HDD Supply Chain Soldiers On – Toshiba’s Golden Opportunity?

In an executive brief from its Information Services, Trendfocus, Inc. released the following article:

HDD Supply Chain Soldiers On; Toshiba’s Golden Opportunity?

Let’s start by stating the obvious: 2016 is not off to a strong start for PCs and HDDs.

First, HDD companies took conservative positions on the CQ1 shipment outlook, ranging from 100 million to 104 million. The industry had not seen this level of unit shipments for nearly 10 years – but given the lousy PC market these estimates are warranted.

Second, ODM notebook production cratered in January to 7.59 million, down a mind-boggling 36% from the prior quarter and off nearly 25% from a year ago.

Third, the global economic outlook continues to deteriorate and this will certainly be reflected in lower enterprise storage spending and weak commercial PC sales (to go along with the prolonged slump in consumer PC buys).
 
From the viewpoint of the HDD supply chain, namely mechanical parts manufacturers based in Southeast Asia, years of pessimism and declining orders have given way to grudging acceptance. The HDD industry is in decline, and suppliers that intend to stay for a while are devising plans to consolidate factories and streamline investments and costs.

But the threat to supply continuity may be intensifying. Trendfocus asserts that the HDD supply chain is reaching an inflection point. Through the 1980s and 1990s, scores of companies were formed to supply dozens of mechanical parts to a growing HDD industry. Even through the first 10 years of the 2000s, the outlook for HDDs was bright. Then, after the HDD market peaked in CQ3 ’11 at 170+ million units shipped, many things changed: there was a fundamental shift in consumer spending patterns (fewer PCs, more tablets and smartphones), the Thailand flood of October 2011 (which profoundly changed HDD company market segment priorities). And, finally, SSDs have established significant attach rates in notebook PCs and in enterprise systems.
 
Toshiba stands to benefit tremendously from recent market conditions. Margin-driven moves by at least one competitor will likely give Toshiba the best chance to build mobile HDD market share since the Thai flood of 2011. It is a huge opportunity for the third HDD supplier to bolster OEM customer relationships and to gain momentum in the mobile HDD market. Management has publicly referred to a reduced emphasis on mobile HDDs, but this opportunity is perhaps the best one in years for Toshiba if it can fill some of the supply gaps that have opened, at least temporarily.
 
With some of the Trendfocus team convening in southern China, meetings revealed some interesting trends that are shaping up for hyperscale companies in the region. At least one company is responsible for consuming nearly all of the U.2 PCIe SSDs currently shipping from a supplier that is currently dominating the landscape for these types of NVMe devices. Information sources continue to point to SATA SSDs dominating the rest of the China hyperscale market for now.
 
The skew towards lower capacity nearline HDDs also continues. Similar to hyperscale companies in other regions, 2TB remains important for data analytics, but storage needs are currently satisfied by 4TB with a slow move to 8TB. In some cases, companies are considering SMR to shave cost at higher capacities and some plan to skip 10TB all together and move on to 12TB later in 2017 if price metrics make sense.
 
Back in the US, Google has published a paper about the continued importance of HDDs as a cost effective storage medium for burgeoning data growth and has provided data to university studies around the susceptibility of data errors with SSDs as they age in the data center. Thought provoking for sure, these reports will inevitably result in additional studies and some scrambling by marketing departments of both HDD and SSD vendors to promote the positive and dismiss the negative points generated by these reports.