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HDD Companies Seeing Stronger Upside Through 1Q24

Will it continue?

This is a Trendfocus, Inc.‘s Information Services Executive Brief

Rising from the Bottom:
HDD Companies Seeing Stronger Upside Through 1CQ24

Will It Continue?

Trendfocus’ end-of-year Asia swing to visit the HDD and tape supply chain yielded the consistent negativity that has prevailed throughout the historic storage demand downturn of 2023. Over recent weeks, some large cloud increases have begun to materialize for 4CQ23, but up until very recently, customers remained cautious over sustained upside into 1CQ24. Component vendors have seen some slight demand improvements, but recent build plan updates reflected very flat-looking volumes throughout all of 2024.

Before getting to better news, the tone of the supply chain comments in meetings were not at all optimistic and in some instances, dire. Like the HDD manufacturers, component vendors have slashed capacity, idled factories and attempted to reduce costs to move into survival mode in hopes of weathering a prolonged demand reduction. With HDD vendors raising prices to stem losses and support margins while underutilization continued, component suppliers have witnessed no benefit thus far, suffering from low volume shipments and the inability to pass on price increases to their customers. While many HDD component suppliers are part of larger conglomerate companies that produce products for other industries, it has become painfully obvious that most HDD mechanical component vendors only exist for the HDD industry. Keeping the relatively few remaining mechanical component suppliers viable over the long term should be a high priority for HDD companies. To paraphrase an old HDD industry adage, “without a (pick your vulnerable HDD component of choice here), an HDD would not exist.”

However, as this trip comes to a close, the cautious demand outlook for 1CQ24 has suddenly turned around with solid demand upside coming not only from large U.S. cloud companies, but also the moribund China market. All the cuts to manufacturing capacity and component inventories are now suddenly putting the entire HDD industry into ALLOCATION with 1CQ24 supply effectively sold out. While tightness and potential allocation were expected as a macro-economic recovery took hold in 2H24, allocation is happening now. Component vendors should begin seeing measurable order increases themselves as HDD companies chase demand, hopefully in a disciplined manner to avoid a sudden customer inventory buildup in the coming few quarters.

On the macroeconomic front, increased positivity surrounding the improving outlook of the U.S. economy got another big shot in the arm today as the U.S. Federal Reserve signaled three quarter-point rate cuts in 2024 on an improved outlook for reduced inflation. Beyond the sudden jump in the stock market that the announcement triggered, confidence over an economic rebound occurring earlier than late 2024 could result in improved commercial and consumer spending well before the end of next year. This recovery could finally commence a long-awaited recovery of cloud and on-premises storage demand that would lift the fortunes of both the storage device companies and the beleaguered supply chain that supports them.