Server market grows 4% to $91 billion in 2021 – could have been more

In 2021 the worldwide server market grew by 4% to $91b. I show market shares for revenues, shipments and the installed base in my Figure above. I want to update you on the current state of the market and its leading players.

On a long term basis Dell EMC has retained its lead over HPE in second position (see my Figure above for the server revenue of the top 7 suppliers since 2003). As for 2021, sales could have been higher if it wasn’t for the disruption in component supply . This is how shortages affected the major players:

• Dell EMC – “The global supply chain shortage of semiconductors and global logistics challenges for goods and components continues to impact just about every industry. We are still experiencing shortages of integrated circuits across a wide range of devices, including network controllers and microcontrollers, that go into our products and solutions. The result, we are seeing an impact across client systems, servers and storage”. “There is some short-term navigation we need to do with the supply chain dynamics”. (Feb 2022)
• HPE – In HPC and AI “The slight operating loss was driven by delayed customer acceptances and supply chain constraints”. Overall “Gross margins drive improved quality of earnings despite ongoing supply chain constraints”. In Compute “orders growth up 20% y/y with record levels of backlog”. (March 2022)
• Lenovo – The Infrastructure Solutions Group “supply constraint prolonged fulfilment of customer orders during the quarter under review, resulting in significant backlog orders for future periods”. (Feb 2022)
• Inspur – “Positive Q3 2021 results are due to high demand for computing power from hyper-scale data centers, and easing component shortages”. (Dec 2021)
• IBM – no apparent backlog; the decline was due to product lifecycle and the anticipation of new server announcements
• Huawei – has continued to face major chip supply chain challenges due to US sanctions.
• Supermicro – “we continued to build inventory to be in a position to meet the increasing levels of large orders our customers and to mitigate the impact of supply chain disruptions” (Feb 2022)

This bodes well for 2022, although there will no doubt be more disruption as the war between Russia and Ukraine continues. In particular it has stalled Ukraine’s output of neon gas used in semiconductor manufacturing.

I use the term ‘branded server’ in my Figure above and below to differentiate the market I describe in this post from the self-built (typically hyperscale) servers made by the largest Cloud Service Providers. As you can see above Microsoft Windows continues to account for the vast majority of servers sold. Linux on these machines has been increasing over the years, but plays a far bigger role in those CSP systems.

One reason why some purchasers are having to wait weeks to months for delivery of new machines is the dependence of most server suppliers on Intel and AMD x86 processors (see my Figure above for the annual sales of servers by the chip they use). This what they said about their supply chains in 2021:

• Intel – “We continue to work across our supply chain to minimize disruptions, improve productivity, and increase overall capacity and output to meet customer expectations”. “We continue to face industry-wide supply constraints, which are expected to persist into 2022. Given our unique position in the industry, we have taken major actions along the supply chain to eliminate bottlenecks—increasing substrate capacity, removing third-party component bottlenecks, increasing our own internal capacity, and obtaining more external capacity”. It is also building a new fabrication plant in Malaysia and believes shortages will last until 2023. (Jan 2022)
• AMD – “Fourth quarter cash from operations and free cash flow included strategic investments in long-term supply chain capacity to support future revenue growth”. “Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2021”. (Feb 2022)

The two companies differ in their approach – Intel makes its own chips while AMD is fabless. Nevertheless AMD did better than Intel; its Enterprise, Embedded and Semiconductor Divsion grew revenues by 113%, while at Intel its Data Center Group’s revenues de clined by 1% in the year.

Finally let’s look at the balance between the virtualization status of the branded servers shipped (see my Figure above). Annual shipments of servers not running hypervisors and virtualized applications (labelled ‘physical-only) have levelled up at 15 million per year, while virtualized ones have grown to 12 million. The total number of virtual machines running on these has risen substantially more to 47 million, assuming a ratio of 4:1 between VMs and virtualized servers.
Looking ahead to 2022’s results, it’s going to be a good year for the server market. Some of the supply constraints and long waits for new machines to be delivered will ease, while IBM and others will introduce new machines – favouring those vendors who can surmount them. However the pandemic and consequential supply chain will continue to extend server lifecycles, increasing the revenues of second-hand server specialists. We will also see the average selling price of servers continue to grow above the current rates of inflation.