Nearline Demand Hot, Is It More Smoke Than Fire? – Trendfocus

This article is an Executive Brief from Trendfocus, Inc.:

Nearline demand is hot, but is it more smoke than fire?
 

For two consecutive quarters, nearline HDD shipments have topped all-time records, rising to an astounding 13.8 million units on over 97EB of capacity in CQ1 ’18.

While mid-cap nearline HDDs (2, 4, 6TB) have seen renewed demand to satisfy both OEM servers and storage as well as tier-2 and China hyperscale, the real story is the acceleration of demand for 10TB and 12TB HDDs by tier-1 U.S. hyperscale companies. The unit shipments for >=10 TB nearline topped six million units, representing 44% of all nearline units in CQ1 ’18 with the top 5 tier-1 hyperscale companies accounting for roughly three-quarters of those unit volumes.
 
The current expansion of hyperscale capacity demand began in earnest starting in CQ3 ’17, following a pause between the 8TB and 10TB transition that occurred in late 2016 through mid-2017. Total nearline exabyte growth for 2017 was a tepid 24% as a result; however, the current outlook for 2018 tracks a year-over-year exabyte growth in excess of 60%. Several of the large cloud companies are now ramping up 12TB – a capacity that will eclipse 10TB volumes in the second half of 2018.
 
Historical trends point to hyperscale expansion cycles lasting between two to four quarters in length before purchased capacity is utilized; however, the so-called cyclicality of this behavior has proven nearly impossible to predict, despite HDD industry claims over the years of having periods of ‘good visibility’ to demand. Certainly, capital expenditure projections by the likes of Microsoft, Amazon and Google, among others appears exceptional through 2018, based on the latest earnings announcements, but there has been little-to-no correlation between CAPEX tied directly to nearline shipments on a quarterly basis. Conceptually and, perhaps intuitively, longer-term CAPEX trends map to the exabyte growth of nearline, but short-term CAPEX alone has not been a good metric to project quarter-to-quarter nearline demand trends.
 
Noise throughout the HDD supply chain, picked up by the Trendfocus team in South East Asia this past week, point to nearline demand well in excess of the recently upgraded Trendfocus forecasts. To sustain the rumored nearline numbers require a bit of the intangible ‘hope and faith’ that actual demand is as strong as the gossip suggests. While the HDD industry may be facing an unprecedented period of cloud market growth, a few factors point to perhaps overheated anticipation of possible, rather than actual, demand.
 
Nearline build plans of 16 million to 17 million per quarter? The HDD supply chain is receiving signals of total HDD industry nearline build plans that approach volumes 20% higher than the record CQ1 ’18 shipments. With projected demand on the upswing, HDD manufacturers are quick to exercise the supply chain to prepare for the increase, thus signaling to component manufacturers to prepare for the most-optimistic scenarios. Multiply those high-side expectations across three HDD companies and one quickly understands the how the build plan totals can get so large. Build plans that are higher than the expected shipment TAM are reasonable, especially as HDD companies are trying to replenish finished inventory depleted from accelerating demand, but actual requirements may not be quite so high.
 
60%+EB growth for 2018 can occur with only marginally higher quarterly TAMs. In CQ1 ’18, total nearline capacity shipments of 97EB were already nearly double that of a year ago. With the transition from 10TB to 12TB underway, total quarterly TAMs for the rest of the year can fluctuate slightly from the CQ1 ’18 units to easily reach the projected year-over-year exabyte growth.

At the same time, quarterly capacity shipments can hold roughly flat for the remainder of the year to hit the exabyte growth projections, indicating that the sharp expansion cycle that began in CQ3 ’17 is leveling off, thus following the historical, yet irregular, two-to-four quarter expansion cycles seen in the past. It is worth repeating, though, that four quarters of roughly 100EB each is a huge jump over the 244EB shipped in 2017.
 
Rumors of component shortages across the supply chain are not universal. On the current Trendfocus swing through South East Asia this past week, the huge build plan numbers circulating through the supply chain have been a consistent topic of discussion; however, although various suppliers are concerned about the potential of component shortages, the supply chain players that we spoke with pointed elsewhere as the source of constraints and none of them were jumping up and down about shortages of their own components. The well-known capacitor shortage issue that cropped up in early 2018 is indeed continuing, but those affected by the shortfall in that particular component have allocated to cloud demand for nearline as a priority.
 
It is worth noting that in CQ1 ’18, around 45% of all nearline HDDs shipped were of the helium-sealed variety and that all HDD companies are ramping up helium HDD assembly capacity as quickly as the demand can fill it.

There is no doubt that supply is indeed tight to demand although the two variables appear to be in good, if not delicate, balance for now. A smooth transition to 12TB production by all HDD players over the next two quarters will further stabilize the growth required by the supply side of the equation and perhaps all of the overheated anticipation of nearline demand and fears of component shortages should ease back to a more rational view of the market by all players involved.
 
On a completely different topic: This past week Reuters reported that China has finally approved Toshiba’s plan to spin off its memory business (primarily NAND) to the previously announced consortium led by Bain Capital. Clearing this major hurdle should allow the members of the consortium, including Apple, SK Hynix and Seagate, to breathe a sigh of relief following several recent weeks of fears that the deal would fall victim to a potential trade war between the U.S. and China. Regardless of what happens on the trade front, Toshiba will likely try to quickly close the deal, although ‘quickly’ is probably a gross overstatement given how long this spin-off has taken up until now …