WD's $4.3 Billion Gamble on Hitachi's HDD Operation

 
 
By Chris Preimesberger  |  Posted 2011-03-07
 
 
 

Western Digital, already the world's No. 1 manufacturer of hard disk drives, is now in the process of creating an even larger HDD-making company with its $4.3 billion acquisition of Hitachi Ltd.'s No. 3-ranked disk drive operation, announced March  7.

When all the papers are signed and the financial folks and regulators have duly recorded everything, Western Digital will own almost exactly 50 percent of the world's spinning disk drive market. Impressive, indeed.

However, there's a backstory to all of this. Because of the fast rise of the NAND flash solid-state drive business, WD also appears to be taking a huge risk on what most IT people see as a technology whose best days are behind it.

It's true that NAND flash shipments are expected to rise by a whopping 400 percent this year, thanks to huge sales of solid-state tablet PCs, iOS and Android smartphones, new digital cameras, and other devices. Major companies such as Intel and Samsung are investing billions into solid-state development, and new companies are popping up regularly using strictly NAND flash-based drives in their hardware.

It's easy to see that the future is looking bright for the NAND flash manufacturers. But this isn't necessarily to the detriment of the HDD folks -- at least not in the near future.

Perhaps California-based WD isn't taking as dangerous a gamble as it may seem on the surface. WD has been around for 41 years, an eternity in the IT world, so it qualifies as "established." The annexation of Hitachi Global Storage Technology is by far the largest acquisition in the company's history; a company with this long a history hasn't made it this far by making egregious strategy errors.

More Happening Than Meets the Eye

Let's look under the surface here for a couple of minutes.

Although Hitachi makes most of the HHDs found in Apple PCs, iPods and servers for a consumer market, the lion's share of the its business is in enterprise servers and storage arrays -- which is a growing market (yes, growing) and one in which WD did not play to any great degree.

WD had become No. 1 in the world -- and in the process overtaking a worthy market competitor, Seagate, last year -- by knowing how to manage those often paper-thin consumer-product margins into good profitability. This was no easy chore, by any means. WD has proven it knows to run this business well.

Now, with nearly 20 percent of the enterprise market about to come inside its firewall, WD has the chance to really add to its profitability.

"The Hitachi purchase will allow WDC to enter the critical enterprise HDD segment. WDC currently is only a marginal player in the enterprise HDD market, with nearly all of its sales going instead to the market for consumer drives, an area that includes products like desktop and mobile PCs, set-top boxes and video game consoles," Fang Zhang, storage systems analyst at IHS iSuppli, wrote in a media brief.

"The enterprise HDD market garners significantly higher margins than the consumer segment, which makes the enterprise a fast-growing market for HDD revenue. WDC has largely been absent from the enterprise segment. However, Hitachi GST brings WDC the essential technology, product portfolio and experience required to compete here."

Hitachi GST offers both 3.5-inch and 2.5-inch HDDs with SATA and SAS interfaces, which are used extensively in the enterprise segment. The company has wide-ranging experience in this area, giving it the kind of track record required to win the confidence of enterprise customers, Zhang said.

In a closely watched-margin business like this, scale is everything, and WD is scaling up.

"A huge amount of this is about scale, economies of scale, scale of R+D, scale of portfolio ... and did I mention scale?" Mark Peters, senior analyst at Enterprise Strategy Group, told eWEEK. "Making money in this high-volume business requires scale in most respects.

"I say 'most' because the loss of a major competitor leaves the potential for less-aggressive pricing. Seagate (a close No. 2 on shipments before this deal) and the other remaining competitors (such as Toshiba) might also see this as an opportunity to compete more."

Trust a Major Factor

One more key factor is this: trust. There are still many people in the IT world who do not trust solid-state drives inside their Big Iron just yet. They are perfectly satisfied with buying lots of relatively inexpensive HDDs and swapping them in and out of their redundant data center systems as needed.

There is no question that HDDs are still a more cost-effective storage media than NAND flash, and it probably will be for 10 or more years.

Is there a method to WD's acquisition madness? Oh yes. While the debate over spinning disks and solid-state drive continues for another decade or more, WD will be controlling half the world market of the storage media that remains the world standard.

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