HDD Shipments Display Unique Yet Familiar Patterns in 1Q03

Transcription

1 Market Analysis HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 Abstract: Despite the war and soggy economies, hard disk drive shipments, as usual, increased on an annual basis during the first quarter and the drive makers, as usual, managed to overproduce. By John Monroe Strategic Planning Assumption As industry consolidation proceeds Gartner Dataquest predicts that, as in 2002, there will be further significant consolidation of hard disk drive (HDD) suppliers in 2003 chaotic quests to maintain or regain market share could result in precipitous and unnecessary average selling price (ASP) declines to worst-case scenarios (0.8 probability). Recommendations All drive makers must stop overproducing during the first half of the year. All drive makers must wisely control the rate of price declines. All drive makers should make three to four weeks, rather than five to six weeks, the minimal acceptable level for channel inventories. Publication Date:3 June 2003

2 2 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 HDD Shipment and Inventory Changes Table 1 shows Gartner Dataquest's estimates of quarterly HDD shipment and inventory changes since the first quarter of Table 2 details Gartner Dataquest's estimates of total first-quarter 2003 HDD shipments and market shares. Table 3 details Gartner Dataquest's estimates of fourthquarter 2002 HDD shipments and market shares. Table 4 details Gartner Dataquest's estimates of first-quarter 2002 HDD shipments and market shares. Table 5 shows 1.8-inch and 1.0-inch HDD shipments since the first quarter of Table 6 shows quarterly and annual changes in HDD shipments for 1999, 2000, 2001, 2002 and the first quarter of Table 2, Table 3 and Table 4 now show combined shipments and shares for Hitachi and IBM. On 31 December 2002, Hitachi and IBM completed the legal creation of a joint venture company that merged their respective HDD facilities and resources. The new company is known as Hitachi Global Storage Technologies (HGST). Please see the "Giant Alliance" section of the Gartner NewsTake "Hardware Platforms Weekly, Issue 16," HWPW-WW- NT-0216 for an in-depth Gartner Dataquest perspective on this merger. Table 1 Quarterly HDD Shipments and Inventory Changes, 1Q01-1Q03 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 HDD Shipments 48,277 44,901 47,533 54,889 53,325 51,405 53,889 61,020 57,732 Quarter-Over-Quarter Change HDD Inventories 10,318 8,953 9,358 11,017 12,108 13,449 11,789 13,506 14,628 Quarter-Over-Quarter Change Inventories/Shipments Source: Gartner Dataquest (February 2003) Table 2 Shipments of Mobile, Desktop and Enterprise, 1Q03 Manufacturers Ranked by Total 1Q03 Shipments Mobile Mobile Desktop Desktop Enterprise Enterprise Total Total Seagate , , , Maxtor , , Western Digital , , HGST 5, , , Samsung , , Toshiba 3, , Fujitsu 1, , Other Vendors Total Units 10, , , , Notes: Mobile-class products are 1.0-inch, 1.8-inch, and 2.5-inch that use Compact Flash, Personal Computer Memory Card International Association (PCMCIA), or Advanced Technology Attachment (ATA) interfaces. Desktop-class products are 3.5-inch that incorporate ATA interfaces. Enterprise-class products are 3.5-inch that incorporate small computer systems interface (SCSI), serial storage architecture (SSA), or Fibre Channel-Arbitrated Loop (FC-AL) interfaces. HGST is the new company formed by the merger of Hitachi's and IBM's HDD divisions. Source: Gartner Dataquest (May 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

3 3 Table 3 Shipments of Mobile, Desktop and Enterprise, 4Q02 Manufacturers Ranked by Total 4Q02 Shipments Mobile Mobile Desktop Desktop Enterprise Enterprise Total Total Seagate , , , Maxtor , , HGST 5, , , , Western Digital , , Samsung , , Toshiba 2, , Fujitsu 1, , , Other Vendors Total Units 9, , , , Notes: Mobile-class products are 1.0-inch, 1.8-inch, and 2.5-inch that use Compact Flash, PCMCIA, or ATA interfaces. Desktopclass products are 3.5-inch that incorporate ATA interfaces. Enterprise-class products are 3.5-inch that incorporate SCSI, SSA, or FC-AL interfaces. HGST is the new company formed by the merger of Hitachi's and IBM's HDD divisions. Source: Gartner Dataquest (May 2003) Table 4 Shipments of Mobile, Desktop and Enterprise, 1Q02 Manufacturers Ranked by Total 1Q02 Shipments Mobile Mobile Desktop Desktop Enterprise Enterprise Total Total Seagate , , , Maxtor , , HGST 4, , , Western Digital , , Samsung , , Toshiba 2, , Fujitsu , , Other Vendors Total Units 8, , , , Notes: Mobile-class products are 1.0-inch, 1.8-inch, and 2.5-inch that use Compact Flash, PCMCIA, or ATA interfaces. Desktopclass products are 3.5-inch that incorporate ATA interfaces. Enterprise-class products are 3.5-inch that incorporate SCSI, SSA, or FC-AL interfaces. HGST is the new company formed by the merger of Hitachi's and IBM's HDD divisions. Source: Gartner Dataquest (May 2003) Table 5 Quarterly Shipments of 1.0-Inch and 1.8-Inch, 1Q01-1Q03 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q Inch Quarter-Over-Quarter Change Inch Quarter-Over-Quarter Change Source: Gartner Dataquest (May 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

4 4 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 Table 6 Quarterly and Annual HDD Shipment Comparisons 1Q 2Q 3Q 4Q Total 1999 Mobile 4,828 5,003 5,617 6,585 22, to-1999 Mobile Increase/Decrease Desktop(KUnits) 31,319 30,580 31,851 36, , to-1999 Desktop Increase/Decrease Enterprise 5,099 5,207 5,666 6,252 22, to-1999 Enterprise Increase/Decrease Total 41,246 40,790 43,134 49, , to-1999 Total Increase/Decrease Mobile 7,263 7,435 7,791 7,735 30, to-2000 Mobile Increase/Decrease Desktop(KUnits) 37,047 34,929 37,696 37, , to-2000 Desktop Increase/Decrease Enterprise 4,519 5,184 6,061 6,542 22, to-2000 Enterprise Increase/Decrease Total 48,829 47,548 51,547 51, , to-2000 Total Increase/Decrease Mobile 6,972 7,571 7,354 8,847 30, to-2001 Mobile Increase/Decrease Desktop(KUnits) 36,127 32,840 35,649 41, , to-2001 Desktop Increase/Decrease Enterprise 5,178 4,490 4,530 4,828 19, to-2001 Enterprise Increase/Decrease Total 48,277 44,901 47,533 54, , to-2001 Total Increase/Decrease Mobile 8,392 9,062 8,533 9,797 35, to-2002 Mobile Increase/Decrease Desktop 39,877 37,660 40,998 45, , to-2002 Desktop Increase/Decrease Enterprise 5,057 4,683 4,358 5,354 19, to-2002 Enterprise Increase/Decrease Total 53,325 51,405 53,889 61, , to-2002 Total Increase/Decrease Mobile 10, to-2003 Mobile Increase/Decrease Desktop 42, to-2003 Desktop Increase/Decrease Enterprise 4, to-2003 Enterprise Increase/Decrease Total 57, to-2003 Total Increase/Decrease Note: Some lines and columns may not total exactly because of decimal rounding. Mobile, desktop and enterprise annual and quarterly totals are rounded independently. Source: Gartner Dataquest (May 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

5 5 Business Trends Total January-to-March 2003 HDD shipments declined 5.4 percent sequentially but increased 8.3 percent annually. War and continuing economic uncertainty dominated the headlines, but the HDD industry set a new record for shipments during the first quarter at 57.7 million units, eclipsing the old mark of 53.3 million units. Throughout 2002, the global economic climate was, at best, uncertain, but the HDD markets exhibited resilient growth after an unprecedented downturn in There may be no widespread economic recovery in 2003 or 2004, but there is little reason to doubt that global HDD shipments will grow in 2003 and again in A controversial war and uncertain peace have, to date, done little to slacken global demand for, which has remained normal (up on an annual basis, slightly down on a sequential basis). It is also normal for the drive makers to overproduce during the first half of the year, and they maintained this unfortunate tradition in the first quarter of The inventory problems, as usual, were most pronounced in the desktop HDD distribution channels. Seagate' shipments declined (as did Maxtor's), but the company remained the world's No. 1 drive maker in the first quarter of 2003, shipping 16.6 million drives, compared with Maxtor's 12.4 million. Seagate's share dropped 1.2 percentage points while Maxtor's dropped only 0.2 percentage points, but Seagate had less channel inventory. Western Digital's shipments increased marginally and the company gained an approximate percentage point of share in the first quarter, becoming the world's No. 3 HDD supplier despite the Hitachi-IBM merger. HGST's sequential shipments declined by nearly 1 million units. With the consolidation of Hitachi and IBM, there is now a greater-than-10- point share difference between the smallest of the top four suppliers and the nearest competitor (Samsung). However, there are now minimal gaps between Fujitsu's, Toshiba's and Samsung's shares. s were heavily concentrated among the largest drive makers in 1995, but, by 2000, control of an enlarged playing field was much more evenly distributed among the top six vendors, with a mere 10.8 percentage-point difference between the No. 1 and No. 6 supplier. Currently, the 2003 markets reflect 1995 trends the top four suppliers control an inordinately large share (84.6 percent) of the total market and the gap between the No. 1 and No. 6 supplier has increased to 23.5 percentage points. Table 7 shows some relative share distributions in 1995, 2000 and The dominance of the largest suppliers shrank between 1995 and 2000 but now has grown again, and the gaps between larger and smaller suppliers, which had dwindled between 1995 and 2000, have once again widened Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

6 6 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 The "Other Vendors" category achieved a 4.3 percent share in 1995 but had declined to extinction in 2001 after shipping only 683,000 drives (a 0.3 percent share) in No shipments of note were produced by Other Vendors during 2002 or the first quarter of Several startup companies including Taiwan-based RioSpring, with its Chinese manufacturing partner GS MicroStor, and U.S.-based Cornice have announced plans to build 1.0-inch. Gartner Dataquest currently forecasts that 1.0-inch drives will constitute the smallest percentage of overall HDD markets duringthenextfiveyears. Table 7 Distribution Among HDD Suppliers, 1995, 2000 and 2003 Difference Between theno.4andno.5drive Maker (Percentage Points) Difference Between the No. 1 and No. 6 Drive Maker (Percentage Points) Year Combined of the Top Four Drive Makers (Percent of Total) for Other Vendors (Percent of Total) Source: Gartner Dataquest (May 2003) Mobile Drives First-quarter mobile HDD shipments displayed a sequential increase (of 4.6 percent) for the first time since the first quarter of 2000 and set a new record at more than 10.2 million units. Although not in the same range as the incredible 38-to-50 percent annual increases in 1999 and 2000, firstquarter 2003 mobile HDD shipments increased annually by 22.1 percent, echoing the strong first-quarter 2002 annual increase and lending further weight to the argument that the marginal (4 percent) first-quarter annual decline in 2001 was an anomaly. 1.0-inch HDD shipments were sequentially flat, but 1.8-inch shipments declined substantially in the first quarter of The major customer for 1.8-inch technology (Apple Computer) has completed a product transition and Toshiba expects 1.8-inch demand to increase in the second quarter. Gartner Dataquest forecasts real second-quarter 2003 demand for sub-2.5- inch drives to hover in the range of 350,000 units. Virtually all of these drives will be consumed in non-pc applications (such as MP3 players and digital cameras). As usual, reported shipments of mobile drives greatly exceeded reported shipments of notebook PCs from the major original equipment manufacturers (OEMs). However, Gartner Dataquest believes that recordsetting first-quarter mobile HDD shipments did not create any inventory problems. Throughout the quarter, most mobile drives from all mobile HDD vendors were on allocation and, at least partially because of the Hitachi-IBM merger (a major consolidation always helps to grant clarity and perspective on the prices that large OEM customers are really paying for certain products), pricing was stable Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

7 Because of allocation, it is likely that the notebook original design manufacturers (ODMs) in Taiwan stocked up on 2.5-inch drives to ensure adequate inventory for April and May build plans. Whether this hunger for product will endure for the entire quarter remains to be seen. April demand from several major accounts was weak and mobile drive makers are concerned that major notebook PC OEMs and ODMs have been "double ordering" and waiting to see which company will be the first to deliver. Probable real demand for 2.5-inch mobile in the second quarter of 2003 will be in the range of 9.3 million to 9.8 million drives. Approximately 200,000 of these 2.5-inch drives will be consumed in non- PC applications in the second quarter of HGST now controls more than half of the mobile drive markets, and its comparative share has varied by less than 2 percentage points (55.7 percent in the first quarter of 2003, 57.2 percent in the fourth quarter of 2002 and 57.6 percent in the first quarter of 2002). Toshiba's shipments exceeded 3 million units for the first time, and Fujitsu's shipments increased to almost 1.5 million units, setting a new record for the company. Respective sequential and annual increases for all mobile HDD suppliers were impressive HGST was up 1.8 percent and 18 percent, Toshiba was up 3.4 percent and 17.7 percent, and Fujitsu was up 20.2 percent and 54.9 percent. It is likely that Seagate will re-enter the mobile HDD market late in the second quarter of The company aims to gradually grow and achieve an 8 percent-to-10 percent share of the mobile drives shipping in December This would equate to December shipments of 440,000 to 590, inch mobile from Seagate, assuming that December 2003 production from all mobile drive makers will account for approximately 50 percent of the total fourth-quarter 2.5-inch mobile HDD shipments (forecast at 11.1 million to 11.8 million units). Manufacturing yields on 40GB/platter mobile HDD technologies are still problematic. It now seems likely that 20GB/platter and 30GB/platter mobile HDD designs will continue to be produced in volume during the second and third quarters of Difficult technology transitions will limit production, but the mobile drive makers seem, at the moment, to be building on their own accord with responsible restraint and managing the markets with fiscal wisdom. Despite the incursion of a new player, Gartner Dataquest hopes to see expanding mobile HDD markets met with carefully curtailed production and increased ASPs during the next two quarters. Desktop Drives First-quarter 2003 desktop HDD shipments decreased sequentially by 6.7 percent but increased annually by 7.4 percent. In 1999, first-quarter desktop HDD shipments decreased sequentially by 1.8 percent but increased annually by 21.6 percent. In 2000, first-quarter desktop HDD shipments increased sequentially by 1.6 percent (an anomaly) and annually by 18.3 percent. In 2001, first-quarter desktop HDD shipments decreased sequentially by 1.8 percent and annually by 2.5 percent (there Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

8 8 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 were abnormal annual declines in all markets in 2001). In 2002, firstquarter desktop HDD shipments decreased sequentially by 3.2 percent but increased annually by 10.4 percent. Seagate remained the world largest desktop supplier in the first quarter of 2003, shipping 13.9 million desktop (a 32.5 percent share). Seagate's desktop shipments declined by 12.1 percent sequentially but increased annually by 14.5 percent. Maxtor shipped 12 million desktop drives (a 28 percent share) in the first quarter of 2003, down 5.5 percent sequentially and also down annually by 11.1 percent. Western Digital's desktop shipments increased marginally during a traditionally down quarter, increasing 0.5 percent sequentially but up annually by a healthy 28.2 percent. Samsung's desktop shipments also increased healthily, up by 5.6 percent sequentially and 19.2 percent annually. IBM reported sequential and annual desktop HDD declines of 18.4 percent and 3.8 percent, respectively. shifts at the major desktop OEM accounts seemed to favor Seagate and Western Digital. As with the mobile 40GB/platter designs, manufacturing yields on 80GB/platter desktop technologies are still problematic. Maxtor led the field in 80GB/platter production in the first quarter of 2003, but Seagate's 80GB/platter program gained substantial steam in February and March. There were virtually no 80GB/platter shipments from HGST, Samsung or Western Digital. 40GB/platter and 60GB/platter desktop HDD designs will be produced in significant volume in the second and third quarters of It is still uncertain whether adequate supplies of cost-effective 80GB/platter heads will be available in the third quarter when the industry begins to make a full-throttle transition to 100 percent production of 80GB/platter desktop HDD designs. Gartner Dataquest believes that actual global hunger for desktop in the second quarter of 2003 will not exceed 38 million units (no more than 36.5 million desktop required by legacy PC markets and no more than 1.5 million required by emerging non-pc markets). Current build plans seem to indicate total industry shipments of at least 43 million desktop in the first quarter of Overproduction engenders, as surely as night follows the day, irrational pricing. Gartner Dataquest urges the desktop HDD suppliers to break with profitless traditions and build with greater caution in Desktop HDD inventories increased at the end of December and again in March. Demand remained strong in January and kept less than six weeks of supply on hand in most warehouses. But demand in April, although strong at certain OEM sites, slackened (as it always does) in the distribution channels, and desktop HDD inventories are swelling. Global channel demand almost always declines in the second quarter, and OEM demand is generally (if variably) weaker than in the first and third quarters. This is normal and should not be a cause for surprise or concern. What is a cause for surprise and grave concern is the desktop drive makers' insistence on overproducing during the second quarter. This profitless practice must cease Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

9 Enterprise Drives First-quarter 2003 enterprise HDD deliveries declined sequentially by 12.9 percent (688,700 units) and annually by 7.7 percent (391,500 units). In 1999, first-quarter enterprise shipments decreased sequentially by 4.3 percent and annually by 17.4 percent. In 2000, first-quarter enterprise shipments decreased sequentially by 27.7 percent and annually by 11.4 percent. In 2001, first-quarter enterprise shipments decreased sequentially by 20.8 percent but increased annually by 14.6 percent. In 2002, first-quarter enterprise shipments increased sequentially by 4.7 percent but decreased annually by 2.3 percent. Quarterly patterns in the enterprise HDD markets are inconsistent and unpredictable; there is no characteristic norm. From 1998 to 2002, total annual enterprise shipments ranged from 19.2 million to 22.3 million units. In 2001, enterprise HDD shipments suffered a 14.7 percent decline but rebounded slightly with a 2.2 percent increase in Gartner Dataquest forecasts 19.5 million to 20.5 million enterprise for 2003 (a mostly flat year with low single-digit upside potential). In February 2003, Gartner Dataquest wrote: "The world probably consumed more than 5 million enterprise-class in the fourth quarter of However, because of inventory hangovers from prior quarters and last-minute stuffing of certain captive and distribution channels, Gartner Dataquest believes that there are at least 300,000 excess enterprise drives in various inventories that may prove to be problematic for at least another quarter." Substantial decreases in first-quarter 2003 enterprise shipments helped to alleviate inventory buildup at distribution and OEM sites. Although some pockets of surplus remain in enterprise distribution inventories, the supply/demand balance was healthier in March than it was in January, and demand from major enterprise OEM customers is increasing. Probable real demand for enterprise in the second quarter of 2003 may exceed 4.8 million units and shipments could increase to more than 5 million units. Seagate enhanced its dominant enterprise presence by increasing its sequential enterprise shipments by 218,000 units and upping its firstquarter 2003 enterprise share to 58.3 percent from 46.7 percent in the fourth quarter. Fujitsu suffered from some product transition issues with its U320 SCSI interfaces (which have now been solved) and reported shipments that declined sequentially by 414,100 units, dropping its firstquarter 2003 enterprise share to 17.2 percent from 22.7 percent in the fourth quarter. With shipments that declined sequentially by 382,300 units, HGST's enterprise share dropped to 14.7 percent in the first quarter of 2003, down from 19.9 percent in the fourth quarter of Maxtor's firstquarter 2003 enterprise HDD shipments declined sequentially by 110,300 units and its enterprise share also declined (from 10.7 percent to 9.9 percent). Respective sequential and annual changes for the enterprise HDD producers were as follows: Seagate up 8.7 percent, down 5.3 percent; Fujitsu down 34.1 percent and 33.3 percent; HGST down 35.8 percent and 7.3 percent; and Maxtor down 19.3 percent, up 86.2 percent Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

10 10 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 During November 2002, after many quarters of general surplus, channel inventories of enterprise-class finally became more balanced but swelled again toward a debilitating excess by the end of December 2002 and then, fortunately, became more balanced again by the end of March At the moment, enterprise demand seems solid and enterprise inventories are mostly under control, but Gartner Dataquest feels constrained to give the same advice as in past quarters. All enterprise drive makers should carefully manage build plans, maintain reasonable prices and be patient. The real demand for enterprise drives will grow or decline organically in response to actual requirements for high-end storage systems. Aggressive pricing to gain or maintain share will have no effect on the growth of this demand, and surplus inventories will only serve to diminish the perceived value of all the surviving enterprise suppliers. After the usual (if frustrating) delays, qualifications (or disqualifications) of new 36GB-73GB-146GB 10,000-rpm designs and 18GB-36GB-73GB 15,000-rpm designs from all suppliers have been completed at most of the major OEM accounts. Production of the older 18GB-36GB-73GB 10,000- rpm designs and 9GB-18GB-36GB 15,000-rpm designs will diminish quickly in the second quarter of 2003 and will cease, except for special OEM requests, by the end of the third quarter of Production of the new, yet-to-be-announced 73GB/platter 10,000-rpm and 36GB/platter 15,000-rpm enterprise HDD designs will probably not begin until the fourth quarter of 2003 and may be delayed until Seagate gained great share in the first quarter of 2003 primarily because the company was able to deliver a wide range of qualified products in sufficient volume and its competitors could not. Fujitsu maintained its No. 2 enterprise rank during a challenging quarter despite a major merger of two large competitors. But Fujitsu, HGST and Maxtor all suffered share declines in the first quarter of Maxtor executives have repeatedly insisted that the company will increase its enterprise shipments and garner a 20 percent share in Gartner Dataquest doubts that Maxtor can achieve a 20 percent annual enterprise HDD share in 2003 unless it merges with another company. A 20 percent annual share of the forecast non-fc market available to Maxtor (approximately 16 million SCSI drives in 2003) would require that Maxtor ship an average of more than 900,000 enterprise drives per quarter for the remainder of 2003 (since the company only shipped 460,100 enterprise drives in the first quarter). Maxtor has never shipped more than 700,000 enterprise drives in a quarter. However, if one interprets this to mean a 20 percent share of December 2003 non-fc enterprise shipments which is what Gartner Dataquest believes Maxtor really means by these statements this would equate to approximately 400,000 SCSI drives in the month of December (assuming about 5.5 million enterprise drives for the fourth quarter, 80 percent of which will be SCSI, 50 percent of which will be manufactured and shipped in the final month of the quarter). This is a significant increase in Maxtor's current monthly enterprise production rates but is certainly attainable Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

11 HGST seems determined to recover from several years of generally poor execution in the IBM enterprise HDD division. Although HGST has taken some painful steps (such as responsibly curtailing enterprise HDD production in the first quarter) and is beginning to execute more effectively, the company will have many merger-related operational and technical complexities to manage and overcome in the next two years. Contrary to seemingly popular opinion, enterprise market share does not need to be pursued with discounted prices. Gartner Dataquest believes that Maxtor and HGST stand a good chance to gain share with minimal price erosion if they are able to execute consistently and deliver 10,000- rpm and 15,000-rpm SCSI and FC products that can be quickly qualified at the right time. The large enterprise customers want to have three, not two, HDD suppliers, to ensure (among other things) competitive pricing and uninterrupted supply, and will strategically purchase from three, not two, HDD suppliers if (and only if) qualified products are available. With proper execution, HGST and Maxtor can close business at these major accounts without having to engage in needlessly aggressive pricing. Without proper execution, price is irrelevant because the products cannot be qualified and will not be purchased. Despite some inevitable share shifts and the giant merger of Hitachi and IBM, Gartner Dataquest believes that Seagate and Fujitsu will remain the dominant enterprise HDD suppliers for at least another year. Enterprise execution at the highest level is brutally difficult and can be very expensive. Only Seagate and Fujitsu have shown an ability to be consistent, high-volume enterprise HDD partners during the last three years. HGST and Maxtor will have to prove their worth by consistent execution, and this worth cannot be judged by the results of a single year. The legitimate measure of any meaningful, long-term share shifts in the enterprise HDD markets will be determined by execution, not by price. 11 Gartner Dataquest Perspective Mobile and enterprise markets should be relatively stable in the near term, but the midyear desktop markets seem headed toward a usual state of increased shipments, engorged channels and senseless pricing. Gartner Dataquest fears that chaotic quests to maintain or regain market share could result in precipitous and unnecessary ASP declines to below initial worst-case expectations, and has recently adjusted its forecast ASPs down for 2003 and In June of last year, we wrote: "In the spirit of hoping the drive makers can stun the world with changed behavior, Gartner Dataquest make the following modest proposals: Rescind all HDD distribution sales incentives and raise desktop prices by $5 to $10 in all distribution channels. Current net lowest distribution pricing is reflective of idiocy and waste Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

12 12 HDD Shipments Display Unique Yet Familiar Patterns in 1Q03 Immediately curtail desktop and mobile HDD production and keep enterprise HDD production at a minimum; continue to build with extreme caution for the remainder of the year. Be patient. Wait. In the recent past, a July surplus has consistently led to an allocation that begins to be apparent in September, when fourth-quarter demand becomes obvious, at which point prices quickly stabilize (albeit at unnecessarily low levels). From the post-price-war perspective of November and December, it is clear the industry could have averaged $5 to $10 more in resale value per drive during the entire second half of the year thereby generating hundreds of millions of dollars in profit if only pricing had not fallen to such disastrous levels in June and July. Gartner Dataquest urges the drive makers to try something daring and different this year." The drive makers did, in fact, try something daring and different in 2002 and discovered that strategic price increases could drive channel demand more efficiently than shotgun-blast price reductions. After needlessly aggressive declines in the second quarter of 2002, and in the midst of a perceived surplus of product, the drive makers raised desktop HDD prices in July 2002 and managed to control production. Paradoxically, and somewhat unexpectedly, demand increased. Then, late in the third quarter, delays in desktop HDD factory reallocation, combined with difficult mobile, desktop and enterprise technology transitions, caused gaps in delivery, which further whetted the appetite of major customers for next-generation products and created opportunities to prolong the production and delivery of older designs (which could happen again this year). This led to an extraordinary fourth quarter, in which new shipment records were set and industry ASP actually went up to $89 from $84 in the third quarter. But inventories also increased and, despite declining shipments, increased again in March Desktop prices dropped in January and dropped again in March. To what degree these erosions can be defined as unnecessary is hard to determine, but Gartner Dataquest believes that desktop HDD pricing could now be $3 to $5 higher without impacting global demand in any way. Mobile and enterprise prices could also increase slightly without impacting demand. With the exception of the third quarter of 2002 the only quarter in the last two years in which shipments increased while inventories declined, thus setting the stage for an exceptionally profitable fourth quarter inventories have expanded in every quarter since midyear 2001 (as shown in Table 1). Industry profits will be intimately tied to inventory control. All drive makers must make three to four weeks, rather than five to six weeks, the minimal acceptable level of channel inventory if they wish to make a decent, deserved and sustainable income from their amazing ability to deliver almost magical advances in a necessary technology. A hard disk drive is a terrible thing to waste Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

13 13 Key Issue What are the relative market shares of key companies in various storage markets? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3 June 2003

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