Horizon Technology Hard Drive Market Brief September 2016
Market; sentiment continues to lean towards a healthy Q4, but demand has yet to materialize in a significant way with the market seemingly in a state of stasis. Both Intel and WDC announced improved Q4 guidance and reports indicate increased notebook demand driven by the combination of a delayed notebook replacement cycle. Combine this with a projected NAND shortage and the hard drive manufacturers have a good story to tell for Q4.
A key takeaway that HDD consumers must understand is the changing market dynamic and the future impact on hard drive supply. The hard drive market bottomed out over the past 9 months and as a result, the manufacturers are looking at things differently. No longer are manufacturers building to capacity but are now building to forecasts and orders. They cannot afford to go backward and allow capacity to exceed demand. Preferring instead to have supplied just under demand allows them to maintain margins and profitability. What end users must understand is this approach has the potential to exasperate and magnify potential shortages, requiring that they carefully plan and line up products for future builds or risk stock out situations.
We are just seeing open market demand percolating with a handful of noteworthy cloud participants and storage OEMs sourcing hard drives in the open market. In turn, this may be a leading indicator of what is to come and supports market pundits’ opinions that Hyperscaling will drive Q4 near line demand. We have yet to see a measurable uptick on notebook demand, but that can change quickly.
Western Digital – little has changed with Western Digital over the last month. They continue to aggressively cut costs and recast their business to survive in a cloud-centric world. They have rolled out their 10TB gold drive, which is an important drive as WD tries to deliver a one-two punch of large capacity rotating media and enterprise SSD (SanDisk) to meet the needs of the growing date center market.
They are well positioned to survive in today’s storage market with a balanced portfolio of SSD, client and enterprise storage. They have proven to be shrewd in their business dealing as evidenced by their recent restructuring of their debt from the San Disk acquisition. However, they still have work to do with lessons learned from HGST, who generates 24% of rotating storage yield for WDC yield, despite only accounting for 18% of WDC’s revenue. Expect WD to move away from their “build it and they will come model” to a more demand forecasted model.
HGST – little new to report with HGST. They are well positioned for Q4 with the right product mix. Interestingly enough, we are seeing open market demand for HGST large cap nearline drives for both current and legacy drives, which is evidence of their rightsizing and approaching the market from the new reality I describe above much earlier than the other drive manufacturers. They have yet to announce that they are on allocation, but that may be soon coming.
Toshiba –Intel announcing improved guidance around notebook demand combined with a projected NAND prices increase for Q4 gives Toshiba a lifeline allowing them to finish 2016 strongly.
Q4’s increased notebook HDD demand is a one-time event driven by a robust notebook replacement cycle and NAND shortage. Although Q4 will look to be a strong quarter, the long-term prospects for their HDD business are not looking favorable. Toshiba’s focus on the notebook market consumes 54% of their manufacturing capacity with a mere 9% dedicated to enterprise and nearline drives. This, combined with their struggle to ramp up their 8TB drive to penetrate the near line market, creates structural challenges in a market quickly galvanizing around the cloud. However, as always, there is a level of opaqueness with Toshiba as capacity is often diverted to internal needs.
Toshiba drives continue to be on allocation across most capacities (500GB, 1TB, 2TB and 3TB). Expect to see particular upward pricing pressure on 500GB capacities.
Seagate –although layoffs are expected to continue through Q1 2017, reports are that moral is improving in the face of an improving market and employees knowing what their roles are in the restructuring plan.
Seagate, with its dependence on rotating media, has depended solely on the whims of the market and has been struggling over the past year. They have to get their product mix and margins in line. Seagate has changed how they plan builds with 60% of their builds based on historical data and 40% on a build to order model, which has the potential to have a significant impact on downstream demand.
6TB demand has tailed off with enterprise customers moving to larger capacities of 8TB (which continues to be on allocation) and 10TB, which is an important drive for Seagate as HDD demand transitions to cloud storage. If they can ship in volume this quarter, they can decrease the gap with WDC and HGST in near line large cap drives. Expect prices to hold firm and expect to see spot shortages with end users going to the open market. We do not expect to see any special pricing agreements (SPA) throughout Q4.
2.5” large cap demand for notebooks continues to be slow as the market continues to favor SSD but demand at the lower end of the market is healthy. Seagate was slated to start shipping 1TB platter 2.5” in volume but has run into delays.
General Thoughts- the bump in notebook demand is a definite plus for the hard drive manufacturers, notably Toshiba, but this does not change the overall direction of the market and changing market dynamics.
First being the change of the manufacturers approach from a commodity approach focused on market share to a model focused on demand and profitability. Manufacturers will sacrifice volume to ensure that they protect their margins. This has a trickle-down effect as authorized distribution is following in kind and working closely with those that can offer forecasted demand. Don’t rely on distribution to back fill poorly forecasted demand.
Second, the storage market is inevitably moving to SSD, which impacts rotating media in two ways. As described earlier, rotating storage has transitioned from a commodity focus to a demand focused model, which will increase as HDD gets supplanted by SSD. Thus, requiring a greater focus on quality forecasting as the penalty for missed forecasts has increased, meaning missed revenue. The other dynamic that must be considered is the outsized impact Apple or Samsung can have on the SSD market through their voracious NAND demand. They can quickly send the SSD market into a shortage.
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