When Maxtor met eSys

Maxtor’s decision to appoint eSys as an authorised distributor in the Europe, Middle East and Africa (EMEA) region has angered some of its existing distribution partners and led to a flurry of accusations.

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By  Stuart Wilson Published  July 7, 2004

Maxtor’s decision to appoint eSys as an authorised distributor in the Europe, Middle East and Africa (EMEA) region has angered some of its existing distribution partners and led to a flurry of accusations.

While the hard drive sector as a whole faces an inventory glut due to manufacturing overcapacity and a couple of soft quarters, specific factors may have forced Maxtor’s hand in its decision to appoint eSys after repeatedly rejecting the distributor’s requests for authorised status in the past.

Maxtor’s own distributors — as well as rival vendors — have been quick to point the finger on the reasons behind Maxtor’s decision, claiming that it was a quick-fix solution to offload a huge batch of drives rejected on quality grounds by OEM partner Dell. With eSys picking up the drives at bargain basement prices, they now fear extreme pricing pressure and problems of excess channel inventory will be exacerbated further.

“Maxtor ran around to its existing distribution partners asking them to take over 1.2 million drives Dell rejected,” according to a components distributor speaking to European publication IT Europa. “The partners took some, but they wouldn’t take them all, so Maxtor gave eSys the agreement it has been looking for to get rid of the drives.”

Another European distributor commented: “Maxtor knows the product is poor, but it is still willing to flush it out to a distributor who will take time to realise it is poor. Maxtor will deny it, as it would be an admission that its distribution channel is less important than its OEMs.”

Said another: “Maxtor’s warehouses are full to the roof and eSys only got the agreement because it agreed to take a massive bulk order. We’re already seeing brokers across Europe drop Maxtor prices by 10% as a result.”

Others contend that Dell simply over ordered from Maxtor and used product quality as a way of returning the product. If there is a quality issue with the rejected drives, putting them through distribution is an obvious choice. This scatters the shipment up into small units and ensures that they hit the end-users at different times, often taking months to work their way through the channel. This makes it harder to identify a widespread quality issue. Procedures for quality assessment are also much less rigorous among local assemblers than at global OEMs buying in huge quantities.

eSys European executives have rejected these versions of events, while Maxtor — ahead of its results announcement later this month — is in a quiet period and is not willing to comment until then. The fact that Maxtor has had a difficult quarter is not in doubt. The company’s second quarter guidance warned that global shipments would be 10% below expectations at 11.6 million units with net losses of between US$20m and US$30m. The vendor plans to cut between 400 and 500 jobs worldwide.

“We are extremely disappointed in our second quarter performance, which was the result of a very aggressive pricing environment in both the OEM and distribution channels and lower than expected unit shipments, primarily to distributors,” said Paul Tufano, president and CEO at Maxtor.

While Maxtor suffers, equity analysts at the Banc of America upgraded rival Seagate Technologies from ‘sell’ to ‘neutral’ citing the fact that Seagate, “has been taking share at Dell from Maxtor”. Such a specific reason for the upgrade lends weight to the version of events being peddled by rival vendors and distributors. Western Digital has also been in bullish mood lately about its sales into the OEM space.

Staff at Maxtor in EMEA have told distributors in the region that the decision to appoint eSys was steamrollered through by the US with one eye on inventory levels and the other on the need to pull the financial quarter into some sort of shape. With eSys buying in huge volume to give itself a working level of Maxtor inventory, Maxtor may have partially achieved its short-term global goal. The bulk order from eSys boosts Maxtor’s top line and reduces its own inventory. Given the alleged circumstances, eSys would definitely have got a good price. But the long-term damage to Maxtor’s relationship with its other EMEA distributors will be much harder to quantify.

Separating fact from fiction in this particular firestorm is not an easy task. Rival vendors will do anything to discredit a competitor; existing Maxtor distributors will be looking to make customers wary of eSys, and eSys itself wants to defend its reputation. Maxtor’s results conference call at the end of the month should be an action-packed affair.

One of the most telling signs in this whole channel saga is the way that Maxtor and eSys tried not to draw attention to their official distribution tie-up. Both companies have a track record of announcing such channel tie-ups with a press release at the very least to generate publicity. Not this time. The deal was kept quiet.

Away from the global shenanigans of the hard drive market, the Middle East channel is also seeing its fair share of fun and frolics. Mike Mogadam, drafted into components distributor FDC earlier this year to execute an ambitious restructuring plan, has now left the company to pursue other opportunities, apparently in the food and drink sector.

FDC is not the only channel player looking for a new leader. Another Dubai-based distributor recently tried to lure away a senior management figure from Aptec to become its new boss. The temptation did not prove too much for the in-demand Aptec employee who decided to stay put!

There are a limited number of candidates for top positions in the Middle East IT channel. Earlier this year Ahmed Khalil left Toshiba to head up Fujitsu-Siemens Computers' regional operation. Expect to see a few more instances of musical chairs as vendors and channel players fight to secure the services of the region’s top managers with detailed market knowledge.

Why did Maxtor appoint eSys? E-mail me your views on this topic and any other channel subjects that take your fancy. Your feedback and opinions are greatly appreciated.

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