Hard Drive Heroes

Almost the entire hard drive industry lies in the hands of just six main vendors: Seagate, Western Digital, Maxtor, Hitachi Global Storage Technologies (GST), Toshiba and Samsung. The market has consolidated so much and the costs of R&D are so high that market entry from a newcomer is highly unlikely. If anything, further consolidation is on the cards and the battle for market share in the developing Middle East markets has is now of premium importance.

“We are putting structures in place to grow in all regions, and the Middle East is a focus area, because there is a growth potential, of 25% to 30%, which doesn’t exist in other regions,” says Hafeez Khawaja, senior regional director Middle East, Africa and South Asia at Western Digital.

Western Digital was the first major vendor to set up in the Middle East, with an office and full service and repair centre in Dubai to serve the region. The last three years have seen the other major players become more committed to this area, with either offices or representative personnel, and collection points for faulty drives established.

Because hard drives are a low margin, high volume product, large distributors have the power to move the volume of product that vendors require. Worldwide distribution giants like eSys, which estimates it sells 24% of the worlds hard drives, and Tech Data, sell the majority of hard drives shipped into the region. As vendors have become more established regionally, they are in a better position to build an in-country distribution chain, which provides better market knowledge and complements pan-regional distribution.

“Last year we set up our own office, we didn’t want to take the Middle East and Africa as one single, homogenous region; so we are evolving country-wide strategies rather than region wide strategies, to bring us closer to the markets and the customers,” says Rajeev Mukul, general manager Middle East and Africa (MEA) at Maxtor. ||**||Regional reach|~|RajeevMukul_Maxtor_200.gif|~|Rajeev Mukul, general manager Middle East and Africa (MEA) at Maxtor|~|Proving that a more regional focus has helped drive vendor business, Mohammed Owais, business unit manager, hard drives at Dubai based FDC, a distributor for Maxtor and Western Digital across the Middle East, reports that FDC closed last year with turnover of US$80m from its sales of 1.5m hard drives. In 2006, the distributor is aiming for US$100m revenue from hard disks.

Market penetration and distribution development are areas of prime importance to vendors, but technological advances are at a crucial stage that will have a massive impact on the channel worldwide over the next year.

There are two main factors driving the hard drive market, firstly, R&D. The technical evolution of the hard drive is slowing down, as vendors have almost reached the maximum amount of data it is physically possible to store magnetically on a disk, recorded vertically (maximum aerial density). This prompts a move to new technology, perpendicular recording (recording into a disk), which will revolutionise the hard drive by offering unprecedented capacities and a new way of storing data digitally. This technology is expected to be unveiled in the next 12 months.

Secondly, the fight between vendors goes beyond specifications and how many gigabytes can be crammed onto a hard disk. Hard drives are moving into the spotlight, no longer just components for computers, but the recording and storage medium of choice for the end-user. This has led hard drive manufacturers to re-position themselves partly as end-user brands, using demand-pull tactics to help drive their products into new channels such as retail and consumer electronics goods.
||**||Merging markets |~|John-Fox200.gif|~|John Fox, EMEA market development manager at Hitachi GST|~|“The industry is diversifying in terms of what a hard drive is used for: is it going to be sitting in a desktop computer, in a living room, in someone’s pocket or in an enterprise in an air conditioned room? Vendors need to have specifically designed and developed drives for these markets. This is not just marketing and re-branding, it’s all down to product development,” says John Fox, EMEA market development manager at Hitachi GST.

The hard drive market has growing sales of high performance small computer system interface (SCSI) and Serial ATA (SATA) configuration hard drives at the high-end. Entry-level drives are 40GB, although some vendors claim that they are already selling 80GB as their standard entry-level. Hitachi GST says it has perpendicular recording drives already in testing stages, and Seagate says it has already started to incorporate this functionality into its drives. Both Samsung and Seagate say they are poised to release 0.85” offerings to the market, the first hard drive that can be integrated into handheld consumer devices.

Vendors are eager to push their products into the consumer sector and have released very adventurous roadmaps. Many are testing the water with external storage retail product offerings, a new, high-growth market area. Maxtor has started appointing distributors that only serve the retail market such as Al Jarir Bookstore in Saudi Arabia.

“When we look at the consumer sector, we are going to see a big shift away from basic PC drives to consumer devices. This will mean more OEM work and the channel has to adapt to these sort of drives, and take the opportunity that offering these products provides,” says Raj Samuel, sales and marketing manger, digital information technology division at Samsung.||**||OEMs demanding |~|Gulfem200.gif|~|Gulfem Cakmakci, channel senior sales manager Eastern Europe, Middle East and Africa at Seagate|~|Globally, OEM work accounts for the majority of business for the large Hard Drive manufacturers, by a large percentage. ”Last quarter ended Sept 2005, the split on a global scale was 72% OEM, 25% distribution and 3% retail, which has been the same, plus or minus a couple of percentage points, over the three previous quarters,“ says Gulfem Cakmakci, channel senior sales manager Eastern Europe, Middle East and Africa at Seagate.

Increased OEM business will put a strain on the supply to the traditional PC market, as Pavan Gupta, general manager at distributor eSys Middle East explains. “Vendors are all very excited about the consumer electronics demand scenario. Everybody wants to use their production resources in the area where the most demand is, and if this meets vendor’s predictions, there will be less hard drives produced for the computing market and the restricted supply will lead to price increases.”

This is an effect already felt by the channel, and will help boost margins, estimated by Gupta at approximately 3.5% to 4% for distributors and no more than 7% for resellers.

“At the end of 2005, for the first time in the last six quarters, we’ve had a shortage in our supply, caused by a much higher demand from OEM customers. We are very positive about these shortages, as the hard drive market was bleeding away margins and taking away from their profitability, now they have gone up slightly,” says Owais.

With margins low and product offerings on a par with each other, the key aim for vendors is to differentiate themselves, by concentrating on a specific product area. All vendors have their strengths, but increasingly there is a need to develop a specific niche of their own.

“Western Digital talks of its external drives, called Passport drives, as well as increasing its offering in the notebook space. Maxtor is very good on its near SCSI offering, Maxline drives. Seagate has already got a full product range, and it is focusing on very high capacity drives of 400GB or 500GB. All of these vendors are also working very closely with the consumer electronics market, and looking at the sub 1” drive space,” says Gupta at eSys.

Hitachi GST claims to be the worldwide leader in R&D and the first vendor to introduce both a 500GB drive to the market and the worldwide leader in 2.5” drives. Samsung is preparing to launch SATA3 drives in early 2006 and also claims its strengths lie in its 2.5” offering. ||**||Product strengths |~|hafeez200.gif|~| Hafeez Khawaja, senior regional director Middle East, Africa and South Asia at Western Digital|~|Product strength areas differ, so distributors can typically carry multiple brands without market overlap, as long as they target products in the right way. Although the largest vendors (in this region Seagate, Western Digital and Maxtor) have roughly equal market share if you look at the regional figures, they all have areas where they are strong and markets where they are weak (with the exception of re-export hub Dubai). This is because supply to each market in the Middle East is restricted to a small number of distributors, giving more exposure to one brand, which then sells more. eSys estimates vendors can capture up to 90% of the market in any Middle Eastern country. According to FDC, the Levant is a very strong area for Western Digital and Africa is an up and coming region for Maxtor.

“We try to target the products at the markets where the other major brands are strong. Where there is a market that has, say, a large Samsung presence then we will push Maxtor or Western Digital to beat them. If there is a market where Western Digital dominates, then we won’t push Maxtor into it,” says Owais at FDC.

Vendors maintain their market position by aggressively partnering, structuring their reseller base and offering rebates and incentives to those who hit sales targets. The more closely resellers follow rebate schemes, the better treatment they can look forward to. The ultimate goal of any reseller is to build a direct relationship with a vendor.

“In the Middle East we define an OEM as a company with a brand that they are actively investing into themselves. A good example of this is Sahara, which is positioning itself as a regional supplier. We are also looking for more companies to qualify as regional OEMs. We have a special relationship with these partners, in terms of technical evaluations; we share our roadmaps with them much earlier. We are also talking to eSys and (Egyptian brand) Metra,” says Mukul at Maxtor.

“The main issues we are addressing with the channel are margin issues, therefore we have a lot of second tier initiatives such as rebates and incentives, which reward resellers with more bottom line margin to help sustain business,” says Samuel at Samsung.||**||Partner strategies |~|Samuel,-Rajj200.gif|~|Raj Samuel, sales and marketing manger, digital information technology division at Samsung|~|“We have much lower operating expenses than our competitors, that is what has kept us profitable quarter after quarter and we are able to pass on this cost benefit to our customers. I think that is the reason that without compromising on quality or technology we have grown so much in this region,” says Khawaja at Western Digital.

Hitachi GST is also on the hunt for more regional partners to work with, having recently launched an ‘Options‘ reseller programme in the Middle East. This gives selected partners support, such as marketing funds, possible co-branding, and a closer relationship with the vendor. This programme is only open to selected local assemblers or resellers, depending on how the vendor assesses each country.

Seagate says that its integrators make hardly any margin on integrating a hard drive into a system, but offers rebates through its Key Channel Integrator programme. The main differentiator and the driver behind its success, it claims, is its product offering. “Margin depends on several factors that could vary from one region to another, HDD capacities and segments. Above all, Seagate’s products offer the highest levels of quality and reliability; which is a key differentiator in a market when people are entrusting their most valuable data to our products,” says Cakmakci

Though they may all be targeting different areas, there is no indication that any hard drive manufacturer will devote production to only one market area. This is possible, but more likely to happen after the introduction of the next generation of technology takes hard drives into more consumer devices. All of the vendors say that there is scope for further consolidation in the IT channel for hard drives at both the distribution and the vendor level.

“There are a few vendors that are struggling, if you see their financials from month to month, these are massive companies and their main focus is not hard drives, but they are in the market because they are big and can absorb losses, but the question comes, how long can they do this for?,” says Khawaja at Western Digital.

Over the course of the next year there will be many changes as the IT and consumer electronics sectors merge and the channel consolidates. Only the most streamlined and organised channel players who are able to shift a decent level of stock and adapt to new market offerings will be able to succeed. ||**||