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Chips on their shoulders

Chips on their shoulders

The chip shortage is wounding large manufacturers and small OEMs alike. The confusion caused by a reported lack of communication and scrambling for limited resources has seen deep rifts appear in once calm distributor/OEM relationships. More disturbing still is the pall of fear that hangs over the channel players when the shortage issue is raised. Many resellers will speak out only when they are assured that their identity will be not be revealed.

Philip Cronin, Intel's area sales manager, explained the official Intel response to the shortage is that it is the result of a dramatic increase in demand rather than a supply-side failure. Cronin claims Intel has consistently increased supply into the Australian channel over the past few months, but demand continues to race ahead of supply.

"Demand has risen exponentially. We are trying to get ahead of it and we believe that with the addition of manufacturing capacity that the end is in sight. We are bringing more product into the country than we did in Q1 and Q1 was an improvement on Q4 - we are getting more product in every quarter."Cronin also insists that no one group can be held responsible for supply concerns, pointing out that under-forecasts and a resulting lack of supply are par for the course in manufacturing and international distribution.

"The problem isn't just here, it's worldwide. We are running as fast as we can to increase production, to be able to fulfill demand. The supply issues are based on a number of parameters, low forecasting, a sudden upsurge in requirements and a move by computer users in both Internet as well as business perspectives to require more and more processing power," Cronin explains.

The real driving force behind increases in CPU power is a contentious issue.

Vendors' constant grasping at faster CPUs is cause for concern according to channel sources, both in Australia and overseas, who would prefer to see the energy focused on maintaining entry-level supply.

As a result, frustrated OEMs are forced to return to their clients with invoices higher than initial quotes. "I feel like a bit of a crook," said Nimrod Thomas, director of Nimrod computer Services, a WA-based reseller and integrator. "I sell my clients a 550, and then I have to call them and tell them I can't make it a 550 - it will have to be a 600 and I'll have to charge them an extra $200 over what I quoted."Other channel players, who refused to be named, confirm the toll the shortage is taking on company goodwill. "It has certainly strained relationships that have taken years to develop. Our clients feel they can't trust us all of a sudden because we come back to them with a different price and product", one anonymous reseller lamented.

Another distributor claimed that prices of the mid-range processors, which haven't as yet been affected by the shortage, are set to fall, giving local OEMs the opportunity to simply substitute the faster processors for the entry level CPUs they initially factor in to contracts.

"There will be a price drop on the Pentium III, so if the reseller makes the move up to the 700MHz and above they can rely more on supply. I don't classify 667MHz, 700MHz or 733MHz processors as high end anymore because the price is moving down to encourage people to adopt new technologies, There is no reason for people not to adopt this new technology."Some resellers, on the other hand, point out that because of the shortage, the price drop will fail to follow through to the channel. Nimrod's Thomas claims that any price shift will be immediately tempered by overwhelming demand.

"They say that the price will go down but that is not true, because if they are so short of them they will immediately go on the black market and go up in price."Concerned about losing already limited access to scarce resources, few in the channel have been prepared to comment publicly, however, once their anonymity is guaranteed, they quickly reveal the distress that the shortage is causing.

Larger distributors are particularly guarded with their responses. Ingram Micro general manager Michael Shea shied away from an interview on chip supply issues, limiting his comments to recognition that, "Intel has always supported Ingram Micro Australia, has always communicated quite openly with us and kept us regularly updated about supply issues."Similarly, Sydney-based ASI's managing director, Ken Lowe, was grateful to the chip vendor for providing supply information to the distributor channel well in advance of any problems.

"Intel always gives a roadmap of exactly what is happening. They are always willing to project future or impending price drops and we always share that information with our close customers - it helps them with IT purchase management."Lowe stressed the importance of close relationships along the vendor-distributor-OEM/reseller chain.

"We are able to overcome the challenges posed by supply shortages by mainly ordering stock in advance and holding it. The good thing about being an Intel Authorised Service Provider (IASP) is the communication with Intel is very good. It is like a partnership program - there are things that we have to do and things that they provide to us," Lowe explained.

According to Intel, the coverted IASP partnerships are based on an industry-related selection process. Intel's Cronin described the program. "The IASP is an umbrella program for the channel to create strong engagement levels with Intel. There are a number of elements to it, such as product training and technical certification."Cronin went on to confirm the benefits outlined by Lowe: "Being a member of the program gives you access to road maps and technical resources. It's a channel program to enhance the business of our key, fully certified IASP partners.

"The criteria are those of engineering resource and capability and marketing focus. We tend not to go in to verticals, we are looking for people who are not building for one specific industry."The Holy Grail of the channel is information about chip availability, and the Intel roadmaps gained via IASP partnerships appear to provide the insider information necessary for planning around supply issues.

In a bid to gain or keep favour with Intel, distributors and other channel players will not besmirch the Intel name publicly. Many fear endangering their IASP status or other relationships they have formed with the vendor.

Rather, they are adopting a put up and shut up attitude to Intel's failure to keep them fully informed about upcoming shortages, and marketing-driven releases of as-yet unobtainable CPUs.

"I don't want to say anything bad about Intel on the record," commented one channel player. "We are very much aligned with Intel in terms of product branding. We are working towards becoming an Intel solutions partner, so Intel is very much part of our business."On the record, we are told that the channel is constantly receiving updates and roadmaps about supply. Off the record industry sources reveal that the releases of the roadmaps are repeatedly postponed. In addition, off the record, the sycophancy is replaced with vitriol, as distributors and resellers alike savage Intel over channel support and supply issues.

According to Intel, the channel was informed as soon as it became an issue that there would be a problem with supply.

According to those we spoke to in the channel, Intel waited to the end of May to inform non-IASP interests. In the words of one disgruntled reseller: "They only came out and faced up to it at the end of May, then all they did was come to us and say, ‘We've got problems and they aren't going to go away in a hurry'. If there had been communication earlier there would still be a shortage, but it might have made things easier because at least we would have a rough idea of where Intel was going. Instead, they say supplies are constrained and it will be better next week. So we wait for next week, nothing changes and it starts to become a joke."Resellers, desperate for supply, are forced to shop around different distributors. "We are just trying to get what we can from who we can get it from. We will go to anybody we can, we are dealing with distributors we've never dealt with before, we are calling up people and asking what they've got and buying it straight away."With such massive supply problems at the entry level it is little wonder that AMD is making inroads into Intel's market share.

According to researcher Inform's senior analyst Phil Burnham: "Especially in the consumer and small business arenas, AMD is very much in there now if you look at their market share. Over the last six months, AMD has taken advantage of the shortages and has gained a lot of ground on Intel. The AMD share of the market has almost doubled in that time."According to Steven Fraser, AMD's business development manager, unit sales on the local market have grown seven-fold over the last year and larger corporate vendors are increasingly integrating AMD CPUs into their hardware.

"The big guys like Compaq, Toshiba, IBM and HP are taking AMD into their product line to make them more competitive against local OEMs - they don't have to rely on one CPU supplier so they become more competitive. I have more and more people coming to me every day because they can't get supplies from Intel."Manufacturers such as Acer and Gateway have been forced to announce lost sales off the back of Intel shortages. In fact, Gateway has recently announced its plans to double the number of chips it buys from AMD due to Intel's erratic supply.

Fraser, on the other hand, claims that AMD supplies are reliable and that distributors in Australia are currently holding stock of the entire range of AMD CPUs from entry-level 500MHz through to high-speed 850 and 900MHz units.

"The local OEMs should take up AMD to make them more competitive. They can come out with high-speed parts like 850 and 900MHz processors, which I have in stock, are available to the larger OEMs because I have stock of the processors that Intel is only making available to the big players, I can sell them to the local guys.

Whereas large manufacturers can rely on the power of their own branding, it would seem that local OEMs remain sceptical about their ability to sell units that with AMD rather than Intel processors.

While Fraser admits that there is a certain reluctance throughout the channel to move from Intel to AMD processors, he puts this down to local OEMs suffering a crisis of confidence in the power of their own branding.

"What is important to the customer," offered Fraser, "whether they buy Compaq, IBM or HP is that they get good reliable service and support. What's on the outside of the box is more important than what's on the inside. The local OEMs that rely on having Intel on the inside of the box are actually discounting their own value.

"The large corporates understand that people know the HP brand and that the customer doesn't really care what's inside the box. The customer will trust HP or IBM or Toshiba or Gateway, no matter what's inside the machine. The local guys haven't learnt this yet - they discount their own brand and say, ‘Oh well I can't sell AMD because the customers won't buy it', instead of having confidence in their own brands."However, local OEMs appear to be gradually overcoming their sell-through concerns and are increasingly turning to AMD processors. Distributors whisper plans to change alliances, but again refuse to go on record, fearing Intel's wrath.

There is a certain amount of end-user pressure on the channel to supply Intel rather than AMD products. Channel sources pointed out that some of their clients would rather wait than run with an unknown product. "From a client point of view, 95 per cent of them are saying they will just wait. They are still adverse to switching over to AMD."However, senior industry commentators such as Inform's Burnham consider end-user concerns regarding quality to be largely unfounded. Channel players recognise that wariness of AMD offerings is largely driven by successful Intel marketing and past concerns regarding AMD products.

"It's just great marketing on behalf of Intel. Most of our dealers are Intel people and they are not that keen on AMD. AMD has had a few issues in the past and people are just a bit slow to react."Nonetheless, the Intel chip shortage is forcing many to cross the floor amid widespread concern that AMD may not be able to keep pace with a sudden growth in demand. Despite Fraser's assurances that AMD in Australia is currently fully stocked, cracks have reportedly already started appearing in the company's supply-chain varnish. As reported in an earlier ARN (May 17, page 8), Nathan Anderson, purchasing manager at systems integrator MBI computers, slammed both CPU manufacturers over supply issues.

"Intel is really starting to lose the plot, and the shortage will not be sorted out until after June," Anderson commented. "But AMD is not much better. It is very frustrating - you can put in an order for 100 CPUs and only get 10 back in shipment."With AMD supply issues yet to be fully tested, channel companies are left with little option, and some no doubt will remain faithful to Intel.

Distributor sources, who prefer to remain anonymous, confirm that some local channel players, apparently driven by end-user prejudices, would prefer to lose market share than test the AMD waters.

"The only option at the moment for resellers is AMD with their Athlon chips, and I think that they will grab quite a good market share out of this, but at the end of the day people will still want Intel chips. While they will lose a lot of market share, a lot of OEMs will just ride it out and stick with Intel."Other distributor sources, steadfastly loyal to Intel, don't see that shortage as an issue and blame resellers and OEMs for being too impatient and failing to provide realistic demand forecasts.

"So far I don't think that it is a big issue - there has been a problem with tight supply. But if the customers could put more planning in place and give us better forecasts, we are more likely to be able to fill the demand.

"I have to admit that supply is not 100 per cent up to everybody's expectations, but we all need to take a step back and look ahead. If resellers could see a month into the future and figure out their requirements for that month and actually pass this information through, then of course we will try to help them. If they need the products "like yesterday", then all we can do is have a look in the warehouse and see where we can get the products from."OEMs reacted strongly to the assertion that their lack of planning is to blame for the shortage, pointing out that for reasons of scale distributors are far better placed to forecast demand than individual resellers.

"If a distributor asked me for a forecast for next month and said they'd buy it and ship it to my warehouse, I'd say not a chance - I could sell nothing. But if they say give me a ball park, and we will make sure that we have that much in stock we could work together on it.""How much forecasting internally do they do?" responded one OEM. "They have a much broader base of information to make those forecasts on, coming back to a statistical point of view, than any reseller has."Although IASP distributors claim that they received sufficient warning to plan ahead and order in a surplus, other distributors reject the notion that forward planning and ordering could make any real difference.

"We stock quite large quantities of CPUs so we are safe for the first two or three weeks of a shortage, but eventually it just catches up with us," commented one distributor.

Resellers, on the other hand, reject the notion that forecasting and forward ordering can provide a buffer zone against shortages, pointing out that they are simply too small to absorb economic shifts such as interest rates.

Nimrod Thomas confirms this position: "We can't order far in advance because we are unable to forecast what is going to happen. The Government might decide to raise interest rates tomorrow and nobody will buy anything, and we end up with lots and lots of stock. Not to mention changes to the dollar - whose going to put good money down and say we have a stable future when we don't know what to buy or when to buy it."Overall the picture for the channel is not good. While AMD's increased market share might stir Intel into action, the theory is as yet untried. As for new players Transmeta's revolutionary Crusoe chip is still in development and not due on the Australian market for some time.

The shortage may eventually come to an end and the supply situation improve but the communication rift developing between OEMs and distributors may precipitate dramatic changes to supply chain partnerships.

Ultimately however, the surviving channel players will be those who take the opportunity to strengthen their own brand and reduce their dependence on a single CPU supplier.warnings of shortages aboundAware of the growing shopping tendency, distributors have taken to warning resellers that they are unlikely to find supply from their competitors. A leaked e-mail from an Intel distributor reveals the extent of the shortage.

"As an INTEL distributor, we have been given our allocations of INTEL CPUs for June and so will the rest of the distributors which will be similar to ours.

The 466 Celerons have been phased out. The Celerons 500 pricing will be revised downwards but delivery for Celerons 500 will be less than 350 units for the whole of June. In other words, the C500 will be "phased out" too. There will be a few thousand units of C533 available but in our opinion will not be enough for the whole June market. Though INTEL has released the C566 and C600, currently there are no allocation for these SKUs.

Unfortunately there will be no NEW delivery of PIII-600 and PIII-650 at all for the whole of June, plus there will be very minimal amount of PIII-667 delivered. So what ever there are stock of the above will be the "remnants" of our shipment for May. The range of Pentium INTEL CPUS available in June will be PIII-700; PIII-733; PIII-750; PIII-800 and PIII-866."


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