Horizon March 2017 Storage Market Brief
I just returned from the Open Compute Project Summit, which is a fantastic conference that hits at the heart of the storage market. A key takeaway is that HDD will continue to play a role in the storage market, as demonstrated by Microsoft’s roll out of its new Data Center technology. Data Centers are optimizing cost and performance by using SSD and HDD in concert to deliver the most cost-effective solutions that meet today’s needs.
The storage market offers plenty of subplots for market participants to traverse with the ongoing SSD shortage, which is pushing into HDD as storage builders turn to near line HDD to satisfy storage demand. As well as the uncertainty of the impact of Toshiba selling a stake in its Yokkaichi facility to raise capital to account for the sins of its nuclear division, the biggest challenge hardware manufacturers face is managing the P&L in a booming market hungry for data, while navigating component shortages.
SSD: having the opportunity to speak directly to end users at the Open Compute Platform conference, they were much more open to acknowledging the challenges around SSD. NAND manufacturers are first using what NAND supply is available to support the higher margin enterprise drives before client SSD, but there is still not enough supply to satisfy enterprise demand. One storage array builder even stated that anyone telling you they are not experiencing issues is not being genuine.
So, this leaves us at the curious intersection of profitability versus viability, as a whole storage array and server builders are still unwilling to pay the premiums the current market commands. Instead ,many are looking to the end user to pay the price point variance (PPV) or they are building lead times into their builds. The storage market is a competitive and evolving space where customers are coveted. At what point does one risk losing a client to a competitor who is willing to pay the PPV? Enterprises are slowly coming to this realization and are selectively making spot buys and swallowing the PPV. Alternatively, they are substituting SATA HDD for SSD when possible.
The million dollar question is when the shortage will end. Identifying the end of the shortage is not straight forward. Converting a fab is a complex and time-consuming task. It can take up to a year to convert a planar (2D) fab to 3D and get satisfactory yields. We heard from a builder they are not happy with the Intel S3520 series SSD, which is built utilizing 3D technology, due to performance degradation in comparison to Intel’s S3510 series which utilizes 2D die. This is evidence of the complexity and challenges in converting fabs to 3D technology. Currently, 70% of fab capacity is planar soon to be converted to 3D, which will create further supply disruptions. Additionally, there are competing entities for NAND supply including handsets and growing embedded applications such as automobiles and IoT. It will get worse before it get better.
Client notebook SSD are expected to carry the brunt of the shortage with Digi Times reporting that after a significant decline in January notebook sales, the sales rebounded in February, increasing by 20%. Coupled with book conversion to SSD approaching 45% in Q1 from a 35% conversion rate, we will see continued pressure on SSD. This pressure is further magnified by manufacturers supporting the double-digit margin enterprise demand before single digit margin client demand. More demand, less product. We have seen prices climb week after week with client SSD now selling in the $.37 per GB range for 128GB SSD and expect it so exceed $.40 per GB over the next month.
Toshiba selling its share of its Yokkaichi operations has the potential to shape the future storage market significantly. One has to consider that there is a handful of SSD suppliers that are vertically integrated and therefore own their entire supply chain. If a Kingston or Foxtec acquires the capacity, another vertically integrated player is added to the game. If Intel or WDC acquires the capacity, an existing player significantly strengthens their hand. The spoiler is China, who has made it clear they will be going after this market and want in, but I don’t see Toshiba risk losing control of its technology. The pressure is on Seagate to secure a line of supply; possibly a JV with SK Hynix or buy Micron?
The enterprise hard drive very much has a role in today’s storage market. As we have reported in the past, hard drive manufacturers have reduced their exposure to the PC market and are focusing on the Data Center space, ehich is experiencing explosive growth with cloud capacity expected to double over the next five years. There simply is not enough SSD capacity to replace demand for the foreseeable future as demand for data storage grows. HGST’s keynote speaker in discussing the economics around the NAND market reported that the dream of the all flash data center is not probable in the next 10 years.
As stated in previous briefs, the hard drive manufacturers are keenly aware of the changing storage market and have accordingly realigned production to survive in a cloud-centric world. Performance hard drives will be replaced by SSD as builders mix low latency SSD with high latency HDD large capacity hard drives to optimize cost against performance. The manufacturers are focusing on delivering low-cost storage with roadmaps extending to 20GB capacities by 2020.
However, the SSD shortage has extended the runway of performance drives. In previous market briefs, we talked about end users substituting SAS HDD for SSD. Over the past month, we have seen this trend accelerate with SAS demand increasing and pricing escalating quickly, along with manufacturers putting performance drives on allocation. We expect to see this trend to continue as end users explore options to find ways to ship units.
Desktop/Notebook: more good news for Western Digital and Seagate. After a difficult January, desktop/notebook sales have stabilized with a strong rebound in February. As evidenced by Nidec, who holds the majority share of spindle motors, raising its Q1 and Q2 projections. Buoyed by stabilization within the PC market.
This is combined with the ongoing SSD shortage impacting the client market even more, as the SSD manufacturers direct their NAND to the higher margin enterprise drives to give the HDD manufacturers breathing room.
It seems like a lifetime ago that market pundits were talking about Toshiba possibly exiting the hard drive business. WDC and STX have allowed Toshiba to feed on the lower margin 2.5″ mobile/ laptop business (hence their rise in HDD TAM market share). As well as being supported by an SSD shortage and a strong 4th quarter for Notebooks, Toshiba HDD has recast its fortunes as evidenced, by increased their market share by 9% over the 4th quarter.
General Thoughts: shortage markets are treacherous territory for supply chain professionals. Especially for starts ups where supply chain decisions can make or break a company. Often, it is the first to recognize the problem and act that secure stock at the best price possible.
There will be fall out over the next year and count on the storage market looking different from how it looks today.
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