A recent growth spurt in the cyclical disk drive industry has slowed price erosion, tightened supplies of some drives, and is leading industry observers to warn that OEMs could have a difficult time meeting consumer demand for the holiday season.
Hard disk drives (HDDs) with capacities of 40-Gbytes and greater already have been placed on allocation, according to analysts, and price drops have slowed to the single digits, compared with the low double-digits earlier this year.
Though a number of drive vendors are expected to add capacity, it may not be available in time to alleviate tightening supplies for the remainder of the year, according to observers, particularly among mobile and select desktop products.
The latest swing in the disk drive market began in the second quarter of this year, usually a weak period for suppliers.
"This is a chaotically sensitive market," said John Monroe, an analyst at Gartner Dataquest, San Jose. "Just minor changes in supply can lead to major changes in market dynamics, with many gyrations in a short time."
Worldwide disk drive unit shipments totaled 57.9 million units in the second quarter, up slightly from 57.8 million in the first, according to Monroe, who expects drive shipments of 250 million to 260 million this year, up from 219.6 million in 2002.
Over the past year, shipments of mobile HDDs have increased while those for most desktop PCs have declined, although even manufacturers of drives for desktops said business is improving.
"Current trends indicate that there will be an increase of hard drives found in consumer electronics devices such as portable, set-top-box, and other digital entertainment applications," said Stephan DiFranco, vice president of corporate marketing for Maxtor Corp., a Milpitas, Calif., supplier of drives for desktop PCs. "Other trends include the increased demand of larger-capacity ATA drives for PC enthusiasts, as well as professional desktop applications such as video, gaming, and the multimedia market segments," DiFranco said.
Western Digital Corp., Lake Forest, Calif., which currently makes only desktop drives but has hinted it might enter the mobile market, also sees an uptick.
"We continue to see signs of improvement in the PC industry," said Matthew Massengill, Western Digital's chairman and chief executive, during a conference call with analysts last week. "Demand looks good across all segments, with revenue and unit shipments for the September quarter trending to the high end of our guidance."
Not every PC OEM has felt the effect of the disk drive industry's latest spurt. Hewlett-Packard Co.'s PC division lost $56 million in its third quarter ended July 31, despite a 5 percent rise in sales to $4.97 billion. PC demand at Dell Computer Corp. has been steady, though the company recently cut prices on a number of its PCs and peripherals.
Neither company returned calls for comment.
"Determining actual global hunger for PCs is complicated, but I believe this hunger will increase significantly in the third and fourth quarters of this year," said Dataquest's Monroe. "HP and Dell are considerable global suppliers, but their desktop and mobile PC numbers don't reflect a complete picture of global demand."
David Reinsel, an analyst at IDC, Framingham, Mass., said inventories at disk drive suppliers were averaging three to four weeks -- and less for mobile drives -- compared with an historic average of five to six weeks. While stressing that supply levels are not critically low, Reinsel said, "There's the potential for system OEMs to order a bit more than they really need."
Dataquest's Monroe said, "Most OEMs are getting the supply they need, but not quite as much. Drive makers can't meet the upsides of OEM requests."
Both analysts believe prices will erode in the long term but continue to fluctuate the next few months. They expect higher-capacity mobile and some desktop drives to remain in tight supply the rest of 2003 as they are coveted for new PC designs.
Some help may be on the way, however. Seagate Technology LLC, Scotts Valley, Calif., which exited the HDD market for mobile computers in 1998, re-entered the sector in June with its 20- and 40-Gbyte Momentus drives. The company did not return calls for comment on its production plans.
Even as demand builds, drive suppliers continue to shave costs in a market that has seen the number of major players slip in the past five years from dozens to just seven. And more attrition is likely, according to Dataquest's Monroe.
"There will be further consolidation in the disk drive industry because the cost of maintaining a strategic position on a changing technology curve will continually increase," he said.
Last December, Hitachi Ltd. and IBM Corp. formed a joint venture, Hitachi Global Storage Technologies (HGST), as IBM left the market. Last month, HGST renewed a manufacturing agreement with China's Great Wall Technology Ltd., a maker of computers and computer peripherals. ExcelStor, a subsidiary of Great Wall, will manufacture 40- and 80-Gbyte versions of HItachi's 3.5-in. Deskstar 7K250 desktop drive.
Though HGST is ranked by Gartner Dataquest as the leading supplier of mobile drives, the company is trying to strengthen its fifth-place ranking in the desktop market.
"We believe the China disk drive and PC markets are among the fastest growing," said Alex Shumay, program director of business development and strategy at HGST. "The agreement gives us added manufacturing capacity."
In July, Western Digital acquired the assets of Read-Rite Corp., a Fremont, Calif., supplier of recording heads and head assemblies for disk and tape drives, for $95.4 million. The company expects the acquisition to improve its disk drive manufacturing economies of scale, particularly as it transitions to building more 80-Gbyte drives.