Can you hear a munching sound? It's the sound of global rationalisation - big international players bullying their way into the market - keeping Australian distributors, resellers and integrators awake at night, fretting about their strategies. Why is it happening, who is most at risk and what can they do to guarantee a good outcome from a volatile situation? Peter Young investigatesWhether you make cookies, distribute computer products or offer network integration services, the force is already in your neighbourhood - the force of economic globalisation and rationalisation, that is.
A parade of huge companies is marching into various areas of Australia's distribution and integration sector, all driven by the same imperatives. Think of names like Ingram Micro, Synnex, Avnet/Hall-Mark, Comwest and Lucent. And the list is about to get bigger in the next few months, with market watchers tipping another three arrivals in the integration sector.
Thanks to a record-breaking US eco-nomy, large multinationals are flush with funds. But pundits are calling for a major correction of the US stock market around Christmas, and the bulk of the world's $30 trillion economy resides outside the US.
So overseas expansion offers natural attractions, according to Gartner Group technology marketplace consultant Mitch Radomir.
"Asia is not looking rosy right now. But when they do their sums, Australia looks very good. It has a transparent economy, triple A rating, a low inflation rate and an educated labour force. It is also a good stepping stone into Asia when that region starts to recover.
"In addition, Australia is a good testing ground, as evidenced by the fact it has more vendors per capita than any other country," he said.
When a multibillion dollar multinat-ional distributor or integrator decides to move into the neighbourhood, "everyone becomes vulnerable because the big internationals are so well capitalised", Radomir told ARN.
Some of the billion-dollar brigade may follow the strategy of building up quick market share through acquisitions. That could appeal particularly to large integrators looking for a service-led focus here.
Others are happy to start from scratch, exploiting their global distribution agreements to prime the pump, especially if Australian takeover possibilities don't offer product sets that match what they are after.
Either way, the Australian IT distribution channel has never been so volatile, so poised to go in a number of directions. The pressure is on distributors and integrators to lift performance, either to present themselves as tempting targets for acquisition or to strengthen themselves against the arrival of a big player.
"There would be a number of smaller distributors trying to pretty themselves up, but the reality is that what any multinational is looking to purchase would be good people and the infrastructure to get them into the market quickly," says John Shein, director of second-tier distributor Express Data.
"You have to be agile, quick on your feet and, most importantly, deliver product to your resellers in a timely, cost-effective manner," he said.
In the reseller market, "it is the value-add you bring to your customers that is important, whether it is desktop value-add, network integration or system integration. The good ones will thrive and the others will find it tough," according to Shein.
John Johnston, managing director of top HP reseller and network integrator Centari Systems, believes there is plenty of scope for Australian companies to pull up their socks. "On the integration side, our experience is that standards of service are just awful. In terms of delivering what the customer thinks it is going to get, the channel bears a lot of responsibility for over-promising.
"In terms of who will be acquired, companies showing high returns on equity would be more expensive to buy but that wouldn't be an obstacle for multinational companies." Nor would poor performers fall outside the envelope of attention if their customer set is what a multinational is looking for, Johnston suggests.
"Anyone who graduated from Year 11 can fix the financials. The multinationals will buy companies with the most interesting customer mix then roll in their own value-add and methodologies and services. The ideal target would be a company with a whole bunch of big customers that didn't make any money last year. That kind of company will be available at a discount if purchase price is based on projected earnings," he said.
Overall, Johnston welcomes the arrival of the internationals. "I would not want to see them stay out. I am all for having the best of class here in Australia. If this improves the industry, then it is great for everybody."
The territory king
Keeping a sharp eye on developments is Ray Shaw, managing director of Intermedia. A Queensland-based distributor company claiming annual revenues in the vicinity of $10 to $15 million, Intermedia could be classed as a third- or fourth-tier distributor.
Shaw prefers to label it a "territory king". He notes it has relationships with 800-plus dealers in its territory, knows its market, holds mobile stock and can adjust quickly.
To supply its customer base of component assemblers and resellers, it buys some items from manufacturers and others from the bigger distributors.
Distributors who fit that category hold key cards if a full-scale shakeout of the distribution world is under way, Shaw claims. He reasons that major players like Ingram Micro and Tech Pacific must opt for a centralised distribution model based in Sydney or Melbourne because supporting 10,000-plus dealers by themselves would demand massive expenditure on infrastructure. Nor can they offer intimate knowledge of each product in the smorgasbord of lines they carry.
Such support flows more naturally from Intermedia and others in its peer group of regional territory kings. "I come back to local knowledge. It is why Dick Johnson wins at Lakeside and loses at Bathurst," says Shaw.
It makes little sense for an incoming major to try and combine a few hundred dealers from each of three or four regional resellers into a larger, less personal operation, he claims. "They would be better off putting sub-distribution arrangements in place which allow us to act at their arms and legs locally, which is exactly what we have been doing with Tech Pacific for a year."
For all the above reasons, "I feel very safe in Queensland", Shaw says.
Shaw doesn't believe the Australian pie is big enough to sustain even four major distributors of Tech Pacific's size. But a tooth-and-nail battle for a profitable place in the tier-one sun by four or even five serious contenders will produce ultra-competitive prices for quality products in the short term. That spells problems for "the very small guys who are single product distributors or the backyard importers who claim to be distributors", Shaw says. "I really feel they are the ones who are going to be shaken out."
In Shaw's analysis, the other layer most at risk from the forces of rationalisation and globalisation would be second-tier distributors such as Express Data. "There is only a finite number of brands on the market and major manufacturers look for the strongest distribution methods," Shaw says.
"At the moment, Tech Pac has things all to itself while Express Data has picked up a few second channel products like Xircom modems. If I were Xircom, I'd see Ingram Micro coming in with a product list that looks like a subset of Tech Pac's and I'd give my business to Ingram Micro."
Express Data's Shein takes a different perspective. "That scenario is unlikely to materialise as long as a distributor is doing a decent job for a vendor," he says. "Depending on how successfully a distributor is addressing that question, vendors are loath to drop a channel just because other channels become available. Why would a vendor want to drop a successful channel for an unknown vendor trying to prove itself?"
Is niche better?
On the other hand, anyone in the volume distribution game who isn't turning over "in excess of $200 million or $250 million will find it difficult to go forward unless they are a niche distributor", Shein believes.
"They will have to be essentially agents for a non-volume product whose vendor requires distributors because it doesn't have its own infrastructure. Those niche distributors will survive because global multinationals wouldn't be attracted by the revenues in that area," he said.
How many top-tier distributors the Australian market has room for is a matter of opinion.
"Right now Ingram Micro and Synnex are very much OEM assembly-type operations," Shein says. "Their strategies will depend on how they see the market.
"My gut feeling goes back to revenues . . . there is not enough room for every multinational that plays in the US market. Maybe five or six . . . I don't know."
The arrival of major overseas players is only accelerating a rationalisation process that was already well under way in the channel. Australia's relatively splintered distribution market has been caused by a geography that encourages numerous regional distributors. That clashes with the need for economies of scale in a high-volume, low-margin business model.
"As a result there has already been a fair bit of fallout over the past 24 months with distributors failing or being rationalised," says Shein. "We've seen CHA making a number of acquisitions among regional players, we've seen some of the troubles that Q*Soft encountered, and we've seen rationalisation in Western Australia. In distribution, at the end of the day you need to get big, get niche or get out."
Sometimes even the big get out, as multinational distribution giant Merisel has already shown. "Merisel came and left because they found the market here unattractive," Shein said. "While we expect a rationalisation of the channel, global organisations work within the same constraints as any Australian company. They are here to make a profit with a well-managed operation that has the right product mix and the right systems. They are not here to lose money. So they are going to think long and hard about entering the market."