Hard drive shortage looms

Rampant demand for hard disk drives in the consumer electronics space is poised to create knock-on shortages in the distribution channel during the second quarter of 2005.

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By  Stuart Wilson Published  March 23, 2005

Rampant demand for hard disk drives in the consumer electronics space is poised to create knock-on shortages in the distribution channel during the second quarter of 2005, according to senior sources at hard drive vendors and components distributors in the Middle East.

Industry analysts cite supply constraint in the glass substrate disk manufacturing sector as the main reason behind the potential shortfall. With devices such as MP3 players and digital cameras carrying hard drives, vendors are diverting the components that are actually available towards these high-margin product areas, and away from the entry-level drive space.

While substrate manufacturers are looking to ramp up production, installing the extra machinery to boost capacity could take as long as six months. Substrate vendors are also wary about believing the claims from vendors that demand will continue to grow, having seen such predictions fail to materialise in the past. This fear has retarded the propensity of the substrate manufacturers to invest in building up production capacity.

Rakesh Sapru, regional product manager for hard drives at Aptec, explained: “The market has already started to feel the shortage and there has been a sudden change in buying patterns of the regular hard drive players in the market. This is expected to last for at least one quarter.”

Pavan Gupta, general manager at components distributor eSys Middle East, said: “Prices will move higher and will become more stable, and the availability of drives will become a much more critical factor than the price.”

Sapru estimates that prices could climb between 4% and 7% before stabilising. “This shortage will affect the yearly planned targets of all distributors selling entry-level drives,” he added. “Due to increased demand and low availability the prices will rise and we may see the market shift towards high-end assembled PCs.”

While the substrate shortage is a problem for vendors looking to increase the volume they supply to the market, it could prove advantageous to the distribution channel, by ushering in a period of stable pricing due to the constrained supply. In a trading update on March 7th, hard drive vendor Seagate, commented: “Distribution channel inventory of Seagate desktop products is currently less than four weeks, compared to a target inventory of between four and five weeks.”

This situation revolves around supply and demand and the simple fact that there are wafer thin margins for vendors on entry level drives. Little wonder that drives that can be used for trendy (high margin) digital devices take priority.

The supply and demand dynamic in the hard drive sector remains incredibly complex. As well as the major vendors, the industry relies heavily dependent on the upstream suppliers of key components used in the production process. Downstream, there is the difficult task of simultaneously balancing relationships with PC giants, the distribution channel and now digital device vendors as well.

With all these parties working hand-in-hand to turn the raw materials into finished goods and deliver them to end-users, there is always the nagging fear that one party could be engaging in some jiggery-pokery to create a business advantage.

Let me simplify that. A shortage of substrates would mean vendors raising prices and distributors doing likewise. The advice to resellers and assemblers would be to stock up now and boost the inventory levels they have at hand in preparation for a shortage. If the assemblers heed this advice and a shortage doesn’t materialise they will be left with a batch of depreciating stock. It is a tough call to make.

Local touch, offshore efficiency

The recent tie-up between Satyam and Emirates Consulting Group (ECG) provides an interesting insight into the evolution of IT services delivery in the Middle East. The fact that such alliances are being formed so early on in the development of the IT services and software market is indicative of a region moving rapidly towards the cutting-edge of service delivery models.

Hardware continues to be the dominant force in any breakdown of Middle East IT spending. However, as software and service spending catches up, the opportunity is there for solution providers, systems integrators and even a few forward-thinking boxshifters, to develop service sales in order to bolster margins.

Those that do want to do this need to move fast and immediately determine which service areas it makes sense to develop locally and which service areas should be outsourced to an offshore provider such as Satyam, Wipro, Infosys, Tata or the like.

The European and US markets have struggled — and continue to struggle — with the impact of offshore outsourcing in terms of service jobs moving overseas and the negative effect on the performance of indigenous systems integrators and IT services providers.

In the Middle East and Africa, there is a relative dearth of indigenous systems integrators and even the global IT services powerhouses such as IBM Global Services and EDS have limited presence on the ground. The theory put forward by many IT services professionals in the region is that the frequency of big deals in the region does not justify a major investment on the ground by the global giants.

Possibly, but you’ve got to be in it to win it, and the small projects tendered out by companies today may well create long-term relationships that endure as the clients embark on massive expansion with corresponding increases in their IT spend.

There is the real possibility that the old school global IT services giants could miss a trick in this region. Those companies able to front-end projects in this region and seamlessly pull in resources from offshore providers have a great opportunity to grab this sector by the scruff of the neck.

Admittedly, they will struggle to displace the global heavyweights from the multinational clients that they serve worldwide. Nevertheless there is a real growth opportunity to build up a valuable client base of indigenous companies and public sector entities.

The global IT services delivery model is changing fast and this region has an opportunity to show the way. Indian IT service giants have already disrupted the global pecking order and that trend shows no signs of slowing down any time soon. Satyam currently has a market capitalisation of US$3.54bn and a price-earnings ratio in excess of 25. Infosys’ market capitalisation now tops US$20bn with a price-earnings ratio of 55. These companies have financial fundamentals that many global IT services giants can only dream of.

The combination of local touch and offshore efficiency looks like a compelling recipe for success in the emerging Middle East software and services sector.

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