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Maxtor explains eSys move

After a difficult quarter, hard drive vendor Maxtor has moved quickly to highlight the reasons behind its decision to appoint eSys as a fifth EMEA distribution partner.

Hard disk drive vendor Maxtor has defended the appointment of eSys as its fifth Europe, Middle East and Africa (EMEA) distributor. Existing distribution partners had linked the move to excess inventory concerns and problems in Maxtor’s OEM relationship with Dell.

“Appointing eSys is part of Maxtor’s distribution strategy in EMEA,” explains Didier Trassaert, VP at Maxtor EMEA. “eSys has a low cost distribution model that allows us to be very competitive on price. Maxtor now has a large product portfolio including low-cost drives moving in high volumes. eSys is a very important distributor for taking these to market in a cost-effective manner.”

Maxtor has had a tough quarter, posting an after tax-loss of US$26.1m on sales down 10% year-on-year for the quarter ending June 26, 2004. Maxtor shipped 11.5 million drives during the quarter — a drop of over 2 million sequentially. Problems with major OEM customer Dell and sluggish demand in the distribution channel were both cited as problems.

Maxtor took back 36,000 40GB drives from Dell after a specific problem was identified. This single incident led to a wider shortfall of orders from Dell totaling between 1 million and 1.3 million drives during the last quarter, according to Maxtor CEO Paul Tufano, speaking during the results conference call. Maxtor must now re-qualify as a supplier to Dell and this relationship is not expected to fully recover until the fourth quarter.

“The OEM client did not take the 36,000 drives because of a specification issue, not a quality issue,” explains Trassaert. “This is not about a wider quality issue. Maxtor wants to cover the region using the most efficient distributors.”

Both eSys and Maxtor are adamant that the appointment was not a quick-fix reaction. “eSys is the best distributor for all key components vendors to work with,” said Pavan Gupta, general manager at eSys Middle East. “This is not about inventory or shifting some rejected drives. Inventory is a short-term phenomenon whereas distribution deals are long-term. Maxtor would never appoint eSys in EMEA because it had excess inventory. Maxtor would analyse the impact on existing distributors and would not create one problem to take the place of another.”

With eSys selling 20% of all hard drives going through distribution worldwide, Maxtor had solid reasons to enlist its services in EMEA. “Because of our efficiency, other distributors find it hard to compete against us,” said Gupta. “We estimate that Maxtor holds 28% market share in the Middle East and Africa and we want half of this business.”

In the first quarter of 2004, Maxtor shipped 55% of its drives into OEM customers and 39% into distribution — unit totals of 7.48 million and 5.3 million respectively. During the last quarter, the percentage split shifted slightly to 58% OEM and 34% distribution — unit totals of 6.67 million and 3.91 million respectively. Despite sluggish demand from distribution, Maxtor continues to uphold its channel policies and refutes suggestions that eSys received special pricing on its initial purchase of Maxtor drives to build a working inventory.

“We are shipping products to distributors only when they have four weeks or less inventory,” said Trassaert. “At the end of the last quarter, we had prices that were available to all our distributors including eSys. You cannot have different prices for distributors.”

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