A path to saving Hitachi drive operations

Implications: Hitachi Global Storage Technology has lost money almost every quarter since it was created by the merger of Hitachi and IBM’s disk drive units.In calendar 2006 the company lost $375 million, 60% more than in 2005.Hitachi provides a bit less than 20% of all the hard disk drives in the world, second only in volume to Seagate and Western Digital,There are rumors that private equity funds may be interested in buying the disk drive unit from Hitachi.It Hitachi changes or exits the industry there will be tremendous effects on the rest of the HDD industry.

Analysis: Hitachi Global Storage Technology (HGST) represents the legacy of IBM’s disk drive group (IBM introduced the digital disk drive in 1956) and Hitachi’s disk drive operation. Since the combination of these former competitors in 2002 the resulting company has rarely had a profitable quarter. For the last couple of years HGST has lost several hundred millions of dollars, $375 million in 2006 alone.

Although HGST manufacturers disk drives for every market segment and provides about 18% of the total HDDs shipped annually the company has not been profitable. At the same time that HGST has been losing money, major disk makers Seagate and WD have had very impressive quarterly results. Hitachi has been the sick man in the drive industry and the company’s problems have helped drag down values of otherwise rather profitable companies in the industry.

Hitachi’s problems stem from a legacy, geographically disparate inefficient supply chain combined with seemingly incurable internal cultural clashes that make effective new product introductions impossible. As a result HGST suffers from higher costs of production compared to their competition and lag behind them in new product introductions. Fast introduction and ramp of cutting edge new storage products are the key to success of a hard disk drive company.

Hitachi represents a significant share of the total disk drive market and whatever happens to the company will significantly impact their competitors and suppliers. For years Hitachi has tried to solve its problems internally while exploring possible options to sell off all or part of its disk drive operations.

In late September 2007 the latest rumors hinted that Hitachi was exploring selling a stake of its hard disk drive unit to a strategic investor or even to sell the entire business outright. If such a sale allowed the resulting entity to concentrate its supply chain and create an effective new product introduction capability, the operation might be saved. If Hitachi keeps running its hard disk drive operation as it has to date they will continue to lose money and market share. On the other hand it Hitachi merely exits the business a large amount of the total market share will be suddenly available to Seagate, Western Digital, Samsung, Fujitsu and Toshiba.

It is highly unlikely that the status quo at HGST can last much longer and when change does happen it will result in a significant and permanent change to this important industry segment.