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Intel is under fire over its channel policy

BY ISAAC JOHN (Chief Business Reporter) / 14 June 2006

DUBAI — Intel, the world's largest computer-chip maker, is at the centre of a controversy surrounding Dubai's IT business with several resellers alleging that "stuffing the channel" tactics by the US giant and its local distributors have triggered the collapse of six wholesalers, resulting in total debts exceeding Dh300 million over the past year.

Signalling that "stuffing the channel" — a  tactic of selling more inventory than is needed to wholesalers — is finally rearing its head in the Middle East, such serious charges levelled against the world's leading microprocessor maker by resellers also ignite a crucial debate on several ethical and professional issues impacting the IT business in the region.

Channel stuffing, considered an offence in the West,  is resorted to by companies that seek to increase their top-line sales. The practice, rampant in some developed markets, basically amounts to pushing unwanted products onto distributors, resellers and retailers. 

Hamid Kutty Shajahan, owner of the debt-ridden Micron Computers, has come out strongly against the "Intel distributor cartel" for what he has termed as an attempt to monopolise the market. He alleged that Intel officials used to pressurise resellers to take stock of slow-moving products along with fast moving ones.  

"If we refuse, the Intel official would warn us that it could affect our IPP (Intel premium provider) status and our pending rebate payments," he pointed out.

Shajahan, who has left Dubai amid debts running to tens of millions of dirhams, said Intel distributors and  Intel Dubai office subject channel partners to intense pressure to meet sales targets by every quarter-end.    "Intel team comes to our office and persuades us to take delivery of huge stocks beyond our capacity. If we tell them we don't have enough credit, they talk to distributors to come up with some extra credit lines and dump the stock on us. We have been trapped like this," Shajahan said.

When contacted by Khaleej Times about these issues, Intel Marketing Manager for the GCC, Dania El Kadi, said she could not comment on any specific cases. "We work with our customer base to understand their product needs and therefore to ensure that we can meet their demand," she said when asked about allegations that stuffing the channel has led to a glut followed by undercutting, resulting in huge loses for the resellers.

On a common concern voiced by some resellers about the delay from Intel in paying the rebates, which often caused a liquidity crisis, El Kadi said: "We typically do not discuss private business transactions between us and other companies, yet, we will investigate any claims; and all of Intel's responsibilities will be met."

IT industry sources said Intel owes Fortex and Micron, the two debt-ridden wholesalers, $2 million and $1 million respectively towards long pending rebate payments.

On charges levelled by some players that they had been trapped by Intel and its distributors' cartel into an insurmountable debt situation by offering more supplies than they actually needed and then abruptly severing the credit line, leading to an inevitable crash, El Kadi said Intel did not get involved in credit terms between distributors and resellers.

"Any credit that we provide is to distributors as per the agreements we have between us and our authorised distributors."

Another leading local computer dealer said an Intel field officer had persuaded him to take the Intel Celeron CPU without informing him that a price drop was due after a week. "By force they  dumped the stock on our head which we have to sell 30 per cent below the cost price."

IT dealers, who do not want to be named, said since 2005, Intel has been very aggressive with its marketing through "unwanted stock dumping,"  despite "our warning that prices are dropping as a result of this channel stuffing.  But they simply turned a deaf ear and said lower priced goods are coming from gray market."

The snowballing scandal has erupted at a time when Intel is embroiled in a legal wrangle in the US with its arch-rival chipmaker Advanced Micro Devices (AMD) who has claimed that Intel has bullied companies as part of its business practices. In a recent anti-trust lawsuit filed against Intel, which accounts for 80 per cent of the microprocessor industry, AMD in its 48-page complaint filed in the Delaware federal court, asserts that Intel intimidated industry customers in order to secure a monopoly.

AMD also alleges that Intel was forcing customers into Intel-exclusive deals in return for outright cash payments and discriminatory pricing, as well as conditioning rebates and giving allowances and market development funds on customer's agreeing to limit or forego entire purchases from AMD.
 
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