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For the occasional observer of the electronics and IT equipment recycling market, the past 12 months have been rather uneventful. Indeed the last big news happened in fall 2012 when Microelectronics sold Redemtech to Arrow Electronics. Since then it was business as usual, obviously until the September 30th, 2013 news of Ingram Micro buying CloudBlue.
Up until then, and still now, large end-user companies, such as big banks, insurance firms, healthcare institutions and others have been busy replacing their aging assets, upgrading PCs that featured Windows XP OS to Windows 7, all while running tests and pilot programs on the new Windows 8 PCs. There has been also a great deal of investments made in enterprise datacenters and cloud infrastructure, essentially leading to the decommissioning of older assets coming out of these centers. All of that bode well for the ITAD and end-of-life sectors, providing a great deal of opportunity for those involved in the ITAD chain from data security, transportation, refurbishment, to remarketing and recycling.
But underneath all of this, a major transformation is underway, one that many ITAD companies and recyclers don’t seem to be ready to face.
The transformation comes in at least two forms. First from within the industry itself; and second from changes related to consumer and business consumption of IT and technology.
M&As Affecting Sector and its Outlook:
The first transformation comes from within, as we expect the acquisition (M&A) movement of the past years to continue and may even accelerate. So far, IT equipment distributors have led the march, first with Arrow making multiple acquisitions, followed by Avnet and now Ingram Micro.
Still within the sector and related to M&A activity, we see leading names involved in adjacent sectors throw their weight in, buying ITAD and recycling industry assets. Waste Management and SIMS have been particularly active on the M&A front.
It is evident that as these M&A transactions are made public, competing firms either get nervous and/or want to join in. So as of today, a number of very large companies operating in the components/IT equipment distribution market, logistics, contract manufacturing, and a few other sectors are assessing to what extent they ought to be buying ITAD assets.
Although it is difficult to pinpoint who exactly is the next target, there is no shortage of candidates left to acquire and cash-rich companies looking to buy them. Therefore we are likely to see some of the remaining ITAD pure-play companies to be the target of potential acquisition in the medium term.
Why is this happening and what are the pros and cons of ongoing M&As?
There are many reasons why such M&A activity is taking place in the ITAD sector. There is obviously the maturing of the industry and unlike other sectors, where the maturity curve peaks at a reasonable time, ITAD and electronics recycling in general may very well be a late bloomer. Indeed while the PC sector matured very quickly since its inception in the early 1970s, the ITAD sector, which services the PC industry, has had a dismal maturity pace. It was only in early 2000s that the first wave of investments from venture capital began to affect the performance of ITAD companies, driving them to optimize their operations and become more mature with a financial model that made sense. This infusion of venture capital money led to the establishment of sound ITAD organizations and structures, which then led to established Fortune companies to buy them.
These acquisitions also come at a time when large firms are looking to expand into new ventures to get new sources of revenue. One particular company I advised was looking to make investments in ITAD because the company’s board mandated the top executives to generate 20% of their revenue from non-core businesses. As you would guess, that company had nothing to do with ITAD.
Yet in the case of Arrow, Avnet and Ingram Micro, critical and real synergies exist with the companies they acquired. This is because their new entities bring a set of skills that complement their services and offerings, essentially tied to managing the retirement of tech assets as they are decommissioned. Because they deals with end-of-life, the asset disposition and recovery functions provide the acquiring companies a greater control over IT product lifecycle within their customers, with the concept of “closed-loop” lifecycle in mind, another expression which simply means “owning the customer”. There are obviously many other benefits. There are also synergies, albeit of different kind, within the acquisitions of SIMS and Waste Management.
However, there is potential drawback in the outcome of the ongoing M&A wave. Two of them are the most cited among businesses that use ITAD services: (1) fear that consolidation would mean reduced competition and (2) fear of reduced quality of services.
The first concern is indeed a legitimate one, as large companies absorb ITAD firms, the number of pure-play and specialized firms is reduced, giving customers lesser options to chose from. The way the new parent companies plan to organize their acquired firms will eventually determine how they are seen by their customers and potential ones.
The second outcome is directly tied to the first. Substantial tweaking of business models of what used to be pure-play ITAD firms turned subsidiaries, could backfire and lead to a loss of not only existing customers but also of key employees, therefore affecting quality of service.
Many end-user companies speak of these two as obviously new issues, adding to unsolved concerns over the quality of data security, transparency, fair market value assessment, etc.
And so going forward, issues of industry restructuring will likely dominate the ITAD sector for a short while.
Changes in IT Consumption:
The second wave of transformation affecting the ITAD sector, perhaps much more important in the long run, comes from outside its domain. Businesses and household consumption of technology is shifting at a rapid pace. A world where simpler but powerful and well-designed systems is being enabled by the explosion of cloud-based solutions. Platform agnostic datacenters and devices are challenging the core of ITAD operations as we have known for decades. Consumers of IT equipment are focusing their budgets on devices that use much lower-cost processors, with applications and files residing on the cloud. This change in IT consumption is very disruptive to traditional sectors that are used to thrive in marketing classic IT assets. It is no surprise that giants like Dell and HP, to name just these two, are seeing their market performance erode compared to companies that have embraced and championed transformation like Apple and Samsung, but also platform owners like Google and Amazon. HP and Dell’s agendas today is how to reinvent themselves, which the ITAD sector should learn from.
For ITAD companies, the challenges will start with product definition and taxonomy. The new products hitting the market carry designs not so familiar to ITAD players, starting with what we see today such as tablets and smartphones, moving to what will come next, from wearables to IT-enabled home appliances that will make recycling a much more different process. For instance, we are moving from hard drives to SSDs, from products that can be demanufactured to locked devices, from systems with high-performance processors to low-performance processors, from modular design systems to technologies that are embed into other more complex systems, including appliances and vehicles. A practical yet simple example of a challenge is that remarketers active in the secondary market are used to selling and pricing based on processor metrics, with Intel processors used for pricing benchmark. Obviously, these companies will have to retool their approaches to the market as new generation of simpler processors that rely on the Cloud are widely distributed. This means new pricing, new partners, but also hopefully new customers for the savvy ITAD players.
In addition, Fortune companies and enterprises of all sorts are right in the midst of their own transformation when it comes to their consumption of IT. And the big elephant in the room is the duo BYOD & Cloud, which are forcing a shift in IT spending, with money increasingly earmarked to Cloud-related technologies.
These events are likely to be much more material to the ITAD sector about five years from now, because there is still a lot of business in handling classic IT. Still, we are already seeing an ongoing shift in client and access device ownership from companies to employees, leaving only the most critical assets, such as high-performance workstations, into the enterprise. Companies are currently spending enormous amount of money into scaling up their datacenters instead, while scaling back their client and access devices purchases.
As these transformations take place, some areas to watch include:
• ITAD services will increasingly become datacenter focused: this means sale cycles will be lengthier, more complex, more focused on compliance and security. And that comes with required new investments from ITAD/recyclers on acquiring capabilities, skills and talents to manage all of that.
• Client devices will have consumer/retail-like characteristics, ITAD sales organizations will no longer deal exclusively with IT management via procurement officers, but will have to incorporate end-user feedback in their sales strategy. Still, the enterprise will play key role in determining requirements and configurations due to compliance.
• New players will impact enterprise ITAD policy: employees will have a greater role as ownership shifts to them, but also watch for the telecom and datacenter functions as they play a key role in determining requirements and rules of engagement.
• Prices in secondary market already under intense pressure. New systems with low-energy consumption processors are getting cheaper and cheaper. Prices in the Secondary market could further erode as the prices of new systems continue to fall.
• Unprepared ITAD firms, those exclusively focused on classic IT assets will have difficulty remaining relevant or competitive.
So what to do in this fast moving environment? There are many things that need to be addressed, but let’s focus on two broad themes:
1– In the next 2 to 5 years, ITAD companies and recyclers should focus on “business as usual” helping companies upgrade their aging assets to Win 7 and then to Win 8. The Rates of decline in new PC sales may not be mirrored into end-of-life for some 5 years and so that bodes well for the ITAD industry in the mid-term.
2– But brace for new changes in product introductions, behavioral changes in IT consumption and continued consolidation and growing role of new players. For instance handling smartphones and tablets at the ITAD level is very different than handling classic assets. So if your skill set is around PCs, the fast growth of phablets, wearables and the likes will bring enormous challenges to your business model, including new competitors that may be entirely focused on the mobility track.
3– Some issues facing the sector in the short term include data security with shift to SSDs, upgradability and component challenges, “de- manufacturability” issues, etc. And on the consolidation front, there will be more to come.
The good news: Beside Win7/8 move, brace for strong demand for new generations of products within the secondary market. Emerging markets are likely to remain hot, though demand in the secondary market in mature economies will remain also high for specific products.
These transformations will not be cheap to manage. All this will require a new business mindset, with the inevitable focus on new channels and tracking mechanisms, lower pricing, more horizontally distributed markets, etc. So what you need to do is to be creative and form alliances with OEMs, retailers, and municipalities, have creative ideas with enterprise clients, and that could help you transition to the next era of ITAD.
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By David Daoud
Compliance Standards
ddaoud@Compliance-Standards.com