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Editorial: Driving a hard bargain

Editorial: Driving a hard bargain

Collusion is a very strong and definitive word to use when you are talking about the way in which companies implement changes to their modes of conducting business. Unfortunately, I am not sure how else you could describe what happened in the hard drive supply chain last week.

The three largest hard drive manufacturers in the local IT channel - Seagate, Maxtor and Western Digital - simultaneously announced they were shifting the warranty period on their products from three years to one year.

While it is probably more of a one-in-all-in copycat act than an actual fraudulent conspiracy, such a coordinated announcement is far too thorough and all-encompassing for it to be a coincidence. Any way you look at it, there must have been some communication between the three big guns of hard drive manufacturing for it all to be announced and made effective on the same day.

No-one actually monitors hard drive sales in Australia, but according to informed estimates from channel sources, distributors in Australia shift somewhere between 350,000 and 400,000 units per quarter. Even if the low figure is closer to the mark, it clearly demonstrates that it is a huge business.

It is also a tough business. Stiff competition at all levels of the supply chain means that no-one has been making any money out of the trade for quite a few years. Vendors have probably been doing it tougher than anybody else and now they want to reel in the costs and try to return some profitability to the industry sector.

In the second calendar quarter of this year, Maxtor lost over $US109 million on just under $900 million of revenue. Revenues were down by over a $100 million and losses up $30 million from the same period 12 months ago.

Seagate fared no better. It lost nearly $200 million on revenues of $1.4 billion in the April to June quarter this year. Revenues were up from 12 months earlier but a small profit from the same quarter in 2001 had slid noticeably into the red.

Western Digital's paltry $13.1 million profit on revenues in excess of $540 million for the same quarterly period made it the star performer of the three, having crawled back from significant losses a year earlier.

A reader e-mailed me on Friday after we broke the reduced warranty story online and expressed dismay that the vendors should use improved reliability of their products as an excuse for the move. This correspondent was expressing the sentiment that surely a lessened propensity to failure would be cause for a longer warranty period, rather than a shorter one.

So what is the real reason for this coordinated move by the three hard drive vendors?

It is all about driving costs out of running their businesses. It is about transferring some of these costs to channel partners, which will now have to bear the burden of any component failures that occur more than a year after they sell them.

None of the distributors I spoke to last week were prepared to go on the record with a bucketing aimed at the vendors, but off the record they clearly were not happy. Words such as "farce", "collusion" and "underhanded" were bandied about.

Of course, the biggest problem with this is the complication it creates for OEM channels, which offer three-year warranties to differentiate themselves from the global brands. They now have to either carry the burden themselves of the extra two years that are not covered by the hard drive manufacturers or offer split warranties.

It's a kick in the guts to the distributors and resellers that have been the champions of these brands. You can't tell me that the unified timing of the announcements wasn't orchestrated by the vendors to their benefit.


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