Distributor distrust? Although certain models of disk drives have been able to command higher margins, sales of drives for desktop PCs have always balanced on the edge of commodity status, where price is the deciding factor. Undercutting a competitors price to buy market share is a not-unheard-of practice, and OEMs are always eager to strike deals. Overbuilding a drive also can lead to dumping in the market, which forces prices downward.During the fourth quarter, especially at the end of October, Maxtor noticed that point-of-sales reports from distributors werent as high as predicted. "We were very surprised," Tufano said. Maxtor began to audit distributors, the company found that its own drives had not "sold through" channel distributors and on to customers as quickly as it would have predicted. Like other manufacturers, Maxtors distributors had been granted "price protection"; if Maxtor lowered prices on any of its products, distributors would be able to lower the price on the drives they held, too. Unfortunately for the distributors, that applied to price hikes, as well. On Nov. 24, Tufano said, Maxtor raised prices to test its distributor channel. The result? We caused a short squeeze on distributors," Tufano said. "If our competitors had followed suit, there would have been a total short squeeze." Now, Maxtor is looking at the distribution channel and its practices "a lot more critically," Tufano said. "We must ensure that supply and demand remains in balance and not grow market share at the expense of price," Tufano said, especially in new markets. "Market share must be earned."
Edwards and Tufano both said Maxtors goal is to continue to drive margins and profits upward. "Whether or not companies are overbuilding is not something I want to comment on," Tufano said. "I think its in everybodys best interests that supply and demand is balanced; that is why we focus on sell-in equals sell-out," or adjusting production to meet demand, he said.