Fujitsu HDD offers point to further HDD Consolidation

Implications: * Fujitsu is the sixth in unit shipping volume of HDD companies making 2.5-inch drives for notebook, consumer and enterprise applications.  * Fujitsu is one of the oldest companies in the HDD business and has been responsible for much technology innovation in the industry.  * Reports abound that Western Digital and perhaps Toshiba are interested in acquiring Fujitsu’s HDD business.  * The acquisition of Fujitsu by another drive company would be a significant consolidation in the HDD industry and could significantly impact the rest of the market.

Analysis: HDDs continue to increase in shipping volume and this is expected to continue despite temporary setbacks due to economic conditions.  This demand is a reflection of the insatiable need  for more digital storage for our content based economy.  My projections (in reports and newsletters available at www.tomcoughlin.com) are that by 2013 over 1 B drives will be shipped per year, up from about 501 M shipped in 2007.  While demand increases prices of drives continue to decrease on average while productions costs could increase in the near future due to the introduction of new technologies such as discrete track recording.  This puts pressure on the HDD and component producers leading to additional consolidation as the remaining companies achieve economies of scale.  

Fujitsu has been in the HDD industry for decades.  The company has historically supplied HDDs for many market niches and has been a leader in the development of HDD technology.  In 2001 the company exited the desktop (3.5-inch) drive market, selling its production plants in Thailand that made these drives to Western Digital.  Since then Fujitsu has focused on making smaller form factor HDDs, in particular 2.5-inch drives for notebook computer as well as high performance enterprise markets.  So far in 2008 Fujitsu is 4th in unit volume of HDDs for the laptop market and 2nd (after Seagate) in unit volume of the high margin enterprise HDDs.  The sale of Fujitsu’s HDD assets to another player in the HDD market will boost the acquiring company's  position in the laptop market and turn them into a major player in the enterprise storage business.  

Reports circulate that Western Digital is in serious talks to acquire Fujitsu’s HDD business and Toshiba has said that it is also interested in Fujitsu’s HDD unit.  If Western Digital were to acquire Fujitsu's HDD business there would probably be a net positive impact on WD.  Western Digital would acquire some additional 2.5-inch laptop drive volume and gain a significant position in the enterprise market (SAS and Fibre Channel interface HDDs) where they have not played a role for several years.  The reported investment of $644 to $944 M to purchase the unit is doable for WD and could have payoff in only a few years time if WD can maintain close to Fujitsu’s market share in their target markets.   

WD would gain some additional production facilities.  Some of these the company would probably keep but some would probably be consolidated with existing production facilities.  It seems likely to this writer that WD would want to keep most of the Fujitsu engineering groups, mostly in Japan and the US.  These could have enormous value to WD since they would allow expansion of the R&D resources that will be needed to continue to be competitive in the HDD industry.  This could help WD with its strategy of becoming a leader in the HDD industry rather than a fast follower.  

If Toshiba were to acquire Fujitsu’s HDD business it is likely that they would keep the laptop drive business but not so clear that they would pursue the enterprise business since this is not in Toshiba’s normal area of business.  Whatever happens to Fujitsu I expect to see additional consolidation in the industry over the next few years as volume expands while costs of production increase.