Nearline HDDs Moving Up

This is an Executive Brief by Trendfocus, Inc.:

Asia Notes, Week Two, and Yes, Nearline HDDs Are Moving Up

The Trendfocus team continued its extended trip in Asia, traveling to Japan for insights primarily within the HDD industry and supply chain, ending the week by chairing a panel discussion and presenting at Diskcon Japan.

First off, nearline demand in the second half is indeed accelerating, supporting the current Trendfocus forecast of a nearly 20% annual exabyte growth in 2019 and roughly 30% increase in exabytes shipped when comparing the 1H19 to the back half of the year.

The fast ramp to 14TB has driven more volume into the market a bit earlier than anticipated and thus the increased mix may put a slight downward pressure on the May 2019 nearline unit forecast in 3CQ and 4CQ; however on a Y/Y basis, total nearline unit shipments should be at least flat to the prior year, if not a bit higher.

An aggressive push to 16TB by at least one HDD company may result in the peaking of 14TB nearline demand by 4CQ’19; however, qualifications and volume ramp of the next major CMR capacity will likely not have a major impact on 14TB demand until early 2020. With 8 and 9 platter designs struggling to achieve the necessary areal densities to support the next couple of targeted CMR capacities, there remains plenty of competition between the HDD suppliers, with nearline market share likely to swing from company to company over the next 2 years.

SMR (shingle magnetic recording) nearline HDD demand remains muted for now as customers adjust host-managed schemes to optimize performance when using SMR nearline drives. Despite the ongoing delays in SMR adoption, the industry expects at least 1 or 2 major cloud customers to begin ramping in earnest by 1H20. Over the long run, SMR may result in the quickest path to higher capacity nearline HDDs, so major and not-so-major hyperscale customer’s interest in SMR remains strong.

If the emergence of energy-assist recording technologies continues to push out beyond the 20TB capacity point for CMR drives, SMR could represent the majority volume for new high capacity nearline models – once energy assist ships in high volumes, SMR on those HAMR and MAMR-enabled HDDs will provide an additional capacity boost for customers willing and able to adopt SMR.

Another side effect of delayed energy-assist deployment is the potential that a 10-disk nearline design will begin to emerge in the next couple of years, driving a fundamental shift in aluminum substrate demand over to glass. Both glass and aluminum vendors are struggling to clarify future substrate demand as 9-disk designs become standard across all 3 HDD suppliers and total substrate, media and head demand increases despite overall HDD unit TAM continuing to slip.

For now, nearline demand remains strong as a broad transition to 14TB combines with foundational strength in 12TB demand for those hyperscale customers eventually transitioning to SMR.

While the current cloud expansion may not have the torrid unit and exabyte growth rates of the last major cycle that commenced in late 2017, the pattern of this cycle may be longer and more steady with the promise of SMR and 16TB CMR in early 2020 driving a smoother transition without the wild swings and tips witnessed in 2018.

On the flip side, client HDD demand may be weakening in 3CQ given the PC build-ahead that occurred during the prior quarter. PC OEMs instructed ODMs to build at a rapid rate in 2CQ in hopes of avoiding the threatened tariff increases from products exported out of China.

Although plans by the U.S. to raise tariffs to 25% remain on hold, PC vendors are now stuck having to manage excess inventories, resulting in significant ODM build reductions in July. Also under pressure is surveillance HDD demand, primarily arising from softness out of China and falling game console HDD demand as the aging current generation of game consoles enter their 7th year of existence. As soon as late 2020, new consoles are expected to emerge with SSD storage.

As mentioned in a recent executive brief, fears over the impact of various trade actions remain the largest concern across Asia . These moves are having real economic slowing effects as companies throughout the region hold off on spending, waiting for clarity on the outcome of numerous negotiations. Largely political in nature, the current trade activities through Asia make forecasting storage demand tough, but Trendfocus will take its best shot at integrating the uncertainties when it revise our forecasts in August ahead of its 2CQ19 quarterly update publications.