This is an Executive Brief Pre-Asia Trip Notes I, published on February 24, 2023 by Trendfocus Inc.
As Trendfocus wraps up its 4CQ22 reporting cycle and heads off to Asia over the next couple of weeks, early checks of the storage supply chain and customer sentiment have provided little clarity over the timing of demand improvements.
Analyst firm’s published HDD forecasts assumed slight, if tempered, seasonal demand in 2H23 following the completion of OEM inventory rebalancing in 3CQ23 and some resumption of cloud growth. Nearline demand in cloud remains a mixed-bag, with some large companies remaining in sharp digestion mode, although pre-publication inputs noted some net Q/Q improvements in total high-capacity HDD demand.
Recently, supply chain build plans have indicated that HDD manufacturers are communicating relatively flat HDD TAMs at least through 3CQ23 with slow nearline improvements offset by expectations of weak client and legacy enterprise builds.
The cautious messaging by HDD companies reflects both real and perceived weaknesses in end demand as economic conditions continue to evolve as companies react to the expected impact of further interest rate hikes to slow inflation. Corporate spending on IT remains in hibernation with many enterprise OEMs minimizing storage purchases to avoid last year’s disastrous buildup of excess product inventory. Cloud, especially for those hyperscale companies providing corporate-focused services, should benefit from the cuts in on-premises IT spending; however, those companies that face reduced advertising sales remain on a path to optimize storage efficiency to address weakening revenue, potentially prolonging the digestion of already-owned inventory.
Market uncertainties essentially mandate a very conservative outlook by HDD companies.
However, some customers are beginning to voice concerns over the ability of the HDD industry to respond to future upsides. Nearline HDD lead times are only getting longer with more complex designs continuing to emerge and if cloud demand, especially in 2H23, outpaces the current pessimistic outlook, supplies of HDDs could tighten. Obviously, this would be a welcome development for the HDD industry after a painful year and could renew and accelerate the need for long-term agreements once again.
As the HDD industry struggles with a weak market, the one industry that remains in free fall is NAND. Falling demand across all end markets has only gotten worse over the past 2 quarters with exceptionally sharp hyperscale digestion kicking in. Cuts to wafer starts by flash vendors, while previously announced by some, have finally become universal to stem the tide of bit supply growth; however, under current conditions, the market will likely remain in oversupply through all of 2023.