ntly they take care of the custo-mer," said Mittal.
Any SI getting into the solu-tions business will have to learn patience and
gear himself for effective response manage-ment, efficient servicing
capa-bilities through onsite support, sharing knowledge through continuous
training of perso-nnel and educating customers.
Consolidation at the Top
All that talk about consolida-tion in the distribution indu-stry came to a
head with the most important event of the year in the history of IT
dis-tribution-the announcement that Ingram Micro had acqui-red Tech Pacific.
The complete integration of the two com-panies is expected soon.
With this development, channel partners are a confu-sed lot. They are worried
about the credit policies of the new entity. Resellers now have fewer options in
terms of being able to pit one distributor against other, helpful in bargaining
for better business terms.
However, Jaishankar of Tech Pacific expects the impact of the merger to be
positive, assuring channel partners that the new entity will continue to give
them the highest level of commitment, just like it used to before. Whilst this
happens, other smaller distributors are hoping to become strong players in terms
of finding favors among principals.
Though mergers and acqui-sitions have become a way of life outside India, the
same may not happen frequently here in the channel business, purely for the
reason that existing companies here do not have any real value to offer, either
in terms of R&D capabilities or a unique asset base for acquirers.
However, what industry obs-ervers feel is that weaker distri-bution outfits
may get weeded out. "But, this surely is not going to be trend," said
Tejas Shah, Zeta Technologies. Che-tan Shah of Xpress Computers feels
consolidation is good.
Squeezed between the consolidation of distributors and the shift of SI and
resellers to solutions providing are tier-11 resellers, also called
sub-distributors or master resellers. Industry experts believe that the going
will get tough for this tier.
"Sub distributors are certa-inly under jeopardy as they do not bring in
any significant value-addition other than stocking/availability and as the large
stockists today follow a direct marketing model, there is no space to co-exist.
Rese-llers, on the other hand, will be conduits to reach the user and will
therefore flourish. Perhaps they will be forced to specialize in select
goods/segments to sustain their presence as the situation evolves," said
Sujit Singh of Dax Networks.
Echoing the same senti-ments Chetan Shah said, "The number of people in
this tier will decrease. Financially stro-nger companies will survive, while the
remaining will choose to close down because of the thin margins."
Resellers like Creative Com-puters and Pacific Infotech, Mumbai-based
companies that have traditionally been hard-core resellers, have scaled up to
involve SI activities in their organizations. A few others like Radiant, SP
Technologies and JayDee Electronics have gra-duated to become master resellers
for various brands.
A few master resellers aspi-ring to become national distributors are also
slowly upgrading their infrastructure and logistics. "From being a city
player to become a nati-onal player is not an easy task." Said Narandren of
TVSE. Today most national distributors have a network of at least 30 bran-ches
across the country.
Acquiring these numbers required enormous effort and patience from master
resellers and sub distributors.
The market also saw the arrival of regional distributors (RDs), but this
concept did not gain popularity, with vendors sticking with the ND model for
their distribution require-ments. The RD model was envisaged as a
"kick-starter" for many small resellers to grow big. LG Electronics'
policy of appointing RDs throughout the country helped them establish a name for
them-selves in the market, with many never-heard-of resellers getting a chance
to come in to main-stream distribution.
However, LG's policy of continuously evaluating its RDs on performance saw
the exit of non-serious players and the entrance of newer upcoming resellers.
Beyond the Metros
Another important trend that has become very pronou-nced in the last two
years was the emergence of smaller towns and cities as potential markets. These
markets are growing at a good pace, tho-ugh the metros are still a better place
to get volumes.
"In the midst of high competition in the metros, distributors are
proactively trying to reach out in smaller cities and towns as these areas
represent high growth and a untapped market segment for many of them,"
informed Shah. Sujit Singh also agreed, "Distributors are steadily making
investments in all the necessary resources to elevate and manage themselves to
meet the end-to-end solutions of end-customers."
Over the years, most NDs have created a presence in most big cities to
leverage this opportunity. However, the top 12 NDs put together cover only 30-40
percent of these growing cities. "About 60-70 percent of the market is yet
to be explo-red," said Narendran. Which essentially means, NDs have a long
way to go. "The sooner they explore these regions, the better their chance
to enjoy the fruits of these untapped markets," he added.
The survival-of-the-fittest process means ambitions run high too: there are
10 or 12 national distributors today, with a set of over 3,000 sub-distributors
aspiring to bec-ome national distributors, followed by a large number of
resellers waiting to become master resellers, often inching towards systems
integration hoping to become complete end-to-end solutions provi-ders. And
survival will devolve only upon the ones with the most to offer.
Nelson Johny in Mumbai