HARD DISK DRIVES: Riding On Price See-saw

Uncertainty in the demand and supply position for some of the most preferred
HDD brands has become a matter of concern in the recent past. Partners are
coming out strongly against the warranty reduction from three to one year by
couple of major vendors.

The hard disk drive (HDD) market has been on a roller coaster ride for quite
some time now. It all started with the unsteady price points in the first three
quarters of year 2001-02, which saw many partners registering a negative growth.
Then came a ray of hope in the JFM quarter of 2001-02 with partners recording
positive growth, albeit a small one.

Things
went well during the first quarter of 2002-03 as well. And just when the going
was good, the HDD market was hit by a slew of price fluctuations and supply
inconsistency in AMJ and JAS quarters of 2002-03.

Despite all these uncertainties, channel partners were still optimistic about
the coming months. But that was before Seagate and Maxtor announced their
decision to reduce the warranty period from three years to one year, bringing
their expectations to zilch.

PARTNERS DISAPPOINTED

Seagate’s decision to follow the example set by Maxtor and Western Digital
and reduce its warranty period did not find favor with majority of channel
partners. They feel that this move will backfire on the company and it will lose
ground to Samsung.

But Sharad Shrivastava, Country Manager, Seagate India, is not disturbed by
the negative reaction from partners to the decision. Says he, "The new
warranty policy continues to cover the majority of defective products, which
typically occur within the first five months of shipment."

"Seagate’s loss has indeed been Samsung’s gain," Ketan Patel of
Creative Computers points out. "Samsung HDD sales have seen an increase of
20-25 percent over Seagate after the latter announced reduction in warranty
period," points out Mrudul Desai, GM, Triune Marketing.

"The new warranty policy continues to cover majority of defective products, which typically occur within the first five months of shipment"

Sharad Shrivastava, Country Manager, Seagate India

Samsung seem to have gained over Seagate in the areas of service and support
as well. "seagate has lost out not just because of the reduction in its
warranty period, but also because of Samsung’s excellent service and
support," says Chennai-based Rakesh Jain, MD, Supreme Computers.

Echoing the same opinion, Sanath Babu, MD, Sri Durga Enterprises says,
"Seagate has a bad replacement cycle which is from 25 days to a month. It
also has a higher failure rate and partners have to courier the defective
products to Chennai with an additional cost." He points out that Samsung
has attractive schemes and a well-defined replacement policy and their failure
rate is low, making it a hot favorite amongst the channel and customers.

Partners feel that Seagate will have to either reduce its prices or go back
to three-year warranty to stay competitive vis-a-vis Samsung. On the other hand,
if Seagate gears up on service front, it might be easier for the company to stay
ahead of Samsung because of its superior technology.

But MS Bhalla, Country Product Manager, Samsung India, sees this initiative
of Seagate and Maxtor as a major threat. According to him, the reduction in
warranty could give Seagate and Maxtor a price advantage against Samsung.
"If Seagate and Maxtor pass on the price advantage obtained through
reductuion in warranty period to customers, then we will not be able to charge a
premium."

However, according to market sources, Samsung’s lower failure rates of
drives will act as a major push factor for the brand. On the other hand, Samsung
claims to be evaluating the option of reducing the warranty time depending upon
the user feedback.

"If Seagate and Maxtor pass on the price advantage obtained through reduction in warranty period to customers, we will not be able to charge a premium"

MS Bhalla, Country Product Manager, Samsung India

Incidentally, Esys Solutions is offering a three-year-warranty on drives that
originally carry one-year warranty from vendors, but is charging a premium for
that. For instance, if you pick up Seagate drive from Esys, you have the option
of buying the extended warranty offered by Esys. According to Esys, the customer
still looks for an extended warranty.

MODEST YEAR

Fiscal 2001-02 was a modest year for the HDD market, with total sales of Rs
4.4 lakh recorded during the JFM quarter according to market analysts. Leading
HDD vendors Seagate and Samsung fought a close contest, but both lost ground to
vendors like Western Digital, Maxtor and Fujitsu. According to sources in recent
times, Seagate’s sales have declined by 10 percent while Samsung has
registered a positive growth mainly because the former has reduced the warranty
period from three to one year.

The Indian HDD market has two prominent segments – the open and the closed.
The closed segment includes MNC brands of PCs that have global sourcing
contracts. The open market would include the Indian PC companies and the market
through channels. And it is in this open market that Samsung claims to have a
marketshare of 50 percent.

"If we were to include only the channel sales, then our figure stands at
65 percent," says Bhalla. However, market sources say that Samsung and
Seagate together constitute 90 percent of the open market and others share the
rest.

Bhalla also points out that the overall HDD market-size grew by 10 percent
during fiscal 2001-02. According to him, Samsung’s sales increased by 24
percent during JAS as compared to AMJ.

“The Indian market is of strategic importance to Maxtor and we have tried to maintain regular supplies of our products”

Yogesh Kamat, Sales Manager, Maxtor,  Singapore.

Nevertheless, in the final tally, Seagate has out-ranked other players in the
HDD market by capturing a lion’s share of 60 percent according to DQ Top-20.
By selling the maximum number of HDDs, Seagate has also emerged as the favorite
vendor among channel partners across the country. Samsung follows Seagate with a
market share of about 30 percent, whereas Western Digital, Maxtor and Fujitsu
comprise the rest of the market.

Vijay Gupta, Proprietor, Tee Gee Sales Corporation, Secunderabad says,
"It’s Seagate all the way though I must say that competition from vendors
like Samsung is catching on." Kishore Kumar, Director of Mehak Data
Systems, points out that Seagate is the brand preferred by corporate segment
buyers. However, Anand, MD of ATI Inc believes that in the entry-level, Samsung
has a majority share.

Channel partners on an average recorded a growth of about five to 10 percent
in HDD sales during the JFM and AMJ quarters. According to Vijay Narsinghani,
Director, Intelligent Computers, the company posted revenues of Rs 60 lakh
during AMJ and JAS 2002. This is a growth of 10 percent quarter-on-quarter.

Ketan claims to have done business of Rs 1 crore in AMJ and JAS. According to
him, the growth as compared to the same period last year was around five to
seven percent.

Kishore Jeswani, Director, Pacific Infotech says, "We have seen a growth
of about 10 percent in last two quarters as compared to the same period last
year." However, he feels that the quarter-to-quarter growth in the HDD
business has been flat.

TRENDS AND BUYING PATTERNS

The key trend that emerged in the HDD market last year was the transition of
the entry level model. In 1998, 4 GB was considered entry-level. Four years from
then, the entry-level capacity for HDD has grown ten times and is at

40 GB.

“Prices are on the verge of getting stabilized. But vendors need to communicate better with partners on their product roadmap and prices”

Mehul Gandhi, Proprietor, A-Plus Computers

Seeing this as a huge opportunity, several vendors stepped up their focus on
the 40 GB offerings, which resulted in a shortage for 20 GB HDDs. The 40 GB
increasingly became the entry-level choice even in the SME and SOHO segments. In
the corporate sector, the demand was mainly seen for 80 GB drives.

In a move to address the HDD shortage, Maxtor showed a positive sign when the
company geared up its distribution network. "We recognize the Indian market
as of strategic importance to Maxtor," says Yogesh Kamat, Sales Manager,
Maxtor, Singapore.

Distributors of Maxtor claim that the demand for Maxtor drives has gone up in
the recent past. "This time around the shortage has been caused due to a
shift from the 40 GB platter to the 60 GB platter technology by a number of
vendors," explains Rajeev Sood, Country Head, CyberStar, one of the three
distributors for Maxtor in the country.

VENDOR PROMOTIONS

To ensure that demand for Maxtor drives continues even after the shortage is
over, the company is looking at floating schemes on its SCSI and IDE range of
drives. "New products up to 120 GB are expected to come in soon," says
Rajeev. The company also held a series of roadshows nationally to exhibit its
technology to partners.

Maxtor also launched the "Find the Diamond with Diamond Max’ program,
wherein lucky partners could win diamonds with the HDDs.

Seagate too went on an channel education drive, talking about its proprietary
3D Defense System which provides instant problem detection for customers and
"peace of mind for partners"!

Samsung used the World Cup football match as the theme for its promotional
campaign in the JFM quarter. The scheme allowed partners to score goals or
points with the products purchased by them. These points could then be redeemed
for various prizes.

The company also has an ongoing online promotion, wherein visitors to its web
site www.samsungindia.com could fill in a form and get a chance to win washing
machine.

OND, JFM AND BEYOND

As of now, nobody is sure when the HDD shortage situation will come back to
normal. Says Mehul Gandhi, Proprietor, A-Plus Computers, "Prices are on the
verge of getting stabilized. But vendors need to communicate better with
partners on their product roadmap and prices."

Resellers hope that normal supplies would resume by January and it should be
business as usual. But it is clear that the recent shortage took most resellers
by surprise, due to lack of any communication from vendors.

But Bhalla of Samsung counters this. Says he, "We shared the reality
with our distributors from the very beginning and informed them that it is
nearly impossible to fill the gap. As far as control over market price is
concerned, there is very little degree of control that we can exercise and
prices are bound to go up."

MC Jain, MD, Mahaveer Computers says, "Vendors have not confirmed the
normalcy in the production of HDDs. So commenting on the stabilization would be
difficult at this point of time."

Many partners opined that the OND quarter might not bring good business,
despite the fact that they are foreseeing a normalcy in HDD prices and
availability of stock. Ketan says, "OND is going to be bad because
customers have postponed their PC buying due to the price hike.">

NEED FOR SPEED

Fiscal 2001-02 also witnessed continued dominance of IDE drives over SCSI
drives, with the former accounting for nearly 85 percent and the balance
contributed by the latter. The 5,400-RPM drive emerged as the de facto entry
level.

However, towards the end of the year, vendors shifted their focus on
7,200-RPM drives. The higher RPM drives constituted one-third of worldwide
shipments. In India, however, it was negligible.

Of every 100 Seagate drives sold, 15 are SCSI models, which shows that demand
for SCSI drives and faster-RPM drives are increasing. Channel partners are
seeing this as a major opportunity as margins are much higher in this product
segment as compared to regular IDE drives.

Also a higher demand for 7600 RPM drives from IBM has been observed from a
niche segment which opts for such high-performance drives. With the increasing
need for server computing among SMEs, demand for SCSI should scale up by 20
percent by the end of this fiscal, say market analysts.

SUNILA PAUL  in Bangalore with inputs from GOLDIE in Mumbai, MOHIT
CHHABRA in Delhi and ZIA ASKARI in Hyderabad