Magazine article Risk Management

Technology Firms Battle the Gray Market

Magazine article Risk Management

Technology Firms Battle the Gray Market

Article excerpt

For years, the global gray market-the unauthorized distribution or reselling of merchandise without the manufacturer's consent-has been a major but understudied problem bedeviling a variety of industries, especially technology firms. But a recent study that quantifies the scope and impact of the gray market could inspire what may be the biggest financial risk management push the high-tech sector has seen recently.

The 2003 Gray Market Study is jointly published by lax and accounting consultancy KPMG, and the Anti-Gray Market Alliance (AGMA), a trade association made up of major technology firms. According to the study, the gray market moves some $40 billion in computer-related products every year, resulting in nearly $5 billion of lost profits for original equipment manufacturers (OEMs).

OEM products enter the gray market most often through unscrupulous resellers or distributors that take advantage of legitimate discount programs that OEMs use to enter new markets or expand in existing markets. To create new partnerships with distributors and resellers, OEMs offer merchandise at 10 percent to 30 percent below the normal price. This gives the distributors a greater profit margin when they sell to the new market's end users. Where the gray market gets involved is when resellers sell discounted OEM products not to end users, but to other resellers for a greater profit.

This may seem like an innocuous practice, but it has a serious cumulative effect. Even though OEMs still make a sale when they sell to gray marketers, they do so at a lower profit margin. When discounted products are diverted to the gray market, the OEM gets nothing back from discounting its products except reduced revenue.

"Another impact of the gray market is on brand image," says Rob Pink, a principal at KPMG. "Products in the gray market get bounced around all over the place. Sometimes unscrupulous people might put questionable components in a unit so it breaks down prematurely. As an end user, you expect to get your products from a reputable source. But if you buy from a gray market source, you might have an unfairly negative image of the manufacturer because your gray product didn't work as advertised. That negative impression hurts the manufacturer, and may even prevent further sales to disaffected customers."

When addressing the gray market, Pink advises, manufacturers have to ask themselves what level of ethics they wish to enforce among their distributors and resellers. And, how far can they trust them to uphold exclusive sales agreements? Manufacturers can always request to see purchase orders from end buyers, as well as hold interviews with them to make sure they are obtaining nongray products. …

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