Intel Takes Steps To Slow Gray Market

As reported by www.crn.in earlier, the motherboard vendor announced its decision to bill its distributors directly from India, instead of from Singapore. Hitherto, the chipmaker used to dispatch all its shipments to Singapore, and the products were then diverted to India.

Intel has now confirmed that it will directly ship its products to the Indian warehouses, thus reducing shipment and goods delivery time from 21 days to seven days. The move will also translate into a 0.5 to 1 percent reduction in billing rates for the distributors following savings in transport cost.

This implies that 99 percent of the Intel processors available in the Indian market today originate from the Indian distributors of Intel products, unlike in the past when a significant share ranging from almost 15 percent to occasionally 50 percent of the processors sold in the market used to come either from parallel imports or through smuggler channels.

Intel had earlier announced its decision to help its distributors in India with a direct shipping and billing move from Singapore to the port of clearance of choice of each distributor.

Sandeep Aurora, director (north), salesmarketing, Intel India, told CRN that the products will be now offloaded at Delhi, Mumbai and Chennai. "Through this system our dealers can receive inventory in stock three times faster than they presently do because it will reduce transportation time, while their products will move faster to the market," he says.

However, there is more to it than pure logistics.

Other sources in Intel disclose that the chipmaker will be absorbing 4 percent of the import duty on the processors which will be reimbursed to the distributors. Intel will also be taking care of the freight and logistics costs involved in freight forwarding and clearance.

This represents almost 4.5 percent of the value of each processor sold in India, and in sheer numbers, Intel is willing to bear an estimated expense of almost Rs 10 crore to Rs 15 crore every quarter in managing the logistics.

According Intel sources, the move is largely to ensure a level-playing field in the Indian market, and better control for both Intel and its distributors over the market as well as the prices in the market.

"The market operating price of Intel has been impacted tremendously due to parallel imports as well as the grey market. This is despite a 4 percent import duty. Moreover, spot prices in Singapore and Hong Kong have been much less than the prices offered by Intel distributors for reasons varying from gross spillover from OEM excess outflow to spot-selling from distributors in other territories," says a Bangalore-based Genuine Intel Dealer. "Distributors were finding it difficult to do business confidentlywe just did not have the confidence to stock Intel processors in large numbers."

For these very reasons in recent months there have been numerous complaints from assemblers that there was a shortage in the supply of processors despite their availability in the international markets.

"You need to understand that an importer dumping even a couple of thousand processors in the Indian market at less than distribution cost is enough to bring down the market operating prices of an entire range of products. Resellers often react strongly to a special price offer, and simply refuse to stock and sell the product, fearing instability. This further hampers the confidence of distributors to stock and sell," explains Alok Thakur, sales head at Ralco Synergy, a Bangalore-based independent distributor.

This meant that Intel's distributors played it safe, bringing only those processors (and that too in limited quantities) which they could sell without losing on revenues.

Things are now changing. "Today we can be confident that only distribution products are available, and this brings in a level-playing field. It also brings back the confidence of the channel partners which we had lost in the past few quarters. The decision has already shown results, and you can see the numbers in the coming days," says the sales manager of an Intel distributor.

"There is a definite improvement in the availability of stock among distributors, so no reseller needs to look at alternative channels for Intel supplies. I hope this continuesthis is indeed good news," says Rakesh Mehta, director of Microport, a reseller and system builder based in Bangalore.

Intel seems to have won the battle as far as ensuring more uniformity in its distribution is concerned, and is gradually restoring faith among channel partners. The costly gamble is expected to give the vendor returns over a longer period as the chip major plans to recapture lost marketshare.

NEXT: The Other Side of the Story However, as it goes, there is another side of the story.

Sources close to Intel disclosed to CRN that Intel already had a plan B to deal with the problem. Apparently, the chipmaker was actually thinking of changing packaging for territories including the color of the box and the language on the boxes. But this plan has been put off since plan A seems to have met with success. Imagine a red boxed processor with Mandarin for the Chinese market, in blue in English or Hindi for the Indian market, and green for Pakistan and the Middle East. While one wonders how logical a logistics move this would have been, we learn that the think-tank at Intel was seriously considering this as a second option. Intel's new logistics strategy has paid off in more ways than one. The new pricing makes a processor available in India more or less at a price which is on par with the conversion rates. This was not the case before.

Suppose a processor is hypothetically priced at $100 to a distributor, and if the conversion rate is Rs 41 to a dollar, prior to the new logistics move the price would have been Rs 4,100 plus the 4 percent import duty which in effect made the processor price in India Rs 4,264 before any taxes or profits.

Now with the duties being reimbursed, the net effective price will remain at Rs 4,100. This makes a huge difference as it cuts down the margins at which a parallel importer might operate even if the purchase cost of a parallel importer is significantly lower than the applicable distribution cost.

The other advantage from a channel perspective is that there will be better availability of Intel products through official distribution channels.

Following the crn.in report, a reader had written back asking us why the duties were being reimbursed but not being discounted upfront.

The most probable reason for this is that duty reimbursement will most likely be against submission of original clearance documents, including the receipts of duties paid, which ensures that the material comes to India. It is an open secret for anyone associated with the channels that not all processors (or for that matter, not all products) meant for a specific market are shipped or sold in that specific market. The cross-distribution of products is common across all industries, and there are many brokers who make a living trading on material based on the fluctuations in the international spot markets.

This, though perceived as unethical by some, is a practice that is quite common and is the root cause of the practice which in India is termed 'parallel import' and internationally regarded as 'independent distribution.' It is also a known fact that India's Intel distributors have been forced to meet their targets by dumping a few thousand chips every now and then to keep their numbers going rather than risk fighting parallel importers, smugglers and other practitioners of dubious business models.

With Intel reimbursing import costs, it is clear that the company will now ensure that distributors benefit from duty savings, and that products meant for India reach India.

--Read more on the channel in India at www.crn.in