Editorial: Changing channels

Editorial: Changing channels

For some people in the channel, that old Chinese adage “May you live in interesting times” must seem more like a curse than the promise of an exciting business journey. And the channel times surely are interesting right now.

While the HP distribution saga continues to fold for some and unfold for others, the industry is also awaiting the results of Cisco’s distribution restructure, which is due to be announced in the next few weeks. Cisco is not hiding the fact that its new game is all about a lean and mean distribution machine. This has already seen it rationalise its channels globally under the careful watch of vice-president of global distribution, Paris Arey.

Rumoured to be heading down under for the end-of-month distribution showdown, Arey’s focus on Cisco’s supply chain integration may be touting value-added distribution as its official mantra. Yet given Cisco’s recent push into the SME space, it stands to reason to believe that, in Australia, the vendor will look for a combination of volume and value-added distribution. Following this logic, in Cisco’s current distribution equation, the variable stands for the number of value-added distributors in the vendor’s line-up.

The next few weeks will be particularly filled with uncertainty in LAN Systems’ Artarmon camp, given the company’s significant reliance on its Cisco business and the two companies’ recently unstable relations. Whoever the winners are in the upcoming shake-up, times will certainly become ‘more interesting’ for the loser looking for a new business model in a rapidly reshuffled distribution space.

If any indication is needed of how tough the distribution game has become, you only have to look at last week’s announcement from the US where Ingram Micro expects to end the third quarter with a $US20 million charge thanks to the Chapter 11 bankruptcy filing of one of its largest customers, reseller Micro Warehouse.

The bankruptcy protection filing of the reseller drove down Ingram’s share price immediately — by almost $US0.50 per share and more is yet to come — depending on the fate of another $US12 million owed to Ingram by Micro Warehouse’s European operations. Commentators in the US noted that the example of Ingram, which was ‘writing off about 10 years worth of profit’ in one day, was not going to be isolated and, unfortunately, was indicative of wider industry trends.

There’s much to be said for the size of the US market and the level of exposure that sets the experiences of American and Australian distributors apart. Most local resellers, whose size roughly corresponds to the size of Micro Warehouse in the context of the US industry, deal directly with their major vendors. Yet recent distribution realignments of a number of tier-one resellers across the industry indicate that the current imperative of ‘redistributing’ the debt exposure is mostly played out at the distribution level, where the changes seem to be having the most radical impact.

With vendors cleaning up their credit and tier-one arrangements, and insurance companies (read: a company) getting more stringent in determining credit levels, there is indeed some space for an entirely new channel proposition — a channel credit provider to mitigate some of the market forces that have been at play over the past couple of years. Hands up anybody?

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