2007 1/4 Q HDD industry

Hard Drive Makers Feel the Squeeze

Drive makers face anemic profitability; Seagate maintains market dominance in Q1

 

El Segundo, Calif., Jun. 13, 2007—The Hard Disk Drive (HDD) industry is going through hard times.

Although HDD shipments increased by 12.2 percent in the first quarter compared to the same period a year ago, they declined by 4.7 percent from the fourth quarter of 2006, according to iSuppli Corp. If that weren’t enough, plunging prices squeezed the margins of the major HDD suppliers during the period.

The first quarter is often a weak season for HDD shipments, following the peak holiday sales period in the fourth quarter. However, the sequential decline in the first quarter came as a surprise amid strong unit demand from the computer market. The HDD industry shipped 114 million units in the first quarter, falling short of iSuppli’s forecast of 118 million units.

“Prices came under pressure in the first quarter due to intense competition and changing demand patterns. The six major HDD suppliers—Seagate Technology, Western Digital Corp., Hitachi Global Storage Technologies (GST), Samsung Electronics Co. Ltd., Fujitsu Ltd. and Toshiba Corp.—engaged in vigorous competition in the market for mobile-PC storage. All of these companies offered similar products as they attempted to position themselves in the fast-growing notebook PC HDD market,” said Krishna Chander, senior analyst, storage systems, for iSuppli.

In the consumer-electronics segment, the high-capacity 3.5-inch SATA/PATA HDDs with multiple platters also came under pricing pressure, as each of the hard-drive suppliers expanded the storage capacity of such products by using a 160Gbyte per platter design made possible by Perpendicular Magnetic Recording (PMR) technology, Chander added.

 

Not so large margins

This intense competition had a deleterious impact on most of the HDD suppliers’ margins and profitability.

Seagate’s gross margin declined to 21.3 percent in the first quarter of 2007, down from 24.3 percent a year earlier— before the company’s acquisition of Maxtor. Net income for Seagate dropped to $212 million, down from $274 million a year earlier.

Western Digital’s first-quarter gross margin was 15.7 percent, down by several points from 19.3 percent one year ago. However, bucking the trend, Western Digital’s net income in the first quarter was $121 million, up from $103 million a year earlier.

Hitachi GST’s net loss in the first quarter amounted to $150 million, expanding upon its year-ago quarter net loss of $46 million.

Companies like Seagate and Western Digital will be challenged to improve their gross margins. One easy way these companies can do this is to pressure their suppliers to reduce the cost of the materials they purchase, i.e. disks, heads, motors, casings, etc. These suppliers will be pushed to lower their costs by as much as 5 percent, iSuppli believes.

The one benefit of a lower price for HDDs is immediate: It reduces the system cost of PCs. More dramatically, the lower prices make HDDs more competitive with the alternate storage solution for notebook PC data storage: Solid-State Drives (SSDs) based on flash memory. Cheaper HDD prices will delay the penetration of SSDs into notebook systems, thus indirectly benefiting the HDD makers.

 

Seagate stays on top

Seagate continued to lead the market in the first quarter with a 34.6 percent share of global unit shipments, maintaining its level from the previous quarter. Western Digital attained a share of 21.5 percent, up 1 percentage point from 20.5 percent in the fourth quarter of 2006.

Hitachi GST held its share position at a steady 17.2 percent. Fujitsu was at 7.1 percent, down three-tenths of 1 percentage point from the previous quarter. Toshiba came in at 7.3 percent, down a whole point on a sequential basis. Samsung held a share of 11 percent, up slightly from the previous quarter’s 10.4 percent.

The attached presents iSuppli’s worldwide HDD market-share estimate for the first quarter of 2007.

 

In summary, the HDD industry had a bittersweet first quarter. The conditions for growth continued to exist, but pricing pressures reduced profitability. The impact of these reduced margins will be felt across the food chain.