Overstocked inventories and cutthroat pricing are dragging down an industry that should be thriving—but consolidation could prove to be the quickest fix, they say at the Diskcon conference.SANTA CLARA, Calif.—The disk-drive industry faces a dilemma: It should be thriving, but it's not. But while analysts say the industry would be better off with fewer competitors, none seems ready to throw in the towel.
That hasn't stopped drive makers from pointing fingers at one another. In fact, analysts say that's part of the problem. Instead of adhering to some basic business principles and carving out small profits for all involved, the cutthroat behavior has dragged down the sector as a whole from a year ago, when the future looked rosy.
For those who feel that consolidation would be the saving grace of the hard-disk industry, Tuesday morning served as a parallel to the Super Bowl pregame show. Analysts and industry insiders handicapped possible business deals at the Diskcon show here, the industry's annual gathering of hard-disk-drive makers.
The most popular candidates include Samsung Electronics, the smallest player in commodity drives; Toshiba America Information Systems Inc. (TAIS), whose commitment to the drive industry some called questionable; Maxtor Corp., which has been late to enter the 2.5-inch drive market; and Fujitsu Ltd., whose market share in mobile and enterprise drives will be threatened by new entrants.
But others feel that there's room enough for the seven vendors that currently dominate the industry: Seagate, Western Digital, Maxtor, Hitachi, Samsung, Fujitsu and Toshiba. Those analysts said they think predatory pricing and poor inventory management will keep the drive industry from the status that industries such as PCs enjoy.
Click here to read about the battle between disk and tape for storage supremacy.
A year ago, the Diskcon show was an unusually happy conference: Continual price declines had flatten to single digits, the PC market was rebounding, and the promised CE market was just beginning to start sucking up hard drives into gaming consoles and PVRs. Seagate, meanwhile, announced its public offering.
Maxtor, Seagate and Western Digital raked in a combined $819 million in profits during the first three quarters in 2003, up 216 percent from a year earlier. The industry made more money than in the previous seven years combined, according to Rob Cihra, hardware analyst and managing director at Fulcrum Global Partners LLC, based in Ontario.
And then, the industry blew it. Massive overbuilding produced 8 million to 9 million more drives than could actually be sold, driving down pricing precipitously and causing vendors to start pointing fingers. From the fourth quarter of 2003 to the second quarter of 2004, the industry erased its former profits and then some.
"As products and technologies, hard disk drives have been a phenomenal success," Cihra said. "As stocks, they've been a long-term disappointment. Some might even call them a bust."
As such, the industry has returned to the bad old days, even as unit demand continues to climb. Demand for the 2.5-inch drives used in notebooks is expected to climb by 25 percent this year, reported John Donovan, an analyst at San Jose, Calif.-based Trend/Focus, while the opportunity that consumer-electronic shipments represents will surpass 30 million units, an 85 percent growth rate. Drive shipments during 2004 should come in at an even 300 million units, roughly 40 million higher than a year ago, he said.
Thomas Weisel Partners LLC forecasts that 303.14 million drives will be sold this year, pulling in $23.8 billion in revenue—increases of 15.9 percent and 4.8 percent, respectively, when compared with a year earlier.
Next Page: One analyst recommends switching to "sell-through" accounting.
Harry Blount, an analyst at New York-based Lehman Bros., recommended that the drive makers be forced to move to a more aggressive accounting method, where sales would be recorded only after they sold through the distribution channel to end customers, a practice known as "sell through."
He said the current practice of "sell in" sales to channel partners leads to "stuffing" the channel with excess inventory to meet sales goals, which later can force price cuts in order to move inventory. Blount also encouraged drive makers to use EDI (electronic data interchange) techniques to manage finished inventory and components, as well as to hold midquarterly updates with Wall Street analysts to apprise them of their progress.
But some argued that the quickest fix would be a merger, partnership or buyout, removing one source of competition from the playing field. Such a merger hasn't been seen for several years, as in 2001, when Quantum Corp.'s hard-disk business merged with Maxtor Corp., or in 2002, when Hitachi Global Storage Technologies assumed control of IBM's hard-disk operations.
Most sources declined to comment on the record, citing either conflicts of interest or federal regulations against limited disclosure of potentially materially significant information.
The possible combinations are many, given the shifting dynamics of each submarket. For example, with five competitors now shipping drives into desktop PCs, seven should enter the red-hot mobile 2.5-inch market by 2005, Blount estimated. Between three and four vendors now serve the enterprise SCSI and Fibre Channel markets.
To read about Sun's and HP's focus on SAN management, click here.
Two vendors—Hitachi and Seagate—will serve virtually all of the available submarkets by 2005, including the desktop, enterprise SATA, enterprise SCSI, enterprise Fibre Channel, 2.5-inch mobile and 1.8-inch "micro" categories, he said, adding that such widespread involvement would likely place both companies above any potential deals.
But Blount drew scenarios that involved Western Digital, Maxtor, Fujitsu, Toshiba, microdrive specialist Cornice, Samsung and even Matsushita-Kotobuki Electronics (MKE) in various combinations.
Two names in play are Maxtor and Samsung. Maxtor will likely be the last major vendor to enter the mobile hard-drive market, meaning that it could jump-start its entry with a partnership agreement, analysts said. The company has not outlined plans to enter the microdrive market, either.
Samsung, on the other hand, is the smallest commodity-drive vendor, lacks vertical integration and could be ripe for the plucking. Toshiba and Samsung already have a relationship in optical disks, Blount said, and they use MKE as a manufacturing partner.
Click here to read about vendors' plans at the Storage Decisions conference.
Toshiba, on the other hand, has been rumored to be exiting the drive market for years. "People have always questioned their commitment," one source said.
On the other hand, Toshiba in January announced plans to enter the 0.8-inch disk drive market, proof of its intention to stick around, Trend/Focus' Donovan said. "I just don't see it happening," he said of the rumored consolidation.
TAIS executives were unavailable to comment on a deal at press time. Earlier, Scott Maccabe, vice president and general manager of Toshiba's Storage Device Division, said the company would sample 2- and 4-Gbyte versions of the 0.85-inch disk drive in the fourth quarter, shipping production volumes early next year.
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