Lessons to be Learned from the Current HDD Landscape
An Interview with: Jonathan Gerber, Horizon Technology
The impact of the Thailand floods on the HDD market is still not fully known, as Jonathan Gerber, VP of Trading at Horizon Technology explains, there may be more adverse effects still to come in 2012, and in these brief months since the start of the supply shortage, there may be many lessons to learn, and ways to prepare for future events like this one. Having more than 15 years of commodity trading experience, we asked Mr. Gerber about those and many other things regarding today’s HDD landscape, below are his responses.
1. Who had the immediate advantage in the days following the flood?
It’s pretty straightforward. Distributors who had an inside track on the impact of the flood and the macroeconomic understanding of the storage market to make purchasing decisions before the news and implications became public. Some distributors, I don’t want to call it luck, but many of them took large stocking positions in the third quarter, and were the go-to suppliers immediately following the flood. Obviously, there is hindsight influencing my response here, but being committed to storage as a commodity, that certainly helped us, as it likely did any supplier with a studied approach to hard drives. From an OEM standpoint, it was those who had a flexible supply chain strategy and standing relationships with independent distributors. Being able to pick up the phone, and put in an order to cover your production or service needs for a couple months, or even weeks, while you get the long term straightened out – I have to think that relieved a lot of stress – and that’s an advantage in and of itself.
2. What about those who disadvantaged from this? Who had to stop what they were doing and go into critical mode?
It’s the converse to your first question. Many OEMs, especially those in the specialty device market, the ones with a high mix of products and low volume of consumption, they are contractually obligated to buy through a very narrow authorized channel. Many of them have been left with palms facing the sky, or have been faced with the option of breaking their contracts in order to buy from the open market. They have to weigh customer satisfaction to vendor satisfaction. They will likely air on the side of the customer, but just that momentary hesitation, has put them in a precarious situation.
3. The first obvious question everyone is thinking as we enter our holiday season: How has short supply impacted the everyday customer?
When will things be back to normal for them? That’s a great question, and one that I must address in two parts. First there are the e-tailers and brick & mortar big box retailers, which sell not only externals and replacement drives, but also offer the first level of service support, and deal directly with managing customer experience. To this end, there hasn’t been much disruption. Granted there have been quantity limitations placed on the consumers, but price and service time have remained stable. It’s not uncommon for retailers of all types to stock pile product as early as July. They are preparing for Black Friday and the Christmas rush. So for now they’re fine, but no one knows how 2012 will play out. Everyone is covering their demand for the 4th quarter, and I mean from OEMs to CEMs to retailers, but there could be a tail whip that happens in the first quarter, and we may experience another shortage. But that’s not where the everyday consumer’s contact ends. What about the stock prices of your big commercial computing companies like , , and ? They are sacrificing considerable profit margin to ensure uninterrupted supply, it’s going to show in their reports, and if it hasn’t already, it’s likely going to impact their shares, and potentially adversely impact investor sentiment.
4. What have you found to be the OEM response? How are Seagate and WD reacting to this? What can their response be in a time like this?
Some HDD manufacturers are taking an opportunistic approach to the market conditions. They have a limited supply, and they admit they won’t be able to satisfy all the demand, so they are placing caveats, such as long term contracts and higher MOQs. On the other hand, others are transparent about raising prices, and are doing so across the line, but are at the same time honoring all standing PO’s at the price before the changes. HDD manufacturers are doing a great job of working with the OEMs to get their specific firmware, and creating a case for distributors like us to flash that firmware on generic drives. We’ll have to wait and see how these strategies compare, you know, after the dust settles, but I know this much. I think it’s fair to say that the agility of the open market is finally paying dividends for the entire industry.
5. Which hard drives are the most affected?
Ah, thank you, a tee ball question. Obviously this is where Horizon Technology has the most intimate knowledge, and where we provide real market analysis. AV drives, we are most exposed to these via set top boxes like TiVo and other high end home theater product, they have become scarce relative to demand, and so have the high performance desktop drives, 750GB and larger. But is that a surprise; is that news? These are consumer focused products, the blood line for OEMs. The story to be written, and the area that will affect businesses operations, is that of the enterprise class drives. Even Seagate, the best-in-class enterprise manufacturer, and largely unaffected thus far, doesn’t yet know the implications from upstream component shortages. Granted they have supply today, but manufacturers of the platters, the heads, the motors, guess what they are all in the same flood struck region as WD. What’s going to happen when the current supply of enterprise drives get used, how do they expect to build more? Cloud computing companies, SaaS companies, IT conglomerates, they all depend on enterprise class; it’ll be interesting.
6. How is the distribution market providing support?
Distributors, have for lack of a better word, been mandated to support the OEMs, the Tier 1 OEMs first. Even we couldn’t buy from the authorized channel, and from the OEM’s perspective that’s a great thing to hear. That’s hardly enough, it’s a good PR statement, but even with dedicated support, the OEMs still needed to exercise flexibility, and reach into the open market to make up the difference. Long hours, working from home, working on the weekends, depleting cash levels in order to properly stock for your customers, flashing OEM specific firmware to generic drives, special testing procedures, that’s just a few of the things we’re doing at least. We’re also staying open to ideas, we’re listening to the customer, and the customer is listening to us.
7. What is the advantage open market distributors have over authorized in this scenario?
You mean other than NOT being authorized? We’re buying globally, we’re the most fluid, we call it market liquidity, and it means more than ever in a shortage like this. We have 10,000 supplier partners, 200 of which we are buying from on a monthly basis. We have a Global Supply & Demand Database that tracks real time pricing and availability on more than 200,000 unique part numbers, most of which are storage devices. The market can’t hiccup without us knowing it, we’re better positioned to act, and act quickly, decisively, the information required to make big purchasing decisions is already in-house before we even pose the question. Most of all, we have only one obligation, and that’s the customer. We aren’t expected to sell any more or any less of any given product. We don’t operate from a line card, we simply observe the global market, HDD, LCD, motherboard, etc., and we monitor it, and buy for our customers’ sake only. Can authorized distributors say that?
8. What will be the business lessons learned from this tragic event?
The lesson, its diversification, isn’t it? I mean that rhetorically, but come on; having all your eggs in one basket is how medium size problems reach critical mass. On the HDD side, it probably means more production locations. For an OEM or their service partners, it means openness to diverse supply channels, it means pushing back on the status quo and expecting more from your suppliers – and quite frankly that higher level of expectation always means open market – we’re just geared for that customer centric solution.
Horizon Technology, LLC is an internationally recognized independent distributor of information, storage and display products for computing and other technology applications headquartered in Lake Forest, Calif. Horizon Technology revolutionized the industry’s standard conventional distribution model as one of the first distributors to offer a customer centric approach and provide top-of-the-line market liquidity. For more information about Horizon Technology visit www.horizontechnology.com