IT resellers, service providers and distributors are facing tough financial times. The US-led downturn in the economy and the loss of faith in IT companies have resulted in a tightening of payment terms, and made it difficult for companies to obtain credit from banks and other sources of finance. The result is that working capital is a scarce resource.
This feature examines the extent of the problem, and the impact it has on distributors and resellers.
Money`s too tight to mention
One of the main problems facing local distributors is that they source most of their equipment from international vendors such as Compaq, IBM and the like, with most US vendors working on 15-day payment terms.
Marlene Heymans, IT analyst at Vantage Investment Solutions, explains that although distributors are bound by US standards when it comes to payment of vendors, local resellers are stretching their payment terms to 50 or even 60 days.
"Distributors can stretch payment terms. However, if they don`t pay on the normal 15-day terms, they lose the early bird discount -- a tough decision," says Heymans.
Distributors can stretch payment terms. However, if they don`t pay on the normal 15-day terms, they lose the early bird discount -- a tough decision.
Marlene Heymans, IT analyst, Vantage Investment Solutions
Siltek, a JSE-listed reseller, has not escaped the problem. Indeed, the fact that it is a public company and its books are constantly in the public`s eye and open for criticism places additional pressure on it.
Siltek CEO Dave Lello describes the problem: "In Europe and the US, payment cycles have shortened. As more manufacture automation occurs the whole supply cycle speeds up -- this has also affected the credit process, resulting in the invoice document becoming the source document for payment.
"However, corporate terms are lagging in SA. International distributors are running weekly payment cycles. Payment terms in Europe versus Africa differ vastly, with local distributors facing pressure from creditors to operate within US terms and debtors operating within African terms. So, the pressure has been twofold -- firstly, vendors introducing new, reduced, payment terms, and secondly, dealers who are also experiencing economical difficulties are stretching terms as far as possible," says Lello.
Added to the delay between outlay and payment is the fact that more and more smaller resellers are going under as a result of shrinking capital, tighter margins and an over-competitive market.
How bad is the bad debt?
The issue of bad debt is raising its ugly head throughout the economy and while certainly not unique to IT, this industry is possibly the worst affected.
A company that makes it its business to know about debt is Credit Guarantee, a South African underwriting company operating in the field of credit insurance. The latest statistics on the company`s Web site speak volumes about just how bad the credit crunch has become.
Technology that is new today is redundant tomorrow. How do the smaller players keep up? Simply, they can`t.
Malcolm Auton, senior manager, Credit Guarantee
According to the site, the latest liquidation (companies and closed corporations) and civil debt figures show corporate failures in the first four months were 32.6% above levels a year earlier. Debt judgments of R505 million against businesses in the first quarter of 2001 was a record, accounting for almost 50% of 2000`s total.
Of most concern to Credit Guarantee are statistics showing voluntary liquidations 74% higher in January to April 2001 and that pertaining to closed corporations alone shooting up 153%.
Malcolm Auton, senior manager of Credit Guarantee`s business unit dealing with the IT industry, says the level of bad debt has increased and this trend is likely to continue.
"The market is volatile and incredibly dynamic. Technology that is new today is redundant tomorrow. How do the smaller players keep up? Simply, they can`t. No one can afford to carry large inventories and most work on a 'JIT` (just in time) basis, putting pressure on importers and distributors to supply at very short notice. The `poor` rand is also taking a hammering against the dominant currencies like the dollar."
Auton says bad debt in the industry (only that which is insured) has doubled in the last year, and he believes this scenario is likely to be worse in that part of the industry which has not bothered to insure against debt.
"There has been a significant increase in the number of liquidations, and the values are much higher than before. This is no longer the `get rich quick` industry of years gone by. The entry level for a new company is still too low and there are still too many opportunists wanting to follow the rainbow. Again, the margins and fierce competition do not permit a quick buck. The bigger the company, the smaller the margins can, and will be pressed," says Auton.
Lello says Siltek has also been "sandwiched" by these harsh realities: "The amount of defaulters increased dramatically and has tripled over the last year-and-a-half. Many of these are good businesses but fail to efficiently manage their cash flow. Delayed payments were steadily increasing from December 2000 but since the revised payment terms were introduced, there has been a move from dealers in paying their account on the specified date. It seems that the tougher we are, the healthier the channel is."
What`s the problem and why the dilemma?
The IT boom of two to three years ago has dimmed, the honeymoon period is over, and investors and shareholders are now expecting companies to deliver. A "back to basics" attitude is prevalent in the industry and organisations are expected to show profit rather than chasing turnover.
Markets have closed the black hole into which shareholders and banks were all too happy to pour money into on the scent of a quick buck in an industry that was renowned for manufacturing nanosecond millionaires.
No one can afford to carry large inventories and most work on a 'JIT` (just in time) basis, putting pressure on importers and distributors to supply at very short notice.
Malcolm Auton, senior manager, Credit Guarantee
The recent profit warning from local giant Dimension Data is a case in point. The local bellwether counter, long accused of buying turnover, is now facing the reality of slow down in the economy and is being punished for its previous strategy.
Brian Bogaard, MD of Acer SA, believes the tightening of credit will lead to higher barriers of entry for the smaller players in the channel, most especially in the reseller arena.
Bogaard says bad debt collecting is a problem for small and medium enterprises in particular, leaving them with diminishing lines of cash and eventually leading to their demise.
What is the solution?
The most obvious result of the demise of the smaller reseller and the inability of those left to compete will be consolidation of the channel.
Not a bad thing, says Heymans. "Solutions for the wholesale distributor will be to narrow the product lines and ranges -- they should not try do be all things to all people.
"They will have to improve their systems and retrench staff to operate more cost-effectively -- sad but necessary," she says.
"The most important solution for the market as a whole is a structural change. There are too many brands and distributors in SA. Our market is too small for this. We need some big and small names to leave our market. Only then will sanity return and the price wars end. If not -- we will be left without a Siltek, MB Technologies and other wholesalers.
"Resellers may have to deal directly with Epson South Africa, Compaq South Africa, etc. Only direct sellers will be left. There would then be no margin left for a middleman like Siltek," says Heymans.
Payment terms in Europe versus Africa differ vastly, with local distributors facing pressure from creditors to operate within US terms and debtors operating within African terms.
Dave Lello, CEO, Siltek
The other solution for the market is to have funding packages from distributors or the vendors themselves, who are also implementing their own rental options.
Siltek has credit options in place, but with stringent requirements governing them, the distributor is all too aware of its need to protect itself from bad debt.
"Besides credit, which we provide, we are exploring credit card facilities for small resellers. Siltek Finance provides end-user equipment financing and reduces the need for resellers to make use of their 30-day credit facility. On large deals we are quite prepared to work with the dealer and invoice the customer on their behalf.
"For a customer to qualify for credit, the business would be required to pass the necessary credit checks on owners. There is a trend in the industry for companies to walk away from their obligations, and Siltek blacklists these individuals. Terms are available to all dealers subject to creditworthiness," explains Lello.
The channel must provide its own solutions
The other option is to lease the equipment, an attractive alternative considering the speed of redundancy in the IT market.
According to the International Data Corporation, leasing enables companies to enjoy the latest technology while keeping their lines of credit open for other uses. It provides a hedge against obsolescence, lowers maintenance costs and ultimately a lower total cost of ownership.
The most important solution for the market as a whole is a structural change. There are too many brands and distributors in SA.
Marlene Heymans, IT analyst, Vantage Investment Solutions
IBM has launched IBM Global Financing, providing leasing arrangements enabling companies to acquire equipment not just from IBM but also from other manufacturers.
Acer Africa is also set to announce its finance options to the local market in August and already has leasing arrangements in place.
The bottom line is that it will be some time before we see an improvement in the global economy, although the signs are there for an upward trend.
As ZAFinance.com editor and IT analyst Patrick Lawlor points out: "The worst is most definitely over for technology watchers, as the effects of cheaper money in the US flow into sales of PCs, and consequently, other goods and services in IT."
However, he points out the recovery is likely to be fairly slow. He cautions SA investors that the weak rand, the poor money supply and balance of payments figures make the case for lower interest rates and cheaper money more difficult.
Until this happens, it appears the industry is stuck with the ever-tightening lines of credit. It is up to the channel players to come up with means of keeping the lines of finance open to facilitate product movement. Indeed, their very existence depends on it.
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