After a few years of consolidation and general HDD upheaval, the market is now reduced to just three players who control the entire hard drive business. These three players, despite standing under the apparent fallout of the Thai flooding, are now in a privileged position to make a tidy sum.
Seagate completed its acquisition of Samsung's HDD business at the end of 2011, and through this has also tapped some cutting edge NAND kit to boost its hybrid drive lineup.
Western Digital, on the other hand, will see final approval on the acquisition of Hitachi GST (née IBM), bar freak accidents, later this month, but has been forced to find a buyer for part of its 3.5-inch HDD business to see approval from market regulators.
This leaves Toshiba, which has traditionally been very strong in the mobile HDD business, to pick up the leftover 3.5-inch business at Hitachi. WD will absorb Hitachi, two of its 3.5-inch HDD plants will be traded to Toshiba, and WD will in turn receive a 2.5-inch HDD manufacturing facility, leveling out the two partners' capacities in both segments.
Toshiba, despite being the smallest of the three remaining players, is the one with the most SSD experience, and can now vertically integrate several market segments, from consumer to enterprise to ultramobility.
WD versus Seagate
Notwithstanding the maneuvering taking place in the foreground, 2011 was marked by floods in Thailand that stalled HDD shipments and essentially threw off the entire PC market as supply fell to an estimated 40 percent of its pre-flooding level. Most PC companies revised their numbers based on the overall recession period, but the official line was the HDD shortage.
Seagate, on the other hand, counted its blessings as the flood in Thailand – all things considered – was an act of a benevolent God.
According to Fang Zhang, storage analyst at IHS iSuppli, Seagate was by mere coincidence spared the brunt of the disaster as it had both its factories on high ground, while not a single WD facility escaped the rising waters. Toshiba's HDD facility in Thailand was also hit hard. This generated a windfall for Seagate as it became the prime supplier of hard-drives in the last quarter of 2011, according to an iSuppli report. Western Digital had 60 percent of its total HDD manufacturing capacity submerged under the raging flood waters.
Below you can see the role-reversal. WD lost the top spot while falling to almost two-thirds of its prior market share. Seagate took over the top spot... and then some.
In a post-consolidation world, at Q4-2011 shares, this will look somewhat like this, however, Techeye believes this will come closer to a 40/40/20 split as production resumes at WD and Toshiba takes on some 3.5-inch drive capacity.
Although supply crashed, average selling prices (ASPs) jumped - for all manufacturers - and the only real problem now is how to handle the demand. With the average selling price shooting up, gross margins reached record highs. WD, for example, had its gross margin rise from $46 to $69, a 32.5 percent increase.
No tears were shed at the company HQ, we are sure.
Post-Thai flooding, HDD manufacturers are now in control of a business they had let run amok. Their two primary concerns being how to keep up their Long Term Agreements (LTA), which usually account for the biggest slice of their business means getting PC OEMs, ODMs vendors and build-to-order their precious storage kit in ample supply. The other concern is to manage the product mix, while it is tempting to think the triumvirate will churn out 3 and 4TB drives like there is no tomorrow, it will have to switch around capacities to keep up with their supply contracts... of course that signing up for a LTA as soon as possible will guarantee you the best deal, and Seagate is counting on that.
Everyone else will basically be on a morphine drip waiting for something to fall out of the back of a truck.
Unfortunately for consumers and businesses, HDDs will be in short supply for the remainder of the year, say the HDD manufacturers. Seagate estimates that supply will reach around 80% of its former maximum by the end of 2012. This reflects both the market consolidation and the time it takes to retool/rebuild after the Thai flood. The truth will be somewhere in between.
The Thai flood has also given the HDD business much to think about, in particular in what regards to future processes and products. Vertical integration was already the order of the day, but most HDD manufacturers are looking to leverage hybrid drives as the next big thing. and vertical integration is the easiest way to go.
This particular expression was dropped by Pat O'Malley, Seagate CFO, a couple of times during the Morgan Stanley conference last week. Seagate hasn't been completely blind to the market's ebb and flow, and part of the company's reasoning behind the Samsung storage acquisition was to provide Seagate with the technology and tools they needed to outpace their competitors in the hybrid market.
During the course of 2012, it will be clear that hybrid drives were the ‘next big thing’ and all three of the HDD players will move into hybrid disk drives as fast as their factories can spit them out. Hybrid drives provide plentiful storage, with today's platter capacities and blistering fast reads and writes to its small Flash cells. Prices, despite being clearly higher than your traditional HDD, aren't over the top.
Then come the niche markets that offer better margins than your 'standard' consumer desktop. Intel has been pushing hard for its Ultrabook initiative to be a major success and despite it being received enthusiastically by PC manufacturers – as an opportunity to match up against Apple's Macbook Air – it's greatest virtue might be pushing out the door 7mm hybrid drives.
O'Malley had previously taken the opportunity to touch base with Intel Ultrabook partners by laying out the ground rules for being on the gravy train: you have to be able to make 7mm-thick (0.3-inch).
Seagate, Hitachi and Toshiba are currently the only hard-drive manufacturers to carry 7mm drives in their product portfolios; however the WD takeover at Hitachi means that all three main players will be able to manufacture the premium format, so expect Seagate to push hard and push fast for this to come to happen.
By the end of 2012, the three main HDD manufacturers will have restocked their components, repaired their factories and realigned their product mixes. They will also have happened to have made a tidy profit, despite the expenses, and ridden off into the sunset.