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It's annus horribulus

It's annus horribulus

As 2000 draws to a close, it is easy to forget the "fin de sicle" mania which gripped the channel, and indeed the world towards the end of last year.

All hands were on deck for the final countdown, as COBOL programmers were exhumed from their nursing homes and chained to their desks for whopping pay cheques. Stock exchanges around the world were set to plunge, planes would come crashing to the ground, processors inside everyday items such as coffee makers would rise up in rebellion, sewerage plants would back up, electricity would be switched off, civilisation as we know it would come to an end.

Go on admit it, we were all a little bit concerned. Then, as the moment clicked over and we all held our breath, and . . . NOTHING HAPPENED, well - almost nothing. There was the odd report of lost or corrupted data, but overall we enjoyed the fireworks, went home, woke up with terrible hangovers and made yet another new year's resolution never to drink again.

As some chronological purists (or bores) like to point out, this time we really are moving into the next millennium. However, chances are we won't get anything like the buzz we got last time round.

Channel interrupted

Overall, 2000 can be characterised by a series of interruptions to channel business. According to David Hancock, director of Inform, there were four major events which bucked the generally expected trends.

"Y2K, GST, components shortages and the Sydney Olympics, have all bucked the normal trends," Hancock said.

Bereft of the usual peaks and troughs in sales, channel players are flying blind when it comes to forecasts. While the business market appears to have picked up in the post-GST environment, many in the SOHO and home market retail sector have been feeling the pinch of the introduction of the GST.

Twelve months ago, analyst IDC made some interesting forecasts regarding the IT business climate for 2000. Amazingly, some actually panned out, while others, like the fabled great southern land, now seem quite quaint.

IDC started by predicting a dot-com stock crash, which was not surprising, given the grossly inflated prices of those stocks at the time. When the fall finally did come, the only real shock was just how long the stocks had been growing for and the levels to which they had managed to rise to. When the bubble burst, it wiped $36 billion from the Australian stock market literally overnight and dashed the hopes of many dubious startups and would-be startups.

Classic examples of companies which completely lost investor confidence due to poor or non-existent foundations and negative (to put it mildly) cashflows were eisa, Liberty One and Solution 6, which all began to fall apart at the seams.

In the channel, the ground underneath distributors was also showing signs of instability. In the second half of 2000 alone, at least half a dozen Australian distribution companies hit the wall and others underwent serious restructuring to avert impending disaster.

And according to Ian Bertram, an analyst with research group Gartner, the instability witnessed in the distribution channel is set to continue. "We are going to see more mergers, alliances and acquisitions," Bertram said. "It's what I call the hour glass effect; you find the big players corner the market on logistics, and keep growing. Small niche players become more important and widespread and middle-size players get squeezed out of the equation."

Bertram believes distribution instability is predominantly due to a vendor-led push towards channel consolidation. Citing Compaq as an example, he said vendors would increasingly focus their energies on a smaller but more specialised distribution channel.

"We have seen some drastic rationalisations," he said. "The resellers are fairly safe because they are the point of contact with the market, but it is becoming increasing hard to justify the extra costs added by a distribution channel that can be significantly streamlined."

Roger Bushell, managing director of national distributor CHA, doesn't mince words when summing up what has been a difficult period for distributors. "This year has been all about keeping your head down and bum up," Bushell said. "It has been all about waiting for things to get a little more optimistic."

Despite the market growing by about 30 per cent, Bushell is not ready to crack out the champagne. He is wary that the difficulties experienced this year are set to continue.

At the tail end

2000 has also seen vendors steadily chipping away at reseller markets, opening direct stores as well as virtual outlets, and increasingly offering integration services on high-end offerings. Nonetheless, the channel is not only surviving, but remains strong, keeping in line with IDC predictions made at the end of 1999.

Although e-tailing as a business model has largely failed to take off, and Web developers have quickly changed their tune from B2C to B2B, vendors have largely renewed their interest in targeting markets through the reseller channel.

When share prices took a tumble in April, the "funding floor" fell out of all but the strongest e-tailer companies, and "clicks and mortar" became the new catch phrase.

Harvey Norman kingpin Gerry Harvey took the opportunity to slam online sales and e-commerce models. Perhaps because of his extensive experience in the retail sector, perhaps because he is at the helm of the largest reseller business in the country, perhaps because he is very wealthy, whatever the reason, Harvey slammed e-tailing and we all listened.

A recent and enterprising move by Australia Post and other logistics and delivery companies, may solve many of the e-commerce logistics problems experienced by e-tailers.

Remarkable shortages

Further down the channel food chain resellers, VARs, retailers, e-tailers, integrators, ISPs, OEMs and all other channel folk should be queuing to yell "we're still here".

Local manufacturers had the added headache of a year plagued by component shortages. Memory chips, hard drives, CPUs, DVDs and TFT screens have all been constrained through a lack of supply.

In late May, the Intel CPU shortage became a full-blown crisis, strangling the white-box market and threatening the livelihoods of OEMs. Major CPU manufacturers went into overdrive and managed to ramp up supply towards the end of the year. Inform's Hancock confirmed that the component shortage allowed big-name vendors to dig into the local OEM market.

"The chip shortage affected the white-box sector more than all the others, as vendors got preferential supply treatment," Hancock said. "In January, the top three vendors accounted for 50 per cent of total market. By August, when the shortage was most severe, their share had risen to 60 per cent of the total market."

A month later, Australian manufacturers were struck again by another crisis, with re-marked AMD chips surfacing initially in Western Australia. AMD went to ground and refused to talk to the media as the chips began to appear in other states. However, after a heady PR campaign and a reshuffle which brought Nicola Bond into the Sydney office as the senior marketing executive, AMD is back on track.

Just as the dust was clearing on the CPU front, networking VARs were up in arms about a reported branded Intel server shortage. However, the supply squeeze was not confined to components. The skills shortage has been reported at all levels of the industry and continues to be a concern.

Dodging the dollar

When the debate surrounding components shortages fired up in May, vendors countered claims of insufficient production by pointing out that the onus was on the channel to pre-order sufficient stock.

However, distributors and resellers alike responded that they were not large enough to hedge themselves against the effects of the falling Aussie.

The Australian dollar's dismal performance over the year has caused headaches across the IT sector. Channel companies are wary of warehousing stock bought in US dollars in case yet another downturn in the Australian dollar's value wiped out their profit margin.

By October this year, the dollar had fallen almost 20 per cent against the Greenback and a chorus of economists droned on, attempting to drown out concern that we are once again in danger of becoming a Banana Republic.

We have been told not to worry because the Australian dollar is clearly undervalued, the rest of the economy is strong, inflation remains low, the same thing is happening to the euro, a weak Australian dollar is good for exports and it only really matters if we are travelling overseas.

David Mozina's, senior fixed income strategist at investment bank Merrill Lynch, comments were typical of many financial analysts. "The fall in the value of the dollar means that international investors are basically in love with the US economy and US dollar-denominated assets," Mozina said. "They don't really want to put their money into any other country or region because they believe the US economy and US assets will outperform global competitors."

However, many in the channel appear to be losing patience with platitudes. The fallout for the IT sector has been devastating. Inflationary pressures are beginning to force prices up in an already tight consumer market.

The weak Aussie is making US IT salaries even more attractive and adding to the brain drain. Profitable Australian companies are being snapped up by US-based conglomerates at bargain basement prices, dragging even more IT profits offshore.

In the ultimate "there's a hole in my bucket" paradox, any gains to be made in terms of manufacturing and exports have been whittled away as the white-box market feels the heat from the components and skills shortage.

However, it is not all doom and gloom, as some enterprising software development companies are managing to capitalise on the exchange rate to sell their wares into the US market.

Sourcing the outsourcing story

The latter half of 2000 saw a classic "good intentions = road to hell" scenario as the Federal Government came under fire for its IT outsourcing policy.

An unusual and haphazard alliance formed as snipers emerged from the union movement, Aust-ralian IT industry representatives, education groups and Government departments.

Large US-based companies such as IBM GSA and MITS seem happy enough with the current Government outsourcing push. However, even Australian companies with a vested interest in winning Government tenders have criticised the Government tendering process for excluding local industry.

While outsourcing is working very well in the private sector, the principal concern is that the Government is chanting an ideological mantra and has lost focus on what is good for Australian business.

Peter Kazacos, managing director of ASX-listed outsourcing company KAZ Computer Services, summed it up when he said "outsourcing in the private sector is good because companies will only outsource services when it makes sense to outsource them. The Government wants to outsource all their IT services, and has made the tenders so big Australian businesses are locked out of the process."

Yesterday's news

Among some of the more quaint predictions made by IDC at the beginning of the year are forecasts referring to the growth of different technologies.

Twelve months ago, IDC predicted the rise of ASPs, a business model which has continued to feature in the news throughout the year. While the model has been slow to take off, it is now showing signs of beginning to establish itself with vendors such as IBM encouraging resellers to adopt the model.

ASP is suffering the result of bandwidth constrictions that have been felt throughout the sector, with many online services going on hold until bandwidth is more accessible.

With whisperings of wireless and Bluetooth technology in the air, portable appears to be in fashion for the year to come.

However at this stage, there are Christmas parties to attend, Christmas shopping crowds to attract and the new year to look forward to. Stay tuned for next week's forecasts for the year 2001.


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