Market participants are always looking for leading indicators to help them fine-tune their product roadmaps and supply chains. Memory, with its quarter-after-quarter price increases, seems to epitomize a high-flying enterprise market.
However, after a long run-up, memory is beginning to slow. Open market pricing is falling, indicating that change may be afoot. The combination of normalizing demand from hyperscalers, increased volumes and lower SSD prices is reshaping the storage market.
Throw in a Trump-inspired tariff and managing the storage supply chain just got a whole lot harder. We are already seeing manufacturers moving supply chains around to ensure final assembly is outside of China, amid reports the costs are being passed on to customers as a logistics fee.
WD does not build product in China so it should be unaffected by the tariffs, but both Seagate and Micron build in China. That did not stop WD from raising prices behind Seagate.
The bottom line is builders are not going to bring storage onto the shelves if they can’t get their hands on motherboards and CPUs at a reasonable cost. In talking to a handful of OEMs, no-one seemed to have a strategy to approaching the tariffs, instead taking a wait-and-see attitude. Maybe Trump proves to be the ultimate negotiator that he claims to be and this quickly goes away, proving to be a big nothing burger.
Hard Drives
Looking at the overall hard drive market, nearline demand has been strong but is expected to fall off from its recent highs. Manufacturers benefited from healthy Q2 PC results and the strong hyperscaler buildout. Performance drives, on the other hand, are feeling the squeeze of falling SSD prices. Nevertheless, the first half of 2018 was a great time to be in the hard drive business.
Looking forward, things are less clear with a changing storage topography and a possible trade war looming over our heads.
The PC market saw its best quarter since 2012, reporting 2.7% growth driven by an increase in corporate demand supporting strong Q2 results for the HDD manufacturers. Despite healthy conditions, the storage market is at an inflection point with SSD coming on strong. Pricing continues to fall as bit shipments increase by 40%. Falling SSD prices are driving an accelerated uptake of SSD in notebook sockets. The 3.5” desktop space is struggling, with one manufacturer describing pricing as brutal.
The long and short of it is that manufacturers are taking a hard look at their roadmaps, trying to determine their commitment to the PC market. Other than modifications and enhancement to existing drives, WD has only one new drive on its roadmap, a 2.5” 9mm 2TB drive, indicating that it is limiting HDD investment in the PC space.
WD has not been as nimble as Seagate over the last several quarters. Last month’s price increase by WD and continued insistence that the market is in allocation has customers scratching their heads, with one customer stating recently, “I can get any drive I need within 8 weeks, not ideal but not an allocation situation”. Its decision to phase out performance drives and reduce its commitment to the notebook space has reportedly ruffled the feathers of its traditional customer base, something welcomed by Toshiba and Seagate, which are more than willing to support tail-end demand.
Not only does Seagate continue to out-execute its rival, seemingly a step ahead of WD in reading the market, it has made significant operational changes, introducing its 14TB at the same time as its rivals Toshiba and WD. Solving the base plate issue that plagued Seagate throughout 2017 brings costs in line with its competitors, and it is reportedly close to introducing a 10 platter 16TB drive.
Toshiba is looking at a much different scenario than the past when it was able to lock in HDD sales in exchange for SSD. It no longer owns NAND (raw SSD components) production and the SSD/HDD relationship has been turned on its head, with SSD poaching more and more desktop sales. Not as established in the nearline space, Toshiba has been much more reliant on the PC business than WD and Seagate, and is having to access its product roadmap in the face of a very different storage market.
Looking forward, the market is in transition. Clearly SSD is making significant inroads and hyperscale demand is tailing off from recent highs. Nearline demand will remain solid going into Q3 and Q4 but not quite at its recent rate, allowing demand to catch supply.
However the tariff situation is throwing a kink in manufacturers’ supply chains, which could be good for WD who does not build in China compared with Seagate who does. The impact of the tariffs is yet to be determined. If manufacturers can’t get ancillary components such as motherboards and CPUs, will they still buy drives?
SSD
As previewed above, increased bit yields and softer demand driven by weak handset sales have pushed pricing downward and accelerated the cannibalization of HDD by SSD. When evaluating SSD versus HDD, there are several variables to take into consideration, the two primary drivers being cost and performance.
Until now, HDD had enough of a cost advantage in the enterprise market to limit SSD to specialized roles or intermediary solutions such as tiering of storage, giving the best of both worlds. Increasing market demands for performance, driven by artificial intelligence (AI) and machine learning (ML) combined with a reduction in SSD price points, will accelerate the push of SSD into the enterprise market.
Price is an important variable but always needs to be viewed in terms of ROI. The performance advantage of SSD is undeniable but limited by using SAS/SATA interfaces that were designed to support HDD. NVMe was specifically designed to take advantage of NAND-based storage. However there were still drawbacks. NVMe could not be used across fabric or in a virtualized system.
With the release of NVM Express 1.3, support of virtualization and NVMe over fabric are big wins, broadening NVMe’s appeal. Not only do you get the speed of NVMe, you eliminate the SAS/SATA controller and certain switches. As NAND and SSD prices fall and NVME becomes easier to deploy, expect to see increased use of NVMe now that all flash arrays can be deployed in a virtualized environment.
It seems clear that SSD is stepping out from the shadows of HDD. We have seen SSD overtake 15K performance HDD, and while 10K HDD currently has a cost advantage over SSD we expect SSD to reach parity with HDD within the next 12 to 18 months. There was talk of a HDD manufacturer reporting a significant order intended for HDD which ended up being ordered as SSD.
Additionally, Samsung has shifted its stance on the enterprise market, with much more aggressive pricing in order to drive forward demand. We have seen increased volumes of enterprise Samsung product hit the street with authorized distribution aggressively pushing product. We expect Intel and Micron to follow suit.
Under no circumstance is HDD going away. However, WD and Seagate both recognize the changing storage landscape and are reported to be making a push into the SSD space.
Each has its own challenges. WDC has struggled to bring new SSDs on line, with reports that its WD 64-layer technology is not maturing as fast as their competitors. It particularly struggles with SanDisk-based enterprise class parts. Meanwhile, Seagate is pushing its Toshiba-based SSD to enterprise customers, although it faces significant headwinds by being late to the market and at a price disadvantage as SSD pricing trends downward.
Final Notes
U.S. tariffs on Chinese goods, which include both NAND and HDD, will impact Intel, Seagate and Micron, which have seven of the nine foundries in China. No doubt there are legitimate grievances with China that need to be addressed, particularly around the theft of intellectual property. I am not sure what the endgame is. Perhaps a closed door meeting with Xi Jinping where he promises China will stop helping itself to American technology? Or will we simply be riding on China’s Belt and Road initiative? Watch this space.
