What a grey day

Tim Phillips delves deep into the bowels of the grey market importbusiness, and discovers that mass dumping and constipation is the order ofthe day

Grey importing used to mean cartons of cheapo PCs with no pound sign on the keyboards, two-pin plugs and a rock-bottom price. It was illegal, manufacturers and distributors hated it, but there were great deals to be found. That was then, but now, when hardware circles the globe, it's usually the manufacturer that does the moving, as excess inventories worldwide means shipping a PC where it can be sold makes the best of a bad deal.

Traditional, entrepreneurial grey importing isn't illegal any more, and thanks to level pricing between the US, the UK and Europe, it's vanishing fast. There are still some remnants of the old scourge in Europe (see box) but nothing to match of any note in the UK.

DUMP AND GO

Grey importing 1996 style is dumping: unloading enormous amounts of bargain-basement hardware on a country from abroad because that's where it will sell before it passes its sell-by date. There's been a rash of it recently, prompted by the wild optimism that gripped the PC industry last Christmas.

December 1995 was going to be a home computer bonanza in vendors' minds, so they shipped the product to match. When it was still in the warehouse on January 1, many were faced with a writedown nightmare and the license to dump.

The industry that hurt most was the CD-Rom business. A combination of over-optimism, competition among the 28 vendors of CD-Rom drives and cruelly short product cycles left Creative Labs with a $30 million stock write-off to begin 1996. Four-speed drives that nobody wanted were the object of a game of pass the parcel with the person left holding the drive unable to recover the manufacturing cost.

Dave Askew, country sales manager for Creative Labs, admits the mistake.

'We underestimated demand for higher-speed drives,' he said. 'In this business we all still believed that consumers would be satisfied with a four-speed drive, and after Christmas we had quite a significant inventory.'

CLEARING THE GLUT

This was shipped around the world, much of it landing in the UK. 'We now have exactly no four-speed drives in stock, and very few six-speed drives. We've cleared out quite quickly. It hurt the corporation, but the longer we left the problem the more expensive it would have become.

It has created some positives. There have been a significant number of exclusive packages - our u50 bundle sold 15,000 units in the UK alone.'

Those positives don't extend to resellers caught with too much stock as CD-Roms bec-ame a spot market to rival DRam. The problem was, in part, the retail channel, says Askew, which takes more CD-Rom drives than business users. The hoped-for sales didn't materialise. 'The retail side of the market wasn't exactly in a downturn but there was a negative effect,' he says.

A bizarre effect of the world glut of CD-Rom drives was a spot of grey importing in reverse. Having come from the US, a batch of Creative drives were sent back home again because UK prices had fallen so low that they were more valuable at home. 'Our last batch of CD-Roms was actually sent back because there's a better price point over there, so it made more sense to transport them back to the US. It was ironic, but it was all part of clearing our inventory in four to six weeks,' says Askew.

KEEP IT REGULAR

So what of the future. As David Clark, product marketing director at Frontline said last month, many distributors are beginning to believe that 'CD-Roms are not the market to be in'. But Creative believes it has learnt its lesson. In future, enthusiasm will be heavily tempered with caution.

'We're putting in applications to police the system better, and we are going to be a lot more conservative in future. With the 10-speed and 12-speed drives that are planned for September, you will see Creative being very cautious - we will almost build to order,' says Askew. 'We will be stocking back-to-back, although there will be a some buffers. You learn from your mistakes, and the entire CD-Rom business caught a cold.'

As prices on Creative's stock went into free-fall, other manufacturers had similar problems, which caused headaches for specialist distributors like Ideal. 'It caused everybody a problem, but as a company I think we managed it efficiently and walked out without any losses. Other firms, especially manufacturers, have taken big hits,' says Ed Bateman, product manager at Ideal Hardware.

He claims that the CD-Rom drive disaster was not just about retail over-optimism, but that was a factor. 'There were two key issues: the first was that prior to Christmas the PC market didn't grow to match the expectations.

Instead of 25 per cent growth, we only had 5 per cent or 6 per cent growth, and that left a lot of people with a stock position. Afterwards, an awful lot of organisations did some pruning; many OEMs which had committed to take product didn't. Second, the technology has been moving on so quickly that this wouldn't have happened if the product lifecycle wasn't so short.'

But product lifecycles continue to shorten - in desktops and CD-Roms too. According to Bateman, a little less optimism might be the answer.

'Whether it will happen again depends on how manufacturers approach the home market in the future, and whether they get too bullish about it again.

In the UK there has been a lot of optimism, but it hasn't really taken off yet,' he says.

Whatever manufacturers do, they will still have problems in future, he adds. This year several previously successful manufacturers, such as AST, Digital and Packard Bell have been left with unsold stock. 'Packard Bell is sophisticated in its forecasting, but the company was still a big dumper. Forecasting is ultimately still a put-your-finger-in-the-air business.'

This was always so, but dumping has increased because of distribution efficiency rather than despite it. Shorter supply chains mean that manufacturers are much more confident about what stock they have anywhere, and when they see an opportunity, can move it with less effort, even across national boundaries. Without modern logistics and distribution systems, cost-effective dumping simply would not be possible for large items.

At Toshiba, imports are regularly used to ease the transition between ranges that causes old stock to be cleared. 'Most often we will sell all our excess stock through the UK. It hasn't happened in a long time that we have had to export any notebooks, but there may be a little gap where we have sold all the old models but don't have the new ones to replace them. That is fairly regular now,' says product marketing manager Murray McKerlie. 'We are able to see what stocks the European subsidiares hold, and there is an agreement from the parent to spread excess stock to places which have no inventory.'

Nevertheless, he claims that Toshiba rarely has to clean out its channel.

Quite the opposite. 'When we bring new product to market, that's one of the first issues we look at, and we always try to establish a sufficient price difference so that the old products can sell out, but you can't judge it exactly right. At the moment we have virtually no stock,' he says.

CLEANSE THE SYSTEM

The logical result is that instead of forecasting approximately, manufacturers will be able to forecast exactly, building systems to order. Compaq is already moving towards such a service, with a commitment to build to order by the end of the year. Direct resellers like Gateway 2000, with a short supply chain, already build to order. It won't stop the volatility in the component business, but it will help to make accurate forecasts and act as a precursor to a complete - components and all - build-to-order service.

At Compaq's last European briefing, chief executive officer Eckhard Pfeiffer saw this as the main challenge for the industry in the next few years. 'The big improvement is still ahead of us,' he said. 'As a product goes off the shelf, we need to know about it: it means integrating your inventory system with that of the vendors. What we can tell dealers now is that we have a five-day response time for products, but that has to change.'

With prices and margins cut to the bone, this could be the way to spark the growth in the retail trade that the industry needs: high prices were blamed for the lacklustre Christmas performance of the entire industry.

'The inventory cost is still significant. It is not quantifiable, but we are talking hundreds of millions of dollars. Because these logistics costs are a huge factor, whoever does it best has a huge advantage. Shipping a box around the world can easily add between $50 and $100,' claimed Pfeiffer.

'That is why cutting inventories worldwide is absolutely fundamental.

We have to manage product transitions well - a product transition can make or break a quarter for us, so we need to get the manufacturing disciplines and planning disciplines right. We have to redefine and re-engineer the manufacturing process.'

But we're still a long way from realising Pfeiffer's vision. As Chris Buckham, marketing director of Apricot comments as he surveys the current constipated channel. 'Some people are in the position where they are having to get rid of inventory and turn it into cash. Everyone is bound to be cutting prices over the next couple of months.'

WHATEVER HAPPENED TO GOOD OLD GREY IMPORTING

Like the Rolling Stones and the Internet, grey importing has gone legit, especially for software houses. Worldwide support policies mean that a product has to be supported anywhere in the world, where it was bought isn't important. Microsoft may be getting heavy on pirate software, but Sharon Baylay software theft marketing manager, is somewhat sanguine about the greys.

'People are not going to a lot of trouble in covering up the academic sales sticker on software, and it is making some people a lot of money.

On the other hand, grey importing of software, we just don't see any more.

There is some problem in Germany, and any software we get on grey import seems to come through Germany. But it's not like it used to be a few years ago, and it's not illegal either. So we can't stop it.'

It's more of a problem in Europe, where the main destination for grey imports seems to be Germany. But you have to ask any wannabe grey importer: 'Have you seen the price of Windows software lately?' she says.