Drive Time

The role of the hard disk drive has rapidly evolved in the past few years and made its way into masses of gadgets on the market today including devices for the car, mobile phones, MP3 players and digital cameras. But what does this all mean for the regional IT channel? Channel Middle East discovers why the hard disk drive market is a land of opportunity for assemblers and resellers willing to go the extra mile.

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By  Dawinderpal Sahota Published  February 27, 2007

|~|nicolascar200.gif|~|Nicolas Frapard, Hitachi|~|The role of the hard disk drive has rapidly evolved in the past few years and made its way into masses of gadgets on the market today including devices for the car, mobile phones, MP3 players and digital cameras. But what does this all mean for the regional IT channel? Channel Middle East discovers why the hard disk drive market is a land of opportunity for assemblers and resellers willing to go the extra mile. The consumer segment of the hard disk drive market represents a major opportunity for resellers in the Middle East, particularly those who possess capable integration skills. As every hard drive vendor will testify, the HDD market is no longer about the PC, but also about the wide range of electronics products that now rely on drives for their storage requirements. Hard drives with ever growing capacities are readily available at low prices and consumers continue to show spirited trends in their purchasing behaviour by snapping up the latest array of products containing both internal and external drive technology. Gulfem Cakmakci, senior channel sales manager Eastern Europe, Middle East and Africa at hard drive powerhouse Seagate, says this trend is only just beginning: “In the near future there will be a huge growth in the consumer electronics because when we say ‘Middle East’, we’re talking about many different markets and many different types of purchasing behaviour. Consumer electronics is just picking up consistently throughout our region.” For the past few years, vendors and distributors claim they have been advising resellers to embrace the consumer electronics trend, citing ease of assembly and growing demand as key factors for this push. However, many resellers continue to depend on the traditional PC business that they understand so well rather than move into a consumer electronics sector they have previously stayed away from and regard as outside their core focus. Components distributors are naturally keen to change this mentality and encourage integrators to maximise the opportunities afforded by HDD technology. “Constantly, over the last four or five years, people would talk about a bright future for hard drives,” said Pavan Gupta, EMEA director at distributor eSys Technologies. “Manufacturers expected to see this hard drive consolidation — it was the message communicated to us that we used to pass down.” He claims vendors and distributors have invested time and money over the last few years informing resellers that information would become digitised across the region, and the result would be a marked rise in demand for storage and hard disk drive components. “At that time, we would give presentations of a set-top box, TV or camcorder with a hard drive. People would laugh and say it was nonsense, but today they are seeing all of that now,” Gupta added. However, it is clear from speaking with resellers, particularly those with a retail string to their bow, that consumer electronics has become a fundamental part of their business, which is good news for the hard drive vendor community. However, it remains to be seen if local PC builders will wade deeper into the consumer electronics sector as the market develops. “We’re increasing our product lines and shifting focus towards products with higher margins,” explained Sunny Menghani, managing director at Dubai-based Quality Computers. “The majority of resellers in this region are, however, choosing to stick to what they know best: PC assembly.”||**||Vendor Collaboration|~|gulfem200.gif|~|Gulfem Cakmakci, Seagate|~|Regardless of the IT versus consumer electronics battle, disk drive vendors are looking for ways to better engage with their partners in this region. Last year Seagate redefined its distribution strategy in the Middle East following the conclusion of the Maxtor acquisition, while Hitachi is hunting for ways to get closer to resellers in this region. Hitachi’s EMEA channel manager, Nicolas Frapard, claims that the hard disk drive giant is anticipating that the Middle East will account for 10% of its EMEA revenue growth in 2007. He claims the vendor is taking aggressive steps to achieve this and is looking for resellers to take the initiative and collaborate with the vendor in producing new and unique products and innovations. “We’re looking for assemblers in the region who we can work with us in co-branding schemes in the region,” he said. “System assemblers are able to build consumer electronic applications, and we want to take a simultaneous approach to tackling this region with some co-branding initiatives. The assemblers from around the region will have access to our laboratories in the UK and new technologies — even prototype products — before distributors gain access to them.” Seagate also encourages system builders to explore new opportunities and assess the state of play in other markets around the globe. “We want them to look into all those products available in Europe and start assembling them in the Middle East,” explained Cakmakci. “If you look at the population there are hundreds of millions of people in the region and consumer behaviour in Western Europe shows that digital video recorders are in every single home like VCRs used to be. These video recorders need hard disk drives,” she said. It will be a difficult task persuading classic resellers to shift complete emphasis from the IT to consumer electronics market, but hard drive manufacturers are naturally keen to push them in this direction. “I think it would be essential for them to do this in the mid term,” asserted Cakmakci. ||**||Leading Capacity|~|rajeev200.gif|~|Rajeev Mukul, LaCie|~|With the fast pace of technology development and consumers demanding cutting edge products, resellers who supply standalone drives should be striving to stay ahead of the curve in terms of the storage capacity that they supply. According to Hesham Tantawi, VP MEA at distributor Asbis: “Resellers should always try to lead the market for higher capacity — they will make more money and they will make their businesses more profitable.” Hard drives and computer peripherals vendor LaCie places huge importance on the skills that Middle East resellers have in terms of PC assembly. Rajeev Mukul, VP Sales Asia and Middle East at Lacie, reckons LaCie’s resellers add value by way of system assembly. “They integrate storage products with PCs, workstations and servers and offer optimum end user solutions. These value-added resellers must remain engaged with vendors in order to bring innovative solutions and higher value to end users,” he said. Meanwhile, Seagate admits it is aiming to increase the level of interaction it enjoys with resellers and system builders in the region during 2007. “In the Middle East we struggle to find pure system integrators. We expect partners to specialise in system integration and we support those types of company because local integration is the key to success in this kind of immature market,” said Cakmakci. “We think that the system builder in this region needs to have a wider perspective than ever. The industry is changing so much. To build a PC you need 12 components whereas you only need two or three components for a set top box or a digital video recorder, which are the hot products in Europe at the moment,” she added. Distributor FDC — which also produces the XPC brand in the region — insists hard drive sales are booming at the moment. It maintains that although many HDD vendors only have a limited on-the-ground presence in the Middle East, it offers support to customers across the region and cites its office in Dubai’s reseller capital, Khalid Bin Al Waleed district, as a key indicator of its commitment to resellers in the hard drive space. According to Mohamed Owais, business unit manager for hard disk drives at FDC, buying behaviour is still immature for hard disks in the Middle East: “PC penetration in this region is very low. The end-user doesn’t really know about hard disk drives — they know they want an Intel CPU, a Samsung monitor or a Kingston memory, but in the Middle East, brand consciousness for HDD is not yet high.” Owais claims the market can be divided into four sectors of demand: enterprise, desktop, retail and mobile — and each segment has its own clear leader in the Middle East. “In the 2.5-inch space — notebooks — it’s Toshiba which is dominating, Maxtor is the leading brand in retail but LaCie and WD are catching up, and in desktops Seagate is particularly strong in North Africa and the GCC,” he said. One area of breakthrough technology that is seeing its way onto resellers’ shelves in the retail space is the external hard drive. LaCie’s Mukul reckons that demand in the region for internal hard disk drives is proportionate to growth in PCs, servers and consumer electronics devices using the hard drives. “However, demand for external storage is increasing at a much faster rate year over year due to growing awareness of data back up and ever growing large data files,” he said. Imran Khan, deputy marketing manager at distributor Empa, agrees that the external hard drive market is the most active area of the hard drive channel in the Middle East: “The external storage market size is vast and surprisingly varies a lot according to the market. Saudi is leading the Middle East market in both notebook and external storage. For external storage the reseller should be aware of the technical specs and be ready to provide it as a solution to the end user.” ||**||Tumbling Margins|~|owaisfdc200.gif|~|Mohamed Owais, FDC|~|As the global PC market becomes increasingly commoditised and PC penetration levels rise, hard drive prices naturally take a tumble. With end-users lacking in hard drive brand-awareness the market has inevitably become fiercely price competitive. “All of the vendors are starting to give more storage for less dollar value,” said FDC’s Owais. “They’re striving to give lower prices and it’s been extremely competitive in terms of price as well as technology.” Gupta at components distributor eSys also lamented: “Pricing and profit margin trends have been really bad. With hard drives, platter density is the key aspect.” Five years ago, new platter-densities were being developed more frequently and there would regularly be new hard drive capacities arriving in the market and stimulating change. As a result resellers stocking the right amount of the right products would make stronger margins than those who weren’t quite as tuned in. Over the last two years, however, this trend has been a lot smoother. “Recently hard drive development has been static at 80GB. Only now have people been talking about 125GB platters or 160GB platters. Now, with stable technology and density, price has been pretty stable,” said Gupta. Tantawi at Asbis claims profit margins in the hard drive business are extremely thin and points the finger at distributors, sub-distributors and resellers guilty of selling on components for the same, or less than, the price at which they paid for them purely for cashflow reasons. He claims some manufacturers are inviting such activity through the kind of rebates schemes given to second-tier channel players that they use to keep afloat. “As a result many resellers are selling on very thin margins — less than one digit. This is not healthy business, some distributors are selling a good mix of products to counteract this but some aren’t selling high-end products and that is dangerous,” he added. Seagate places the blame for the current pricing battle squarely on the heads of its competitors, which it reckons are undercutting each other in an attempt to eat into Seagate’s high market share. “The pricing environment digresses continuously,” said Cakmakci. “It’s a very competitive and aggressive field. This is a result of what we’ve seen of our competitors, who seem intent on capturing our market share without regard for profitability. As the leading manufacturer we are the technology, market and product leader — this allows us to move forward whilst remaining with our pricing discipline.” ||**||Guaranteed Quality|~|imran200.gif|~|Imran Khan, Empa|~|Another issue close to the heart of the hard drive channel is the issue of after-sales support and warranties. Western Digital, for example, raised the bar by opening a “fully-fledged” service centre in Cairo towards the end of last year, designed to cater to the needs of resellers in North Africa. Hitachi and Seagate both claim to operate similar centres in Jebel Ali. As a result the three hard drive vendors are utilising their service centres to offer increasingly competitive warranties on their products. Each is hoping to win reseller loyalty by claiming that they stand to reap the benefits of less time, hassle and money spent on dealing with returns. Seagate stunned the hard disk drive industry when it first announced its five-year warranty several years ago, but Cakmakci insists the move proves how important it is to give resellers and customers peace of mind. “One factor that has an impact on the reseller is the number of defective drives — it needs to be taken care of. Seagate has the lowest return rate in the entire industry and we believe that the five-year warranty will help us get customers loyal to Seagate in the Middle East,” she explained. Asbis’ Tantawi reckons the role of warranties in hard disk drives should not be underestimated. “One of the major things that vendors, partners and distributors must all understand is that the data in the hard drive is a hundred times more valuable than the hard drive itself because it contains thousands of working hours. They have to choose the right drives, right technology and give longer warranties,” he argued. While vendors have been offering extended warranty periods on internal hard drives, war ran tees on external hard disks are in-line with the consumer electronics products they are bundled with, such as digital cameras, wireless modems, printers and scanners. Mukul at LaCie said: “With increased reliability and consumer awareness of better product handling, failure rates are consistently going down. However, a prompt response to customers’ problems remains the highest priority amongst respectable vendors.” The new wave of consumer electronic convergence has created varying demands for hard drive products across the region. In terms of market size, Saudi Arabia and Egypt consume more than 800,000 units of hard drives every year, according to market sources, but in terms of buying behaviour there is a difference. “Egypt buys a little more high-end to Saudi,” revealed Gupta. “But it’s not a massive difference — overall I’d argue that it’s quite a homogenous region in terms of hard drives,” he reflected. Frank Sheu, CEO at broadline distributor Almasa, disagrees: “Each market has its own demand. Africa for example still demands 40GB, but we also see a strong demand for entry-level 80GB, which contributes 60% of the HDD market share in the region. With the launch of Windows Vista, we see a strong demand for higher HDD capacity,” he said. Cakmakci claims that the variance in market behaviour can be categorically broken down. “At the moment, demand in the Saudi market is huge in the enterprise segment and in Egypt it’s about personal storage — we can differentiate those countries. In the UAE, we see a strong opportunity for personal storage and notebooks, but surveillance is the most important area for Seagate in this market.” Hitachi’s Frapard endorses this view and acknowledges the future role that surveillance has to play in the Middle East hard drive market. “CCTV is the big thing,” he predicted. “Surveillance is big in Europe and I’m sure it won’t be long until this trend is mirrored here — certainly in Dubai and then elsewhere in the Middle East too.” Training is also a key element in the hard drive market, even though it may not necessarily be something closely associated with such a fast moving, high-volume sector. Vendors and distributors claim that although resellers possess the skills, they have not yet ascertained the knowledge to assemble consumer electronic products. The ability to upgrade hard drives features high on the list of skills they are being encouraged to develop. “I advise resellers to develop a skill set based on servicing the hard drive,” said Gupta. “Hard drives are in many gadgets now and there is an opportunity if someone walks into your store asking to upgrade a hard drive. If resellers can do this, they’ll get additional revenue,” he said. That sentiment is echoed by Sheu at Almasa. He explained: “The demand for storage is driven by products such as CCTV set-up, video cameras and other back-up solutions. But there is also an increasing demand from the storage upgrade market, and that is a potentially lucrative opportunity not to be underestimated.” If members of the vendor community are to be believed then not enough integrators in the Middle East are taking the opportunity to broaden their PC assembly and servicing business to include consumer electronics applications that utilise hard drives. The non-PC sector has already become a more significant aspect of the wider HDD market and the implications for the channel are encouraging. But at the same time, vendors must ensure they are assisting their local channels in terms of sales, technical and service support. The hard drive sector is a market synonymous with falling price points and aggressive margins; vendors must make it an attractive proposition for their partners. ||**||

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