Toshiba Investing Toward a Turnaround in HHD Market

Heavily leveraged Toshiba is wearing out its corporate credit cards these days in an effort to be well-positioned for a bounceback in the world economy.

Only four months after announcing that it will buy 30 percent of SanDisk’s share of solid-state-drive manufacturing capacity for a cool $1 billion, the Japanese IT hardware maker said it will buy longtime competitor Fujitsu’s struggling hard drive business. A price in the transaction has not yet been announced, but it won’t be cheap.

Such a deal would give Toshiba a running start in enterprise server hard drives, a market in which the company has never competed. Seagate (63 percent), Fujitsu (19 percent) and Hitachi (18 percent) are the current enterprise HHD industry leaders.

Should the transaction come to fruition — and industry insiders believe that it will — Toshiba also will become a much more powerful player in the overall spinning disk storage market against Seagate, Western Digital and Hitachi.

Seagate is the current world HHD leader with 32 percent of the market, followed by Western Digital (27 percent), Hitachi (17 percent), Toshiba (8.7 percent), Samsung (8.2 percent) and Fujitsu (7.3 percent).

All of these market numbers are based on calendar year 2008 revenue reports.

Based on the 2008 revenue numbers, Toshiba will be nearly neck and neck with Hitachi as the world’s No. 3 hard disk makers with 16 percent of the world market, storage industry analyst Tom Coughlin of Coughlin Associates told eWEEK.

“This deal [Toshiba/Fujitsu] has been in the works for months and months,” Coughlin said, “but it’s of course been slowed down along with everything else in this economy. It’s not a surprise by any means.

“Western Digital wanted to make this deal but got cremated with the decline of the dollar versus the yen,” Coughlin said. “It makes more sense for a Japanese company to buy Fujitsu’s drive business anyway. It’s a good entry point for Toshiba in this [enterprise HHD] market.”

In the 2.5-inch laptop drive market, the deal will instantly make Toshiba the world’s No. 1 player at about 34 percent. Currently, Western Digital and Hitachi are tied for first at 23.5 percent, with Fujitsu at 18 percent and Toshiba at 16 percent. Seagate is in fifth place at 14 percent.

“Clearly, the deal still has to be done,” Mark Peters of Enterprise Strategy Group told me. “That said, assuming it does, consolidation in this market is not surprising. The pressure on disk manufacturers comes both in terms of price — especially at the lower, mass quantity end of the market–and technology — as solid state devices begin to make a mark.

“In such a mature market, only a handful of really big players are likely to survive in the long haul. Toshiba with Fujitsu stands a better chance than either alone — not only to survive, but also to enjoy the eventual steady returns that a large mature market can deliver. With Fujitsu making losses in the business, it is no doubt happy to find a willing suitor; meanwhile, Toshiba gains more footing at the higher ends of the market and may be able to leverage such access — in combination with its existing solid-state capabilities — to penetrate additional product areas as they develop,” Peters said.

Toshiba is positioning itself for a rebound in the market — one that is inevitable, Coughlin said.

“By 2011, we expect an incredible pent-up demand for storage,” Coughlin said. “With the continuing trend toward higher-definition video and photos, there is nowhere to go but up. People have to have storage.”

The Toshiba-Fujitsu deal is expected to close in the April-June time frame.