The COVID-19 pandemic has brought about many challenges for IT suppliers, and the hardware segment is no exception. With users stuck spending more time inside than ever before, demand for digital technologies rose to record highs. PC shipments grew by 13% year-over-year during 2020, the highest growth the industry has seen in 10 years.
The sky-high demand has led to a depleted supply of many of the fundamental components needed to build this technology. Semiconductor and RAM chip makers have struggled to keep up with this boom in demand. The effects were first felt by the auto manufacturing segment in January 2021, but in the past month these shortages have been seen in the IT hardware space, affecting PCs, servers, and storage boxes. Manufacturers such as Dell, HP, Apple, Intel, and NVIDIA have all cited supply chain disruptions in recent earnings calls, and industry experts warn that these shortages may last until 2022.
How PC Vendors are Reacting
Insights from client interactions and industry sources indicate that hardware vendors plan to use these shortages to hike prices and intimidate customers into making more immediate purchases. Our deal data shows that clients have seen price increases as high as 8-10% on crucial hardware components such RAM chips, and we have evidence of sales reps warning of similar increases for other components.
Also, sales reps have taken advantage of the supply chain issues to help meet their quotas. In client interactions with hardware vendors, we have heard sales reps cite end-of-month or end-of-quarter dates as the point in time when these price increases will go into effect. This appears to be a textbook scare tactic to push clients to make additional purchases to help sales reps achieve quota; the lack of a consistent target date for when the price increases will become effective is a tell-tale sign that these interactions may be “strategic”.
What Can PC Buyers do to Protect Themselves?
Spend extra time and resources to build a good medium-term forecast of purchasing/ deployment. Protect your immediate hardware needs by building a 6-12 month forecast and presenting it to your vendors. This will allow you to ensure the vendors have the stock or processes in place to support your demand and give you ample time to pivot if you need to shop elsewhere. Also, find out if any of your hardware vendors have begun to enact price increases. If they have not, move up any spend in the pipeline for the next 6-12 months – it may save you from getting stuck with a poor deal this summer or fall.
Steer clear of volume commitments. You cannot afford to commit to 4K devices with Dell only to find out two months later that the vendor is out of stock, when you have no ability to bring in HP or Lenovo. Instead, buy as needed for the time being, and convey to your sales rep that there may more be volume needed down the line. This will keep your rep hungry to win your business and protect you from being contractually obligated to them.
Delay any refreshes until 2022. It is likely the effects of this shortage will make it difficult to achieve competitive pricing in hardware deals in the months ahead. To combat this issue, we recommend exploring options to extend your currently negotiated pricing. For PCs, this may mean switching from a 3-year refresh cycle to a 4-year cycle to delay any large buys for the next 12 months. For servers/storage, extending maintenance for an extra year on your current hardware is a viable strategy to postpone net new purchases. Taking these steps will give your team the ability to hold off on large expenditures until the market stabilizes.
Request quarterly supply chain updates from your incumbent suppliers. Having direct access to this information will provide up to date intelligence on your strategic partner’s business challenges, and advanced notice of forthcoming supply chain disruptions. The hardware space is a complex industry with many moving parts, and whether its tariffs, shortages, or shipping delays, current events frequently impact pricing. Access to this data can help your sourcing team be better prepared to react to fluctuations in supply.
For more information about building leverage to use with your strategic suppliers, contact your ClearEdge representative.
- Joe DeVirgilio is an Analyst at ClearEdge Partners.