Horizon November 2016 Hard Drive Market Brief
Today’s storage market can be described as a shifting mosaic that features several prominent subplots that all are interconnected. Past briefs focused on the manufacturers, however, we are orienting the conversation around the key components that shape the storage market, which is redefining itself.
After seven quarters of declining unit volumes, the strong Q4 rebound is a welcome sight to the storage manufacturers. After breaching 100 million units, as demand from its bread and butter customer base of notebook and desktop manufacturers waned, Q3 came in as a surprise with volumes pushing to 112 million units supported by healthy near line (enterprise) demand and a reinvigorated client (desktop/notebook) market. The increase in demand combined with manufacturers reducing manufacturing capacity has set the stage for allocation. Manufacturers have successfully increased pricing over the past several months, however, demand and supply normalized in November with supply just behind demand. Spot shortages are driven mostly by missed forecasts, thus reducing the need for manufacturers to offer back-end marketing dollars to push stock.
SSD in our last report, we made the statement it is not “if we will see a shortage but when”. We can confidently say it is here and now, but not everyone knows about it. An industry insider is likening the shortage to the floods of 2011. Smartphone demand is sucking up NAND flash (raw component used to assemble SSD) and increased storage array and data centers adoption is compounding the shortage. Manufacturers continue to raise prices and are shipping very limited quantities while customers’ planning cycles are 4 to 6 weeks behind the realities of the market, leaving many unaware of the potential shortfall in SSD supply. Getting lead times or delivery dates on existing orders has been very tough in this feast or famine business. The word is that franchise distribution is not receiving shipments. Expect to see the manufacturers sell to the highest bidder. The product will be leaked out the back door at exaggerated prices.
The client market, which is more cost driven, will better weather the storm because they are more open to substituting a hard drive for an SSD. Meanwhile, the enterprise market is focused on the performance benefits of SSD as demonstrated by the significant uptick in the transition to SSD in the enterprise world with PCIe having been reported to have seen a 101% increase from Q2 to Q3. No one questions that the market wants the cost-performance benefit of SSD, but the big question is how the enterprise market will react to a severe SSD shortage. Can and will enterprise customers substitute HDD for SSD?
Expect 3D NAND to bring a quick end to the shortage? Not so fast, manufacturers are not expected to ramp capacity until the second half of 2017. This will be a challenging time for enterprise SSD consumers and possibly derail new product introductions and product transitions to SSD solutions.
Enterprise- the action continues to be on the cloud and white box solutions targeting the cloud, which are cannibalizing OEM solutions, such as HP, who has seen their server and storage sales retreat 6 and 3 percent respectively. By moving away from proprietary OEM solutions, a level of liquidity and pricing transparency is added to the storage supply chain.
The long-term focus for growth has been on the cloud, and we see continued strength over Q4 and into Q1. Manufacturers are trimming their stack (available capacities) to those suited to supporting the cloud. Less and less are conversations defined in cost per megabyte but rather in cost per petabyte. With the change in focus, expect to see this complicate the supply side as the higher capacity drives require a higher level of componentry and testing, which leads to longer manufacturing leads times that can exasperate inaccurate forecasts. Additionally, in the face of a market transitioning to SSD from HDD, subassembly component manufacturers will err on the side of caution, leading to an increasingly volatile supply chain.
The majority of the capacities continue to be on allocation across all manufacturers. However, it is difficult to ascertain how tight supply is. Anecdotally, we have seen demand settle with a handful of enquiries for 4TB and 8TB HGST helium drives. My guess is the manufacturers project tightness to support pricing. Mostly, build is spot on, if just a fraction behind demand. We have seen large amounts of 3TB and 5TB available with little open market demand.
Desktop/Notebook – after a long period of computer manufacturers reducing inventory and consolidating in the face of stagnating sales, manufacturers replenished inventories in Q3 and Q4 demonstrates continued strength as evidenced by Marvel’s (semiconductor mfg) strong results; a good leading indicator of continued strength in the client market.
This runs contrary to our last report, where we focused on Microsoft and Intel’s soft forecast for Q4.
Q3 was supported by strong back to schools notebook sales. We continue to see healthy open market demand for notebook drives. Desktops less so and are far more price driven. Expect to see the manufacturers continue to move capacity to support mobile demand as desktops fall out of favor.
The wild card is the impact the NAND (raw components used to assemble SSD) shortage will have on client notebook/desktop demand. With talk of the NAND shortage extending to late 2017 or early 2018, expect to see HDD gain a reprieve from the SSD onslaught as manufacturers ship systems with HDD when SSD is not available. This is especially true with consumers being much more price conscious than the enterprise community and unwilling to pay the exorbitant SSD price increases caused by the shortage.
General Thoughts- clearly, we think Q1 will be a challenging quarter driven by the NAND shortage. At the micro level, we expect to see hard drives get pulled into the SSD pricing updraft with customers filling SSD supply gaps with HDD on an as-needed basis and leading to pockets of HDD shortages. Does an SSD shortage threaten startups reliant on SSD deliveries?
At the macro level, it is evident that SSD has turned the corner in demand and the market is hungry for it. What is the impact of the consolidation and rise of the data centers such as a Google and Amazon Web Services on the storage market? As they increase in foot print and stature, so will their purchasing power. Will the storage market go Amazon?
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