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Beyond any doubt Thailand floods have affected HDD market. However, some analysts say that the effect on the market should be a 10-30% price increase. Meanwhile in the consumer market the increase is 150-300%.

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source: Idealo

There are claims that this is in fact caused more by big distributors creating false shortage by excessive stockpiling, rather than only the effect of the floods.

Example of such claim:

According to Sander van Veen, storage product manager at Samsung, this increased production cost of Samsung HDDs by 7 to 8 percent. Samsung could not pass that up, because there were already agreements with distributors.

Despite this, the retail prices of Samsung HDDs, as well as those of other manufacturers such as Seagate and Western Digital, increased enormously.

Is there evidence to prove or deny that claim?

Update: yet another claim, few months later. "HDD Crisis Was Fake: Seagate and Western Digital Post Big Profits"

vartec
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    I've personally lived through half a dozen of these spikes. Hard drive prices run widely up and down, and looking at a two month period tells you nothing. – dmckee --- ex-moderator kitten Dec 01 '11 at 16:36
  • @dmckee are you saying that HDD prices are less predictable than the stock market? – ratchet freak Dec 01 '11 at 17:37
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    What is the method of price fixing being touted? I do not think this question can resonably be addressed in the negative with out that piece. – Chad Dec 01 '11 at 17:41
  • @Chad: basically stockpiling by big distributors. – vartec Dec 01 '11 at 18:07
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    Lookit, they start the y-axis at 40 to make the situation look much worse. Makes me almost disbelieve the text around the figure by reflex. – Jonas Dec 01 '11 at 18:38
  • @Jonas - Its a lineal scale as opposed to a log or inverted log scale. That would make it look worse. I really do not understand your concern. – Chad Dec 01 '11 at 20:19
  • @vartec: You say there are claims of price-fixing. Could you cite some please? – Oddthinking Dec 01 '11 at 22:01
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    @vartec: Is "stockpiling by big distributors" equivalent to the (legal, intelligent and perhaps even boom-bust-smoothing) practice of raising the price of your current stock in the knowledge that future stock will be more expensive to obtain? – Oddthinking Dec 01 '11 at 22:18
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    @Chad, it isn't *wrong* to not start the y-axis at the origin, and if you are experienced at reading graphs, you will look for it. However, it is often seen as misleading in popular sources (such as newspapers), as some people don't know to look for it [citation needed]. It accentuates the absolute differences, while hiding the relative differences, which tends to make small changes look more dramatic. – Oddthinking Dec 01 '11 at 23:31
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    @Chad: Plotting this in log scale would make the difference very small. Also, since the y-axis starts at zero, it appears that the prices rise about 15-fold, rather than about 3-fold. While the absolute difference is correctly displayed, the relative difference is greatly overstated, most likely as a means to make the case appear more dramatic than it actually is. – Jonas Dec 02 '11 at 02:17
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    @Oddthinking: might as well be interpreted, that in this case stockpiling is intended to created false shortage. Ok, it's not exactly same thing as price fixing, will change the question. – vartec Dec 02 '11 at 09:19
  • Interesting. To me, the question has completely changed character now: It was a little too "conspiracy theory" and making claims that would be impossible to prove. Now, it is a little too far the other way - making claims that seem (to me) obviously true (as long as "raising the price to match the expected future price" is considered a form of stockpiling/false shortage). – Oddthinking Dec 02 '11 at 13:21
  • @Oddthinking: if the expected future price is within +10-30% of pre-flood price, then rising price by +150% is not "raising the price to match the expected future price" – vartec Dec 02 '11 at 13:28
  • It is a function of supply and demand. If people are willing to buy at 120 in the same rate that you could supply for 60 why would you undercut. As the supply rebounds the excess supply (caused by people not willing to pay 120 and deferring purchase) should cause the prices to drop as suppliers can make more money by selling more at lower prices than their competitors. The only way this could be a "false shortage" like this claim suspects would be if the distributors had an excess supply of hard drives accumulating. If their stock is basically consistant that is not the case. – Chad Dec 02 '11 at 14:11
  • @Chad: your logic assumes two things: a) distributors sell as much as they buy from manufacturers (in short term); b) they wouldn't do something anti-competitive. Of course price is determined by supply-demand. The claim in the question is, that the supply to retailers is artificially reduced by big distributors. Of course such a action by individual distributors is not illegal at all. However, if there would be evidence that they did it in agreement, that's a cartel agreement and that's illegal (falls under antitrust laws). – vartec Dec 02 '11 at 14:44
  • @Vartec - a) I am saying that if you look at their inventory history amounts your ratio of onhand/sales should trend constant. A spike here over the last couple of months would be one indicator that the claim here is possible(maybe even likely) b) not saying that at all. But there is enough competition here that all parties would have to know that this is not going to be sustainable. And someone will lose and the temptation to be the first one to cash out your stock pile is going to win out sooner rather than later. And when they do prices should crash. – Chad Dec 02 '11 at 16:30
  • In normal situations, we can assume, that the price of hard drives is a producer price. It is not increased by a monopoly or a natural restriction, so if somebody has a price which is too high, competitors will enter the market, and gain it with a lower pricer. The price is build by the marginal costs of production. However, the production of HDDs isn't trivial, so you need some years to build up a new production, and weeks or months to increase your production in a significant way. So for some time, a destructive event can limit the offerings, and increase the prices. Long time agreements ... – user unknown Dec 03 '11 at 04:26
  • ... can shift the profit to another party. Building a stock of hard drives in a temporary heated market is very risky, since prices for old hard drives tend to fall quickly. Given, that all competitors will try to fill the gap, I wouldn't encourage speculation. – user unknown Dec 03 '11 at 04:29
  • Christmas (X-mas) shopping is likely the main reason for this, although diminished supply from flooded manufacturing facilities probably adds to it too. – Randolf Richardson Dec 03 '11 at 20:04
  • In order to try and answer this, you'd need to start with the price elasticity of both demand and supply. It sounds like the supply is inelastic over the short-term (which is what we're interested in); I have no idea about the demand. Some HDD demand is inelastic (e.g., at work we have RAID arrays. If a drive fails, we'd replace them immediately, even if we'd save 50% by waiting a month—the data is worth far more than that.) – derobert Dec 07 '11 at 03:23
  • @Vartec - I will join you now with my tin foil hat... It looks like there may be some shenanigans. – Chad Dec 19 '11 at 19:05
  • Two more stories for the list: (1) [Seagate CEO] reports that, while not directly affected by the floods, they are having [supply chain issues due to the floods](http://www.theverge.com/2011/11/23/2582677/thailand-flood-seagate-hard-drive-shortage). (2) [Seagate have bought Samsung's hard-drive business.](http://www.theverge.com/2011/12/20/2648216/seagate-samsung-hdd-deal-complete) – Oddthinking Dec 20 '11 at 07:03

1 Answers1

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It turns out that the spike may be because warranties lengths are to be reduced by two major manufacturers in the future.

The current (i.e. expensive) drives have a significantly longer warranty period than future ones from the beginning of 2012.

Seagate's warranties on certain drives will be reduced as of Dec. 31, and WD will follow beginning Jan. 2. All drives shipped prior to those dates will continue to carry the current warranty term associated with the products.

So the OP may be right: These drives will likely command a premium over those with the 1 year warranty after first of the year.

"When we moved to a three-year warranty, the expense of doing that was phone calls, repair rates, return rates, refurbishments. None of that has really changed," Rutledge says. "What has changed is the average selling price. Back then, the average price was $175. Today, our average selling price is $65 to $75."

Source

So while this does not actually answer the question of why it definitely gives motive to horde hard drives with longer warranties that can be expected to command premium prices as over time people will expect that the shorter warranty period will imply low quality product. (Second source(pay walled) that backs up the claim of warranty inferring quality)

Oddthinking
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Chad
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  • Anecodottally I know from being in the Industry (I used to recover data from failed hard drives) That moves like these usually leak to vendors and supplier before the populace. Any link to back up that it happened here would be appreciated as then we can show opportunity. – Chad Dec 19 '11 at 19:08
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    I'm no economist, but this seems a long bow to draw - it seems to me it should result in *lower* prices next year, but (a) could it really drive a huge demand this year, and (b) could an extra few years of warranty (on identical hardware) really account for any more than a few percent of the purchase price? – Oddthinking Dec 19 '11 at 22:01
  • Not sure how this could apply in Europe, given that 2yrs is minimum required by the law: http://www.wak-tt.com/tt/2yearwarranty1.htm – vartec Dec 20 '11 at 09:36
  • @Oddthinking - I included links to research that shows that a longer warranty infers a high quality product. And yes people will pay premium for higher quality products... and as the standard is now 66-80% of the old standards that's quite a drop in perceived quality. – Chad Dec 20 '11 at 14:25
  • @vartec - well it gives them reason to horde the drives being manufactured now with the old warranty. These drives will command a premium over the drives made after Jan 1. A temporary spike is risky this is a permanent change creating a finite supply of the old drives that are in demand. – Chad Dec 20 '11 at 14:29
  • p.s. it's "hoard", not "horde" :) Must say I agree with others that merely changing the warranty terms doesn't explain a price spike as indicated. Most people buy drives when needed and don't keep spares just in case, which might drive them to buy drives now in anticipation. – jwenting Dec 21 '11 at 06:22
  • @Chad: still not convinced. We're talking here about consumer HDDs on consumer market. It's not like average person actually knows or cares how long a warranty their HDD has. That would be important for organizations, but these usually don't buy components, but whole systems with a guarantee for the whole system. – vartec Dec 21 '11 at 14:13
  • @jwenting - No but it gives motive to the distributors to HOARD the drives. Just hoarding to drive up price is bad motive. When you have inside info, which I believe that the industry insiders would have, that the warranty terms are changing then hoarding the old drive, which will have a greater value that will continue to increase as the quantity of premium warranty drives drops, is good motive to hoard. This happened with Freon in the 80s the laws went into place Jan 1 1989 that drove the price of a can of Freon from $2 to $15 for a soda sized can over night. – Chad Dec 21 '11 at 14:15
  • @vartec - I do not think this proves the distributors are hoarding the drives. But I think it establishes motive for hoarding them. These drives are used by more than just the average user. If you combine a shortage due to natural events, with the increased value of the drives because of a future change in warranty (and drop in quality that will inevitably come as a result of no longer needing to reduce the number of in warranty failures in the 13-31 month range) The current drives will have a greater value. And the shortage provides a perfect opportunity to profiteer. – Chad Dec 21 '11 at 14:41