Feature

Are the bargain prices of grey-market computer hardware too good to be true?

Be aware of the pitfalls before you rush into buying cheap hardware.

With budgets under remorseless pressure, containing IT spending is a key item on all IT directors' agendas. But is buying imported kit from the so-called grey market, estimated to be worth £24bn worldwide, a wise option?

At first glance, it could look tempting. As Computer Weekly reported earlier this month, prices for "grey" Cisco networking kit could be up to 70% less than suppliers' list prices. And since grey kit is not illegal, why pay more?

Industry experts have warned that buying hardware from the grey market poses a variety of risks, ranging from variable quality to counterfeit copies.

"The decision to buy grey goods can come back and bite you," said Stephen Way, divisional IT manager at chemical company Johnson Matthey and vice-chairman of the IBM Computer Users' Association. "The problem is you never know exactly what you will get."

Cynics might argue that suppliers are keen to discourage users from taking advantage of the grey market because it diminishes their revenues. However, analysts also warn users to be careful when buying from the grey market.

"It is the unknown," said analyst Andy Rolfe of Gartner. "You are buying an unknown piece of equipment that may be what it appears but may not - it may not be all there, it may be damaged. It could be brand-new or a piece of junk. It is very difficult to tell old from new kit visibly."

Packing boxes may look new but contain old kit, and some components could be counterfeit. The most risky source of grey kit, according to Rolfe, is the second-hand market. "Second-hand grey goods are the most dangerous because they will be of unknown age and configuration," he said.

Telecoms kit, for example, could have the wrong cards for the chassis, old versions of software that do not work with the hardware, or it could have been assembled by untrained people.

Nevertheless, particularly in the telecoms sector, which has seen a number of suppliers run into trouble recently, there is a lot of surplus kit floating around. Some of this kit is even available on online auction site eBay.

Any failure in a relatively minor piece of grey kit could have a knock-on effect on other IT systems that are critical to an organisation.

"The major issue is not the cost of grey imports," said Andy Vickers, UK channel director at Hewlett-Packard. "You could have a £200 grey or counterfeit disc drive that fails, but if it takes down a mission-critical system for hours, you could be losing £2m for the sake of £200."

User organisations should also bear in mind legal issues when deciding whether to buy from the grey market. If the supplier has not paid VAT on hardware, or PCs have tax-unpaid chips in them, you could be liable for the VAT, and possibly subject to seizure of goods and prosecution.

But perhaps the biggest headache that arises from buying grey goods is the lack of support and warranties.

"Support is a big issue," said IBM Computer Users Association council member Geoff Petherick. "Kit is so complex that if you have no support contract, you have got a big problem."

This can affect users who buy kit from authorised resellers that was intended for another customer. "The supplier could say it will not support it because it was obtained fraudulently against the spirit of the contract [between the reseller and supplier]," said Rolfe.

Buying abroad and importing goods yourself can also be risky.

"Global purchasing can easily get you in hot water," said Way. Suppliers can be loathe to honour warranties and offer support when kit has been purchased in a low-cost region and brought into a higher-cost region.

The UK Computer Measurement Group, an independent user group for IT professionals, warned that manufacturers make parts that are slightly different in different regions to cope with local power, temperature etc. "In this way, they can deter people from shopping abroad to save money," it said.

Companies should also check that the IT kit's licensing and warranties are in order. "Warranty is very important for software because it is the warranty that says software will do what it says it will do," said Petherick. "If there is no warranty, you have no claim against the supplier."

If you do buy second-hand, experts advise using a long-established, specialist broker and getting all the guarantees and licensing issues taken care of.

Cheaper prices

The main attraction of buying grey market IT goods is the cheaper price. But here again appearances might be deceptive.

Initial cost savings can be eroded because users will have to buy their own maintenance and support. Nevertheless, this will still mean they save at least 20% by going through the grey market.

"Grey imports may seem to be a bargain in the short term, but in the total cost of ownership stakes the grey import will always let you down," said the UK Computer Measurement Group.

So can going grey ever be justified?

If you are in a short-term position, grey imports could be a good move. However, a less-risky option would be to put pressure on suppliers, particularly regarding regional price differences.

Despite the tempting savings, the variable quality of IT goods on the grey market can be more trouble than it is worth. Licences, warranties and VAT all need to be in order, and users should also bear in mind the hidden costs of buying their own support and maintenance. Going grey should not be rushed into.

Why is there a grey market?

Apart from speculation that suppliers rid themselves of excess stock by feeding the grey market, grey kit has several recognised routes on to the market:

Differential geographical pricing

Suppliers put different prices on the same kit, depending on what part of the world they are selling it in. But if you buy kit in a low-cost part of the world at local prices and import it to use at a site in a high-cost part of the world, warranties and support may not transfer.

Surplus stock

Authorised resellers can buy kit under "price support" (ie generous discounts) to sell to a specific user. If the reseller orders more kit at the high discount than the user wants, it has surplus to sell to other users. The supplier may regard that surplus as grey because it was not part of the original contract with the specified user customer.

Second-hand kit

Financially troubled resellers or users make "distress sales" of stock, which suppliers may regard as grey.

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This was first published in July 2003

 

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