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Face Off
The recent Elcot offer to provide IT products to students and the general public at prices 50 percent lower than reseller pricing has exposed the duplicity in the policies of vendors.
By Dhaval Valia
The controversy that erupted last month in Tamil Nadu over a mass-market offer floated by state agency Elcot promising students and the general public IT wares at 50 percent lower than their market operating prices has created quite a stir among channels across the country.
While eventually Lenovo and Samsung pulled out of the deal following strong protests by the local state channel associations, the episode has raised several critical questions about vendors’ channel policies.
Several have questioned the legality of the Elcot offer, while many have questioned the vendors’ policy of special rate contract. A few of them have also called for creating a policy that ensures smaller players a level-playing field to compete against large players who with their volumes might usually get better prices and under-cut smaller companies.
The controversy
For those who missed CRN’s coverage on the controversy, here’s a brief peek at what happened. Last month Elcot, the nodal agency for electronic and IT purchases of the TN government, floated a laptop scheme that promised to offer Dell Latitude and Lenovo R60 notebooks at 50 percent discount to its retail price to any student in Tamil Nadu.
Even a student studying in Class I could buy a notebook by providing the school fee receipt and the domicile certificate.
While channels didn’t have any problems with Elcot offering Dell notebooks, they surely had a big problem with Lenovo’s brand name appearing in the offer. The ThinkPad R60 offered under the scheme was available at Rs 31,600 (all inclusive) vis-à-vis its market operating price of Rs 54,000.
“As a sub-distributor, my transfer price for a similar-spec R60 is Rs 52,000, and the suggested retail price is Rs 54,000 (excluding taxes). The only difference between the model available through the channels and Elcot is that while the mainstream model has a DVD-R/W and a Windows Vista Business, the Elcot model has a combo-drive and comes with Linux OS. Even if you discount this, the MOP will work out to Rs 46,000,” says Karthik, president, Confed-ITA, the conglomerate of channel associations in Tamil Nadu.
The second offer was more startling. Lenovo desktops, Samsung laser printer ML2010, Benq projectors and Fuji digicams were on sale at 40 percent discount to the general public. The ML2010 was being sold at Rs 5,188 including taxes, with a 3-year warranty and a free black toner cartridge worth Rs 2,500; the retail price of the Samsung ML2010 is Rs 5,900, and comes with a 1-year warranty. The Lenovo desktop sporting a Core Duo processor and 19-inch flat panel display was being offered at Rs 25,614.
What followed were strong protests from channels across TN, including a threat from local associations to boycott all participating vendors. “Our major issue was not that such a low-priced offer was made to students. I think what Elcot is doing is a very good social initiative to make computing available to the masses. We were disappointed with the fact that the vendors did not take us into confidence. They could have made the same scheme available through us as well,” says Karthik who spearheaded the protests of the Tamil Nadu channel community.
According to Confed-ITA, the Elcot offer broke the reference pricing for laptops in the market. “The Elcot offer threatened to cause serious damage to the channel business. We had several instances where customers who had purchased a Lenovo laptop from channel partners the previous week came back asking for a refund. We therefore had to take strong action against the vendors,” explains M Magesh, President, ITTA, Pondicherry.
Legality
Samsung and Lenovo have both claimed that their products listed under the Elcot offer were sourced by the government agency for an entirely different project.
According to a Lenovo spokesperson, the company had never entered into a special rate contract with Elcot for the mass-market offer. “The products supplied (to Elcot) are for government schools and also certain state departments and not for any individual student purchase,” he says.
Samsung too, in a mail to Confed-ITA, claimed that the ML2010 Elcot was offering under the mass-market scheme was actually sourced through a tender meant for printer supplies to government departments. The mail also said that the company had taken up the matter with the Elcot authorities and made it clear to them that if the printers were sold in the mass market they would withdraw from their contract.
“If that’s true then Elcot is surely guilty of breach of contract. Special rate contracts are for specific cases. It’s for internal use and not for resale. Elcot cannot resell the products in the open market. Vendors on their part should have ensured that such a thing shouldn’t have happened in the first place,” says Sanjiv Krishen, CEO, Iris Computers.
Adds Sameer Mathur, Head, SPG, HP India, “Strictly speaking, from HP’s view, if products sourced under a special rate contract are diverted to the mass market or for that matter to other projects not mentioned in the tender, we would have raised the matter with the company. For special rate contracts we expect that the agreement is followed in toto.” Sameer Mathur's Interview >>
Nitin Shah, MD, Allied Digital, feels that it is extraordinary for the vendors to state they do not have a say in the end pricing of their products or who they are sold to. “If tomorrow a large company buys a product under a special rate for internal use and then decides to resell it in the open market, who will protect the interests of the channel partners?” he questions.
Another fact revealed by a Lenovo distributor is that there was no specific tender floated for the project in question. “Honestly, we were surprised when we saw a laptop offer ad in the local newspaper. I checked with our tier-2 partners, who are empanelled with Elcot, to find out who was servicing the deal, but even they didn’t have a clue. This probably means that no tender was floated by Elcot for the mass-market offer. It’s a norm for all government agencies, limited or public, to float tenders when they are undertaking such a large scheme,” points out the Lenovo distributor seeking anonymity.
Chennai-based Origin Infosys and Bangalore-based Frontier Business Machines, which are empanelled Elcot suppliers, feigned ignorance about the Elcot offer. “We haven’t been asked by Lenovo to supply laptops for this particular Elcot project. I don’t think there was any tender floated for it. In fact we also wanted to know about the modalities of the scheme,” said Bhaskar, CEO, Origin Infosys.
Huge mark-up on retail
The price differential between the Elcot offer and the channel pricing of these products was so huge that it prompted several partners to ask if vendors have such huge mark-up on retail products.
“I don’t think any vendor can afford to sell at such low costs even when the volumes are very large. I believe that Lenovo would have either sold the product at cost or even subsidized it,” says Krishen of Iris.
Krishen, who has serviced several large special rate deals, says that nobody really makes money on such deals. “You know the margins vendors usually make on hardware. If vendors had such huge mark-up on products they would be posting huge profits which is not the case if you check their balance sheets.”
Agrees Mathur, “In a competitive market, no vendor can think of having such a huge mark-up. Vendors at times give at-cost pricing for large deals. This is done either due to topline pressures or to gain entry in a particular segment or account. There are also certain instances where vendors sell below cost to upstage a competitor from an account.”
Reveals Raj Saraf, MD, Zenith Computers: “We were also asked to participate in the Elcot offer and were asked to provide products in the range of Rs 20,000-25,000, but we didn’t see any point in such a deal as it would have compromised our profitability. As a company we are not comfortable with it.”
Pricing parity
The episode has also underlined the need for vendors to have pricing parity among its partners. It’s a well-known fact that most vendors have volume-based pricing for channels and end-users. Distributors and tier-2 resellers having large volumes get a significant price advantage as opposed to those doing lower numbers.
The issue of pricing parity also assumes great significance what with the impending threat from large format retailers like Reliance Retail and Croma who are increasing their specialty retail presence in the country in a big way.
In view of this, channel partners believe that there ought to be some pricing parity. Once these large retailers build a big presence they would be able to source products at best bargain prices and they will use this to undercut channels. Vendors ought to have a pricing policy that protects the interests of small channel partners who will never have the scale or volumes of such large entities.
“As distributors we are threatened by large retailers like Reliance, Bharti and Croma. Once these national chains reach a critical size they will buy directly from vendors, bypassing distributors. Hence it’s important vendors have a pricing structure that doesn’t alienate the smaller players in the industry,” says Umang Mehta, CEO, Roop Electronics.
While this may take a couple of years to happen, many small retailers are already feeling the heat from retailers with multi-store presence.
“Retailers like Infocity, Gigahertz and Geonet, which have multiple stores, buy in large volumes and get a pricing equivalent to the transfer price of distributors. These companies retail products at prices that are at least 4-5 percent less than small retailers like us. On a notebook worth Rs 50,000, this works to a substantial Rs 2,000-2,500,” said an HP retailer in Mumbai who requested anonymity.
Vendors however deny this allegation. “Pricing is a tricky issue. As a vendor you have to find the right balance while deciding a pricing strategy. As for the example (of the partners) you have given, we do provide them better pricing. But that’s because these companies have invested substantial amounts in retail. Their recurring costs are also high,” says HP’s Mathur. “As a vendor we cannot afford to alienate smaller players, so we cannot have a pricing model where large players have a substantial advantage. We ensure that the price differential between smaller retailers and large retailers is not more than 2-3 percent. If it’s more than that, smaller retailers will not see the benefit of doing business with HP, and that will eventually show in our market penetration and share. We constantly monitor the pricing of our products in the market and ensure that the parity is maintained.”
Many channel partners also feel that there should be a fair and standard pricing clause included in vendor-partner contract. However, Mathur feels that IT being a segment where technology obsolescence is high, it’s impossible to have price parity. “Technology transition in IT is so fast that following a fixed MRP model becomes tough.”
However, many like Mehta, for instance, feel that the introducing a price parity model is eminently possible if there is an intent. “Several IT distributors who supply products to Reliance Digital and Croma know that these companies have a stringent pricing clause in their contracts. This clause states that the distributor cannot sell the same product at a lower price to any other reseller for same volume,” says Mehta.
While the Elcot controversy has ended with the vendors rightly pulling out, it has surely raised certain questions regarding the vendor-channel engagement. It has created an opportunity for vendors and their partners to sit around the table to discuss and define a framework that will ensure the interest of the channels in the long term. |