As industry pundits continue to question Ingram Micro’s commitment to Australia, the distributor keeps powering on claiming its management problems are behind it and announcing a renewed battle for the number one distribution spot in the country.
Ingram’s regional head honcho, Hans Koppen, says Ingram is ready for more aggressive growth. Koppen discusses the IT market and Ingram’s acquisition plans with ARN’s Editor-in-chief Tamara Plakalo.
ARN: The Australian channel has undergone a significant rationalisation of late, decimating both the distributor and reseller ranks. Given that revenues are down year-on-year and the consolidation is not showing any signs of abating, the question on everyone’s lips is whether Ingram Micro will continue to support its Australian operation?
Koppen: I’ll answer this question from a global and regional perspective, and then from that of the Australian operation. We are the only global distributor who has presence in the region and we have done that as a strategy. Most of the presence that we have in Asia-Pacific came out of the acquisition of Electronic Resources Inc. We paid a substantial amount of money for that acquisition — several hundred million dollars. I cannot tell you how much of that was allocated to Australia, but it was a substantial investment for Ingram Micro. Another significant investment was the acquisition of ITG. Secondly, we were a newcomer to this market. Our focus in the beginning was very much in the components space, so we basically had to create a place for ourselves in the market in the more traditional desktop/peripheral segment. When you’re entering into a market that is already functioning, that is not easy. We have been working very hard over the past few years to do that. Again, it is an investment in people, technical support and so on. We also brought our own ERP system into Australia, the same system that manages some $25 billion of our business worldwide.
ARN: Weren’t there some problems with the implementation of the system that had a significant impact on Ingram’s early days in Australia?
Koppen: There are always problems or challenges when you implement a system, because, first of all, you need to adjust it for the market. Secondly, it is a terribly complex system so you always have problems with implementation and [the system] needs to settle down. But, again, this is a system that manages billions of dollars worth of business and millions of transactions a day, so the system itself is solid and robust. That was another big investment. Then we attracted more and more vendors and invested in building up our business. We had two major locations – in Sydney and Melbourne, that was basically a result of these acquisitions.
ARN: But you don’t have a centre in Melbourne any more . . .
Koppen: No, and that made a lot of sense because we have been growing rapidly. We grew significantly last year, so our growth is continuing, but it didn’t make a lot of sense for us to have half the operation — the sales part — in Melbourne and then the upstream supply chain, marketing and vendor relations here. In this business you also need a tight integration of people, so we decided it was time to move our base to Sydney. This will increase our efficiency, improve our functional integration. We’ve been consolidating our distribution centres and are continuing to do so all over the place. That was another investment we made. As you know, we trying to close in on Tech Pacific and we do not want to wait forever to close that gap, so we are open to investing more to accelerate the catching up process.
ARN: When are you going to “close the gap”?
Koppen: Short term plan — two years, long term plan — three years. Obviously, this is not going to happen through organic growth . . .
ARN:. . .which obviously means growth through acquisition . . . Do you have your sights on anyone at the moment?
Koppen: We have a few companies in mind but that will obviously depend on their owners. We are looking at areas where we are not well represented. We did a few things that cannot necessarily be called acquisitions but are effectively that — like CHA, so we are now the largest Toshiba reseller in the country. Storage was another area where we did this, but on a smaller scale – it brought us specific knowledge, but not a forward leap in terms of revenue.
ARN: Yet a number of industry figures are questioning Ingram’s willingness to invest more in Australia, given that the significant investment you’ve already made has not necessarily delivered the desired ROI.
Koppen: We will continue to invest in this region because it gives us the highest growth potential. We are definitely committed to Asia-Pacific. Secondly, we are also profitable in Asia-Pacific. That was not the case when I came on board a few years ago. We’ve crossed that hurdle. Yes, you can ask — why Australia, because Australia is not China or India. But we also see more and more consolidation in the vendors’ distribution channels. It has already happened in the US and it is happening in Europe and in Latin America, so what does it all mean? Companies like Cisco, IBM, HP are looking at reducing their importance because they want to further integrate their supply chains and they’re looking at having the least number of partners globally and regionally.
ARN: How does the Australian channel compare to the rest of the world in this context?
Koppen: It was and still is more fragmented for two reasons — first, there’s no large Asia-wide distribution system in place at the moment. Secondly, the distances and enormous differences in currencies, cultures, and legal systems has made it a more locally managed business. But the vendors are taking greater control in the region, consolidating their channels and having tighter control over them. The other thing peculiar to Australia is that there is a large distributor here that I would call a ‘lost soul’. They have a parent that doesn’t want them, they have been for sale for two-and-a-half years now and nobody wants them. You wonder how long you can continue and keep employees and associates motivated — not knowing where the future is.
ARN: So you see an opportunity there?
Koppen: We see an opportunity, obviously! Express Data, Lan Systems are having problems at the moment for different reasons and this creates opportunities. As you know, today we don’t represent Cisco, although we are a multi-billion dollar customer of Cisco world-wide. I see the time coming nearer when we can step in there. All those things will help us move forward and accelerate our growth. Let’s say that better product makes a better margin opportunity.
ARN: Your experiences with the acquisitions of ER and ITG were described as difficult and cumbersome, and some of the early problems Ingram had in Australia were attributed to this. How is the componentry side of the business doing right now?
Koppen: Take Intel, for example. Asia-Pacific is now their largest region and Ingram Micro is their largest partner in distribution in this region. We have grown that segment by 20 per cent compared to last year. That is bigger than the growth of the channel itself for Intel. We are still improving our position there and we are doing extremely well with Intel, but also with Seagate and Maxtor, where we keep getting more traction. On the other side, it was a battle to get into this market and, if you talk about the actual problems, yes, we’ve had problems because ER was a very entrepreneurial company that started spreading around the region rapidly without having the infrastructure and the systems behind it to do it. I came here in March 2000 and the goal was to basically do a good integration of that company. It took us until about the last quarter of last year to do so. Now we have a safe platform to start accelerating growth again and put those problems behind us. However, the major issue was not in Australia — Australia was more about poor management problems a few years ago. We’ve fixed that, but, interestingly enough, when we were fixing it, Tech Pac went into the same cycle where it had a management issue and they took their eyes off the ball. For us, the biggest problem was actually in China. That is a very complex market because a foreign company cannot own a distribution business there, so we had to find a solution to that by finding a partner. We have completely changed the situation there now.
ARN: Coming back to Australia, has the closure of your Melbourne office affected your business and reseller relationships?
Koppen: We have not closed down our business in Melbourne. We just don’t have presence in Melbourne any longer. The reality of this world is that rationalisation is driving cost out of the supply chain. In the past, there was a lot more local presence and that was required because of the complexity of IT and people being unfamiliar with it. IT has since become so commoditised and volumised that local presence doesn’t really have any meaning any more. If you look at our business in the US, 70-80 per cent of our shipments don’t even touch our resellers but go straight to their customers. What is more important to resellers is that we deliver on time and correctly to end users. Our resellers are moving towards learning how to provide service and integrations services and want us to take care of the delivery side of business.
ARN: One of the most significant events of the past 18 months has been the HP-Compaq merger. How it has impacted business in the channel?
Koppen: It has had a significant impact on the channel. You’ve got a lot of product floating in the market. The first thing was to try and figure out what will continue and what will not, as well as pricing issues, margin issues, oversupply issues. Then HP started to tighten terms and conditions on price protection and payment terms: you paid Compaq within 60 days, now you pay HP within 30 days. That’s a big impact. I would say that they have done a good job in cleaning the room. At the same time, I have seen IBM take advantage of the situation by starting to push hard into the SME market and through the channel. In certain places they took market share. HP is certainly facing a challenge on the PC side of things. They have to fight off Dell and to some extent IBM. If I listen to my US colleagues, a lot of resellers are very upset by the change in credit terms and have shifted their business to IBM as a result. In this region, due to consolidation in distribution, the impact has not been that significant, because even if the total pie has become smaller, our share is growing, even though some of the targets they have been setting for us were not always doable.
ARN: Finally, given the current state of the industry, the question on everyone’s lips: is there a shining light somewhere on the horizon?
Koppen: There is always a shining light in IT because this stuff is only at its beginning. I mean, we are only starting out [as an industry], and it’s already one of the biggest businesses in the world. So, if we cannot figure out a way to have a good business in this market, there must be something wrong with the way we’re doing it. We are witnessing a transition where everything is becoming place and location-independent, and mobile. For example, there is an enormous amount of opportunity in wireless, but you have to enable yourself to do that.