A profitable 2008 for Hitachi has been followed by a miserable 2009, with two loss-making quarters and a possible fall behind in the areal density stakes.
In April last year, and after much high-level debate within Hitachi, it was decided that Hitachi GST would remain as part of Hitachi, not be sold off in whole or part, and have its fortunes rebuilt by its own internal efforts. HGST was formed in 2003 when Hitachi absorbed hard disk drive (HDD) manufacturing facilities from IBM. There were prolonged difficulties in realising a profit from the combined venture, leading up to discussions with a venture capital fund, Silver Lake Partners, for a partial sell-off in return for a capital injection. After a couple of quarters of profit in the second half of 2007, Hitachi backed out of this and decided to go it alone with Hiroaki Nakanishi as its chairman and CEO.
What followed was its reward: four quarters of profit in 2008 (see chart below) accompanied by bullish marketing statements about competing with industry leaders, including number 2 Western Digital and number 1 Seagate, both also profitable. It also made noises about areal density expertise - the industry is in a never-ending race to increase areal density and so both increase HDD capacity and lower cost/GB.
Then the recession hit, and the fourth quarter of 2008 showed a substantial profits drop, from an estimated $85m in the preceding quarter to just $4m.
This was followed by executive changes in the first quarter of 2009. Steven Campbell was appointed as Chief Technology Officer in January 2009, with global responsibility for all aspects of the company’s product development and technical vision. In February chief financial officer Stephen Milligan was promoted to President, whilst keeping the CFO role and remaining at the company's San Jose, California headquarters.
Hiroaki Nakanishi remained as chairman, but also became an executive VP at parent Hitachi, Ltd. responsible for the Hitachi Group's global strategy. There was no official full-time Hitachi GST CEO.
Another executive left Hitachi GST; Shinjiro Iwata, an Executive Vice President became CEO of Service and Global Business for the Information and Telecommunication Systems Group of Hitachi, Ltd. There was also an incoming executive, Masaya Watanabe, who joined Hitachi GST as its Chief Strategist of Data Storage reporting to Steve Milligan. He came from Hitachi's enterprise server division.
The first calendar 2009 quarter was poor. Revenues fell to £1.026bn from the previous quarter's $1.252bn and there was a net loss of $57m plus a fall in HDD unit shipments to 19.2m from the previous quarter's 22.26m.
The next one was slightly better. Revenues rose slightly to $1.109bn and there was a loss again, but a smaller one at $32m. The glory days of 2008 are becoming a distant memory. The recession hit Western Digital and Seagate even harder, with plant closures, headcount reductions and, in Seagate's case, executive changes at CEO and direct report levels.
Revenues and income fell at Hitachi GST but it kept on expanding. It bought SimpleTech earlier this year, to gain external drive capabilities and released two products in July. There was the SimpleTOUGH portable USB drive, a colorful SimpleDRIVE Mini portable USB drive, together with a SimpleNET network storage adapter for sharing USB drive content over a home or office network.
Hitachi GST also expanded its product capacity by buying an unwanted WD aluminium platter plant in Malaysia at the beginning of July.
Areal density matters
What is slightly concerning at Hitachi GST is that it might just have dropped behind the industry leading edge with regard to areal density improvements. It has only just announced its 2TB drive, the Deskstar 7K2000, whereas Western Digital and Seagate brought theirs out in the first half of 2008. Also, and tellingly, the HGST 2TB drive needs five platters to do what four do for its competitors. Admittedly, this enables a faster 7200rpm spin speed than the industry leaders, but there is always a cost to using an extra platter and head.
Oddly, Hitachi GST did announce a refreshed 1TB drive, the Deskstar 7K1000.C, which needs just two platters and so uses the 500GB/platter density that would be needed for a 4-platter 2TB drive. What is going on? The 7K1000.C is not yet available, which suggests that the 500GB/platter media or heads were just not ready when hardware decisions were made at cut-off dates in the 7K2000 development process. Alternatively there are manufacturing capacity issues and HGST felt the 500GB platters would be better used in the 1TB drive and not the 2TB one. It seems that something is not quite kosher here.
The thing is that, according to head manufacturer TDK Corporation's roadmap, the 3.5-inch drive areal density is jumping up from 500GB/platter to 640GB/platter, meaning we could see 4-platter 2.5TB drives. WD and Seagate could conceivably announce theirs in April, a year or so after their first 2TB drives were introduced. But Hitachi GST has only just introduced its 2TB drive and its first 500GB/platter 1TB drive. To announce a 2.5TB one and use 640GB/platter technology in April would mean that it would get no good return at all from its 500GB/platter tech.
There could be a nine month or longer lag opening up here.
SFF drive areal density
Areal densities on its 2.5-inch small form factor (SFF) drives appear to be suffering too. Hitachi GST announced a 10,000rpm 300GB 2.5-inch drive, the UltrastarC10K300, in March this year, with a 6Gbit/s SAS interface. Late last year it had a 500GB small form factor drive with a 375Gbit/sq in areal density. But it has not yet introduced a 640GB SFF drive, as Seagate has with its 640GB FreeAgent Go.
Western Digital has a 3-platter 1TB SFF SCorpio Blue drive with a 333gB/platter areal density. That seems to be on the SFF areal density leading edge, and TDK's roadmap confirms it, with a transition from 250GB/platter to 320GB/platter occurring now. Will Hitachi GST introduce a 320GB/platter SFF drive by the end of the year?
If it fails to keep up with the leading edge of areal density development then it will cede retail shelf space and OEM market share to WD and Seagate. Because Seagate let WD get ahead in SFF disk areal density last year, it now faces the possibility of being overtaken and relegated to the number two drive manufacturer position in terms of unit shipments. HDD manufacturing businesses are like massive super-tankers. Changing course takes ages and speeding them up and slowing them down happens at near-glacial speed.
HGST has virtually no chance of catching up with the two industry leaders unless it maintains areal density equality with them or, even better, gets an edge.
The 7K2000 and 7K1000.C areal density pattern suggest that it might be falling behind the curve in this essential parameter of HDD manufacturing success. A 320/333GB/platter SFF drive introduction would quell such concerns. It could be that Hitachi GST is coming towards a tipping point. Staying up with its competitors on areal density improvements will ensure it has table stakes for competition with them. Falling behind will mean that it will likely face an anxious time during which it will try and catch up while seeing relatively diminished revenues and higher costs.
Competition is good, so let's hope that Hitachi GST does the business and keeps up with the leaders. That will spur them on to build better products and help all of us get more disk drive bangs for our bucks. ®