HGST Hoists High Hopes

Hitachi Global Storage Technologies (HGST) will restructure manufacturing operations and launch a spate of new wares this year in an effort to turn profitable. And a prime target for sales will be the corporate enterprise. (See Hitachi Moves to Consolidate .)

In recent months, HGST has fallen behind main competitor Seagate in several key enterprise areas, including 2.5-inch SAS drives and 3.5-inch 15,000-rpm SAS drives with 300-Gbytes capacity. And while HGST beat Seagate to market with its 1-Tbyte drive, there's a chance Seagate could beat HGST to market with an enteprise version.

HGST, a division of Tokyo-based Hitachi Ltd., has failed to turn a profit since Hitachi and IBM closed the deal that formed the company in 2002. (See IBM, Hitachi Finish Merging Disk Units and Hitachi Buys IBM Disk Unit for $2B.) Despite reporting $4.9 billion in revenue from disk drives in calendar 2006, HGST logged a $375 million operating loss.

"Hitachi, enhanced by the creator of HDDs (IBM), has always been the student capable of an 'A', but perennially earning a 'D'. Only time will tell if the cross-cultural experiment in technology integration will ultimately work," write analysts Richard Kugele and Sean Hannan of Needham and Co. in a note today.

One problem is that HGST has fallen behind main competitor Seagate in the enterprise disk market, where it's all about smaller, denser, faster drives. Key trends include the SAS interface, 15,000-rpm SAS drives (especially for transactional performance), and capacity in 3.5-inch drives that doubles every 12 to 18 months. (See Seagate Intros Smaller Drives, Seagate Reports 2Q Results, and SAS Wave Breaks Big.)While HGST has 15,000-rpm SAS drives, the capacity is 147 Gbytes, not 300 Gbytes as it is for Seagate.

"Hitachi should have been there a long time ago," laments analyst Krishna Chander of research company iSuppli Corp. "They have to be a lot more aggressive to compete with Seagate." He says Seagate's into its second generation of 2.5-inch SAS drives and is also shipping 3.5-inch 300-Gbyte 15,000-rpm enterprise SAS drives. (See IBM, Hitachi Finish Merging Disk Units and Hitachi Buys IBM Disk Unit for $2B.)

HGST spokeswoman Karin Gilles says 2.5-inch SAS and 3.5-inch, 300-Gbyte 15,000-rpm SAS enterprise drives are "imminent." She also notes that an enterprise version of the 3.5-inch, 1-Tbyte drive Hitachi launched early this year will be released soon. (See Short Ride to 1-Tbyte Drives and Dawn of the Tbyte Hard Drive.) Dell is reportedly using that drive in consumer PCs.

Meanwhile, Seagate spokesman David Szabados says his company should be making a 1-Tbyte enterprise drive available in a 3.5-inch SATA version sometime "in the summer timeframe."

To get its act together, HGST plans to increase sales of its hard disk drive products by 33 percent to 40 percent in 2007, even though HGST expects the worldwide drive market to grow just 14 percent this calendar year.To move things along, HGST is consolidating a range of disk drive component plants. A key 4,400-person plant in Guadalajara, Mexico, for example, will be moved to the Philippines. Actions like this should save HGST about $300 million over the next five years, the company claims.

Analysts don't think HGST's plan can work, unless it reduces its prices, a move that could have broad negative effects (albeit some positive ones for bargain-hungry OEMs). "With a current capacity of 100 million units/year, we fear Hitachi could produce an oversupply, causing further pricing and profitability erosion across the industry," writes analyst Daniel Renouard of RW Baird in a note today. "[W]e do not believe Hitachi will achieve their unit shipment goals."

But HGST has another strategy. Apparently, it's turned to Xyratex for help. Forty percent of Xyratex's revenues, you'll recall, come from sales of disk-drive test and manufacturing equipment. And the company's doing well with its other OEMs. (See Xyratex Zeroes In on Growth, Changes.)

A Xyratex spokesman had no comment on any new deals with HGST at press time. HGST had not responded at press time.

Between the restructuring, new products, repricing, and extra help in manufacturing, HGST hopes to reverse its poor showing. Analysts are skeptical, but at the very least, these actions could lower prices and increase product choices for end users. Unless HGST shoots itself in the foot, its plans might work out nicely in the data center, if not the board room.Mary Jander, Site Editor, Byte and Switch