99 Million to 101 Million HDDs Shipped in 3CQ18 – Trendfocus

This is an Executive Brief by Trendfocus, Inc.:

HDD Market, Supply Chain Update on a Southeast Asia, Japan Swing

CQ3 Preliminary HDD Market Analysis
Trendfocus published its CQ3 Preliminary Update on October 8, with some of the following points highlighting the rollup:
• Total HDD shipments in the range of 99 million to 101 million, close to the Trendfocus forecast of 101 million, published in August. It appears there was some level of ‘ship ahead’ in CQ2 which resulted in total shipments exceeding our forecast and then falling just short in CQ3. 
• 3.5″ Desktop/CE HDDs: Total desktop/CE HDD shipments (including 3.5″ external HDDs) in the range of 30 million to 31 million held flat to slightly up Q/Q. 
• 2.5″ Mobile/CE HDDs: Peak seasonal demand for game console HDDs drove total 2.5″ mobile/CE HDDs to 50 to 51 million HDDs. 
• 3.5″/2.5″ Enterprise HDDs: Following three straight quarters of record nearline shipments driven by strong cloud demand for high-capacity models, nearline HDD shipments fell approximately 0.4 million units in CQ3 ’18 as consumption of previously deployed capacity softened unit demand in the quarter. Performance enterprise also pulled back following relatively solid demand in the first half of 2018, with units falling more than 0.3 million Q/Q.  

CQ4 ’18, 1H ’19 Outlook
Based on our swing through Japan (twice in October!) and Southeast Asia, focusing on both HDD companies and the supply chain, here are some thoughts on the near-term HDD market: 
• Supply chain players continue to face secular decline in demand for their parts, except for those heavily invested in the nearline/capacity enterprise segment. Financial pressures continue to mount as HDD companies are expecting price declines each quarter, despite declining volumes, and this is threatening the ongoing viability of some key suppliers. As usual, companies that produce components related to the growing number of disks-per-drive in nearline and surveillance are faring better but are still susceptible to short term HDD demand swings and must carefully balance expectations for the longer-term decline in total HDD demand. 
• CQ4 HDD market expectations are for relatively flat shipments, although build plans for nearline drives appear to be out of phase (temporarily) with slowing unit demand. The August forecast for CQ4 ’18 of 99 million appears potentially within reach despite the slowing nearline demand and the seasonal dip in game console HDD shipments. HDDs to PCs should hold steady, indicating a loss of ground to SSDs in a seasonally stronger quarter for PCs, but retail external HDDs and some slight end-of-year corporate IT budget clearing should help performance enterprise a bit. Trendfocus will publish revised forecasts in November in its CQ3 ’18 quarterly update, highlighting any major shifts from this early outlook into CQ4. 
• Nearline demand already in ‘consumption’ mode: Nearline demand from large hyperscale customers had benefitted from an exceptionally strong deployment phase by nearly all tier-1 cloud companies since CQ3 ’17 with the transition to 10TB. Over the past two quarters a couple of major companies also began shifting to 12TB; however, such strong deployment of new capacity inevitably triggers a period of consuming deployed capacity. Fewer than a dozen hyperscale companies control the purchasing of nearly 40% of all nearline HDDs, so even the moves of one or two companies invariably affects total nearline demand. While Trendfocus has already forecasted flattish exabyte demand on lower units in CQ3 ’18, the preliminary results for the quarter as well as numerous data points throughout the industry highlight the slightly earlier onset of cloud demand softening across some tier-1 as well as China hyperscale customers. CQ4 will continue this softening trend before the next phase of buying commences within the first half of 2019. Even with this slightly more negative outlook, total nearline exabyte growth in 2018 will still approach or even exceed 60% Y/Y. 

Without resorting to clichés about HDD demand mirroring the chilling of the oncoming winter season, the temporary cooling of demand for nearline and the growing impact of falling SSD pricing on next year’s HDD demand for PCs provides additional challenges that the industry will face in the near term.