One can feel the momentum changing within the storage market, with several variables at play as we head into the fourth quarter.
After a hyperscaler build cycle that felt like the gift that kept giving, we are seeing signs of a slowdown. Without the cover of lofty nearline sales, manufacturers will go back to focusing on fundamentals.
There is also talk around Intel’s struggles and reported CPU shortage. However, at this time it is difficult to ascertain the impact of Intel’s 14nm CPU supply problems, with reports of a shortfall of 50%.
Also playing into the variability are SSD prices falling 15% in Q3, with another anticipated 15% decline come Q4.
Further adding to the uncertainty are the tariffs in the trade war with China. The Trump administration has just launched a fresh round of tariffs covering 200 billion USD of Chinese goods, 10% starting September 24th and 25% come January 2019. China does not seem to be backing down, responding with tariffs on 60 billion dollars USD of US-made goods.
Not only will material costs go up, but there will be indirect costs around reconfigured supply chains that will be increasingly difficult to manage. Tariffs may prove to a boon for those who manufacture outside of China, such as Western Digital and Samsung. However, it is not so good for those, such as Intel and Seagate, who build in China.
As much as politics can affect the timing and adoption rate of new technology, innovation will ultimately press on. Although hyperscaler demand is taking a breather and tariffs may have an impact on when exactly the hyperscalers will re-enter a build cycle, it inevitably will kick into gear again, although who knows what the storage landscape may look like at that point.
ENTERPRISE
Hyperscalers continue to demonstrate their ability to move markets, with TrendFocus reporting a record combined revenue of 5.8 billion USD in Q2 for HDD and SSD enterprise storage sales. The torrid pace represents a 36% jump in nearline sales and a 69% increase in HDD exabytes shipped, posting a record 3rd quarter on the heels of a record-setting 2nd quarter.
Enterprise SSD sales witnessed an accelerated uptake of NVMe-based SSD, with TrendFocus reporting that 40% of enterprise SSD shipments comprised of NVMe-based SSD. This is something to pay attention to as NVMe extracts much more performance from NAND than SATA-based SSD, altering the cost/benefit relationship in favor of SSD and putting pressure on HDD sales.
As already mentioned and after an unprecedented run-up, the hyperscaler build cycle is showing signs of slowing. We have heard several viewpoints as to the direction of nearline pricing, with one manufacturing insider stating that the nearline market has fallen off from 70-80% growth, although they are still expecting a healthy 40% growth rate.
Supply has certainly loosened and customers are beginning to see price drops. We heard from another manufacturer’s representative that they are returning to typical quarter-over-quarter price takedowns of 3% to 4%, which falls in line with what we are hearing from end customers. There is also concern among the manufacturers that falling demand will lead to the hyperscalers pushing for price concessions.
Now that the hyperscaler build cycle is winding down, we are left wondering what will be the catalyst to jump start the next build cycle. Will it be the increase in capacity that 14TB drives offer over the 10/12TB capacities, with 10/12TB representing 40% of nearline shipments over the past build cycle? Or possibly the adoption of AMD EPCY 7nm CPUs that promise to offer increased performance and lower total cost of ownership (TCO) in comparison to Intel’s 14nm based Xeon driving a new round of builds? Will the performance benefits of NVMe combined with dropping NAND pricing push HDD into cold storage?
What’s for certain is that increased adoption rates of NVMe will only accelerate as more SSD hits the market at lower price points and that the discussion of HDD versus SSD needs revisiting. The roll-out of larger nearline capacities is increasingly critical for HDD manufacturers to keep the cost advantage over SSD and buy time until next gen products such as HAMR and MAMR are released.
Toshiba and WDC are currently sampling 14TB for Q4. Seagate was targeting a Q3 sample date, but is pushing out 14TB samples into Q4 due to trouble hitting areal density targets. With a limited SSD presence in comparison to WDC and Toshiba, a delay is a setback for Seagate, which has otherwise executed well over the past few quarters against the hyperscaler build cycle.
As the per-GB pricing of SSD moves closer to that of HDD, the importance of gigabyte costs is reduced as there are several variables other than per gigabyte price at play including performance, power consumption and physical dimension.
Not only is Seagate at a disadvantage with SSD, WDC is struggling with the transition of its SSD controller to 3D NAND, leaving SanDisk without 3D NAND-based product for the enterprise market. Not a great situation not to have product available to fill the void left by winding down HDD mission critical support.
A further potential disrupter within the SSD market is hyperscalers exploring the use of internally designed NAND-based storage solutions, with Amazon furthest along this path and Microsoft building out its capabilities in this market. This may potentially limit the opportunity for enterprise-oriented drives, as hyperscale demand shifts towards raw NAND rather than assembled SSD.
Nor can we overlook the effect of the tariffs on the global supply chain, which is highly integrated. Other than the obvious impact on material costs, tariffs are very disruptive to the planning cycle, exposing the market to a whole host of hidden costs and complexities.
The challenge lies in this administration’s unpredictability. Do global enterprises look for short-term workarounds or is it time to reconfigure supply chains, manufacturing, and distribution centers more deeply? Was Harley Davison’s decision to increase manufacturing in south east Asia a glimpse into the future? Of course, the decision was taken on Harley Davidson’s part prior to the duty on steel imports, but the administration’s trade policies made the commercial logic of restructuring its global manufacturing much easier after the fact.
In any event, increased material costs and rising complexity will force some tough decisions.
CONSUMER
The PC market got a boost from corporate demand and gaming, with the strongest quarterly growth since 2012. The 5 top notebook brands saw year-over-year growth of 11% in July. Several factors contributed to this growth spurt including an increase in corporate capital budgets, the replacement of Windows 7 machines, as well as a drop in GPU prices jump starting gaming PC purchases.
The fly in the ointment is Intel’s lack of 14nm fab capacity leading to a CPU shortage that may blunt storage sales, with market forecasters indicating a potential 5-7% drop in PC sales.
Despite the recent uptick, WDC appears to see the writing on the wall. It has not only pared back its support of its notebook HDD roadmap, it also announced it is closing its facility in Malaysia in 2019. For the short term, this is good news for Toshiba and Seagate but the announcement is a clear indication of where they see the market going.
Not only do HDD manufacturers have to contend with SSD prices continuing to drop (declining 15+ in Q3, with prices expected to erode at the same rate over Q4), with SSD already snapping up 50% of the notebook market, but consumers are increasingly storing data in the cloud. Capacity being less of an issue makes SSD more attractive because of its performance advantage.
Seagate is known for HDD and has been focused on and experienced success within the enterprise space, so its launching the Barracuda SSD SATA line, which ranges from 250GB to 2TB, is somewhat curious and seems out of synch in a market that is trending to M.2 and NVMe, with NVMe being the go-to in the notebook space. Let’s face it, NVMe is the new SATA, and—frankly— is there really a need for 2TB?
With consumers storing data in the cloud, negating the need for large capacity storage, falling NAND prices and SSD’s performance advantage, expect adoption rates of SSD to increase within the PC space.
CLOSING THOUGHTS
Not only are we seeing NAND pricing dropping quickly, there is talk of a potential glut. Manufacturers are very aware that they have to get bit pricing down to drive mass adoption. With increasing yields from 3D NAND and 96 layer technology combined with more and more capacity investment to chase new technologies such AR, VR and autonomous vehicles, we are seeing continued investment into a saturated market.
A fab typically costs in excess of 5 billion USD to build and has a limited life span before it needs retrofitting. This leaves companies with a limited amount of time to get a return on their investment. In what feels like a race to the bottom, the only way to move bits is by dropping the price. We are already seeing the PC market shift to SSD and the race for enterprise sockets is on.
Increased adoption rates of NVMe will only accelerate as more SSD hits the market at lower price points. The roll-out of larger nearline capacities is increasingly critical for HDD manufacturers to keep the cost advantage over SSD and buy time until next gen products such as HAMR and MAMR are released.
