2012 drive availability and pricing

Rick Stephens
12-29-11

  Drive manufacturing capacity was severely impacted by flooding in Thailand in November 2011. In addition to the chaos and destruction in the lives of Thai people with hundreds of deaths, manufacturing damages reduced production of drives by some 25 percent from industry highs of summer 2011. Thailand produces 25-30% of some critical drive components and existing manufacturing capacity elsewhere cannot make up for the shortfalls. This essentially means that drive production/availability in the retail market is significantly below demand. Those component and drive assembly plants in Thailand require high tech clean room facilities and machine tooling that doesn't take well to being underwater. It is going to take many months, at least into summer 2012, just to clean up those facilities and get them back running.

 In the meantime, unfulfilled demand for drives is increasing by the day and will take considerable months of manufacturing at full pre-flood capacity to catch up with the ever increasing backlog.

  As a commodity, hard drive prices are entirely set by markets based on availability and demand. Manufacturers have very little direct control over the price a drive brings. They only directly control production costs, quantity manufactured, and warranty terms. The current high volatility in prices is entirely due to supply shortages. The increase in drive prices happened almost immediately after the floods because of industry inability to manufacture enough drives to meet future demand.

  To make matters worse for the consumer, the supply shortages and price hikes are borne pretty much entirely by the retail market. This is because large business buyers of drives operate off of contracts set up to guarantee long term delivery at a negotiated fixed price.

 Changing warranty terms. With Western Digital acquiring Hitachi's drive division last year, and Seagate having already snapped up Maxtor and Samsung, Seagate and Western Digital become our only competing drive manufacturers. With the floods reducing capacity, these two manufacturers are guaranteed to sell anything they can make for the next couple years. They have no market pressure at all on them to be competitive.

 I expect both manufacturers to move towards increasing their profit margins by immediately reducing warranty on all their product lines. We expect to see all desktop drive warranties drop to 1 year from the current 3 year warranty. Enterprise drive warranty should drop to 3 years from the 5 we have enjoyed on the high end products. This is a pure profit move that has no downside for the manufacturers since they are going to sell their entire production no matter what they do to offend the buying public. For now, and until production again meets and exceeds demand, expect the slimmest manufacturer's warranty terms possible on new production products going into 2012.