Will traditional purchasing practices for capital equipment on these fast-track projects leave distributors out in the cold? Not necessarily.
If you haven't worked on a data center project yet, chances are you will soon. Whether you know them as data centers, IDCs (Internet data centers), telcos, server farms, telecom hotels, or 24x7 sites, the opportunity for electrical distributors to enter this market and enjoy high profit margins is very real.
As a customer, imagine a promise of only five minutes of downtime per year. In telecommunications lingo, that translates into 99.999 or five nines of reliability. And if that isn't good enough, some Internet service providers (ISPs) and Web-hosting companies tout only 30 seconds of downtime per year or roughly six nines of reliability (99.9999). When you're making that strong of a pitch, the products and services behind your claim better be good.
No matter how you choose to refer to them, data centers house the network servers for ISPs and Web-hosting companies and provide renters or individual corporations with a secure connection to and from the Internet. Striving to deliver 100% uptime for such critical business functions as e-commerce, point-of-sale inventory, check clearing and credit card processing, a typical data center is full of redundant systems and components (see sidebar for a detailed list of core products).
These days, some data centers demand as much as 200 watts per square foot of reliable power service from utilities. In fact, many of these companies take redundancy so seriously that they have built-in penalty clauses in their contracts with clients, says Frank Nash, dot-com marketing manager at Square D, Palatine, Ill. "Some Web-hosting companies will offer huge credits to clients if they experience an outage for as little as one second," he says. "So it's very costly to them, just as it is to any business to go down for any period of time."
Hired by Square D to research the data-center market and help the company define its most common channels to market in this area, Consultant George Brown, co-owner and CEO of Blue Canyon Partners, Evanston, Ill., characterizes the data-center craze as remarkable.
"The sophistication of these Internet data centers and server farms is extraordinary," he says. "You walk into one and you feel like it has the security of Fort Knox. It's sort of out of Star Wars.
"So the center of gravity is very much at the high end. But when you really get into it, there's a pretty broad spectrum of products included - certainly things that are available from what I would call mainstream distributors, manufacturers and contractors."
PURCHASING PATTERNS According to Dan Sylvester, director of telecom business development at ASCO, Florham Park, N.J., most customers are currently buying his company's equipment (paralleling equipment for multiple engine generators and automatic transfer switches used for switching between normal power and backup systems) through engine generator dealers or in some cases direct. "That's because of the interface with the engines and the dollars involved," says Sylvester. "However, customers also need the wiring, outlets, lighting, cages, raised floor, etc."
When talking about servicing through the larger OEMs, Square D's Nash agrees that buying direct has been the trend. "Most of the time, the big ticket or prepurchase items may go directly through OEM channels or an agent network," he says. "But you're still going to have contractor involvement. Therefore, distributors will still be involved in the whole supply chain."
Brown predicts buying direct will decrease as competition increases. "Right now, there are direct dealings and dealings through what I would call very high-end intermediaries, consultants and top-of-the-line contractors that have long-term working relationships with some of these manufacturers," says Brown. "So it's a very specialist crew right now, and they are principally working directly with manufacturers."
However, as more companies enter the market, Brown believes they will bring their traditional networks of distribution with them. "Right now, there is no leisure whatsoever, so you can't take an extra step. But I think a year or two from now, you'll see a much more traditional setting," he says.
Looking at this relatively young market from a historical perspective, Brown points out an important consideration: The vast majority of facilities constructed over the last few years were either built by pure telecommunications companies or companies that no one had heard of three years ago. If you look at the market three years from now, Brown sees Fortune 500 companies dominating. "These companies have traditional relationships, including relationships with distributors," he says. "One of the things we've learned from our research is that no matter what the opportunity is, these companies do things their own way. That will mean bringing their networks, contractors and distributors much more actively into play."
From a contractor's point of view, Rob Moeller, vice president, technology industry group, Sachs Electric, St. Louis, (one of the country's top 20 electrical contractors) has seen a mix when it comes to purchasing products for these fast-track data centers. According to Moeller, in some cases, the owners actually procure the items with 20-week-long lead times like generators. Other times, the general contractor purchases long lead items, and asks the electrical contractor to purchase the motor control centers, panelboards, PMMs and UPSs. "It really is a myriad, depending on the customer," says Moeller. "But one thing is certain: Distributors must be willing to react quickly. If they don't, they're going to lose the order."
Speaking from experience, Moeller says that just as with any other booming industry, you've got to set up partnerships. "From a manufacturing standpoint, if one distributor offers a 24- to 30-week lead-time, whereas their competitor offers 16 to 20, they've got major problems in this particular industry," says Moeller. "So they have to also look at how they can expedite the manufacturing process and consider stocking of such equipment."
From a manufacturer's point of view (who provides electrical distribution and control products as well as supplies a lot of the components to companies that make specialized switchgear and paralleling switchgear), Square D's Nash says the industry can't keep having these "moonshots" on every project. "So you're going to see the emergence of a lot more alliances with companies," he says. "They may not be exclusive, but the awareness is really going to be driven by these alliances or partnerships."
CASHING IN ON CONNECTIVITY Although distributors will typically not have a whole lot of involvement with the big-ticket items, Nash explains there's a ton of build-out equipment that will go through the traditional distribution channels. "There's also an incredible need for distributors to support their contractor and/or data center end-user network by having products on the shelf that they need," he says. "This means everything from safety switches to lighting. There is going to be a huge value associated with local representation of product, and distributors are going to reap huge benefits if they have properly stocked shelves and replacement parts."
Focusing less on the specific characteristics of the data-center market, Brown suggests distributors should follow a rather simple business strategy for success in this competitive arena: Think about what it is that made you successful with your existing core customers. "It's those same things that are going to work in the future - whether it's multi-point service, fast-to-market capabilities, an ability to customize, or technical support," he says.
Although all the attention right now seems to be on constructing or retrofitting these server farms, Brown says the next phase will inevitably be maintenance. "Even though these things have been designed with ridiculous redundancy, they will need maintenance, occasional repairs, upgrades and replacement parts," says Brown. "Data centers will go through a lot of change during their 10- to 12-year useful life. I think distributors will find this area very good business."
Parrish-Hare Electrical Supply Corp., Dallas, Texas, is already reaping the rewards of this market opportunity. "Successful distributors are placing huge stock orders because they recognize the opportunity, and they know the product," says Nash. "They've figured out what products they need to stock for the contractors on these fast-track projects. The products are flying off the shelves, and they're making huge margins."
Parrish-Hare owner Pat Hare says the reason his company has succeeded in this area is because it deals with the right contractors. "These are usually very fast-moving projects, and the customers want to make sure they have a first-rate contractor," he says. "So if we're doing business with the right contractors, we're going to be the ones to get the work. However, we also have to have the quality manufacturers."
Although there's obviously more work sold direct than Hare would like, there's still an awful lot of product being locally purchased through electrical distributors. In fact, up to 15% of Parrish-Hare's business comes from its data-center work. These projects require products like switchboards, switchgear, panelboards, lighting and pipe and wire.
After identifying the materials, a distributor's next challenge is delivery. Believe it or not, six months is a fairly long time in the short lifetime of a typical data center construction project. "The key is how quickly a distributor can get together with his contractor and manufacturer to work with the engineer and get the drawings and plans done," says Wes Butler, Parrish-Hare's sales manager. "If this can be done in a timely manner, then that helps you meet the delivery date."
Butler explains where normal switchgear could require a 16- to 18-week lead time to be ordered and built, most of these customers want their switchgear within eight to 12 weeks. "I think what we (and the better distributors) have is current inventory and the newest technology available. We also have people who can do the work necessary to make all of that flow," says Hare. "As distributors, we've always looked for the right kind of business where you can get value for what you're providing for your customer. With this kind of work, we are able to get what we consider the right kind of profit or value, and that doesn't happen all that often."
TOMORROW'S MARKET Despite obstacles associated with some of these data-center jobs, including unrealistic construction schedules and deadlines, permit problems, labor shortages, and difficulty getting the right equipment, the end of this upward swing is nowhere in sight. That's why the major manufacturers like Square D are giving this market so much attention. "We feel this is probably the single largest opportunity that we'll have in the next 10 years, next to utility deregulation," says Nash. "The analogy has been made between this market and the creation of the electrical utility. They're calling this the creation of the information utility, and I agree."
Sachs Electric's Moeller believes the future of this market will depend upon how application service providers (ASPs) take off. ASPs make it unnecessary for a company to have its own software and hardware to support it. ASPs are building data-center sites and providing a central location for file storage, running applications, and managing those applications with updating and maintaining software. "If that niche continues to grow, that's going to provide a huge boom for contractors, distributors, and manufacturers," says Moeller. "The telcom providers have been working on getting the Internet backbone in place over the last five years to be able to have the bandwidth that could then transport that tremendous amount of data. That's why Sachs has a national presence on this. I really see this thing taking off in the next three years."
Driven by forecasts for Internet, e-commerce, and business-to-business activity, Consultant George Brown sees this market accelerating slightly and then maintaining a steady pace for at least another five years. He admits this is such a new area that five years out is obviously rolling the dice in terms of anybody making a forecast. However, he predicts that now (and probably for the next two years) the pace will be somewhere between maddening and unrealistic. "When you drive and see signs that say `space available for a 200,000-square-feet server farm' and then you look up and see the power lines located within a quarter of a mile of one of the Internet gateways, there are customers out there snapping them up as fast as they can identify the project."
To put this trend into international perspective, Brown says they're just beginning to build data centers in Europe. The majority of Web hosting capabilities is in the United States - probably three or four times proportionately more than you would expect. He says you can find server farm activity in all the major European countries and some of the smaller countries. But the lag is probably three to four years. The same goes for Japan. Everywhere else, there's hardly any activity, he says.
"It's just unbelievable that business is still accelerating this fast. The whole industry is in a condition where the demand is exceeding capacity right now, so our lead-time is getting pushed out. Some of our end-user clients would have as much as 70% of a facility leased out before they even dig the first hole in the ground," says ASCO's Sylvester. "I view it as being similar to the build-out of the interstate highways or even the railroads. It's a big infrastructure build-out."