Residual Effects Abound From Thai Flooding

It's been a year since the floods began in Thailand, floods that, by October 2011, had inundated a great swath of that country's industrial parks. The impact on the semiconductor supply chain was tremendous, wiping out nearly two thirds of the hard disk drive (HDD) sector.

While most of the immediate supply problems due to the Thailand flooding are gone, the industry is still hurting from its residual effects. Despite the fact that supply levels continue to improve and increase, pricing in the market remains at an elevated level compared to the pre-flood pricing levels. The elevated pricing situation, however, is not only due to lingering deficits in supply; there are other supply chain factors that are adding to reduced HDD availability and the slow resumption of competitive pricing.

Two critical elements affecting HDD pricing are the strategic alignment of Seagate Technology LLC (Nasdaq: STX) with Samsung Electronics Co. Ltd. (Korea: SEC) and the acquisition of Hitachi's HDD business by Western Digital Corp. (WD) (NYSE: WDC) -- important moves to increase both OEMs' reach into newer NAND memory solutions for the expanding SSD market. These two major OEMs have dominated control of the HDD sector, and with that they are able to affect the average standard pricing (ASP).

As a result of these two significant market situations, I expect that HDD pricing will continue to be elevated throughout 2012 and will start a slight and gradual decrease during the second and third quarters of 2013. However, it is unlikely that there will be a complete return to pre-flood pricing, because neither of these leaders is likely to re-engage in the competitive pricing that artificially deflated average selling price prior to the flooding.

Beyond the final supply and pricing effects, there are still both good and strategic opportunities in the present HDD market. Western Digital has released a new Red line of HDDs intended for network attached storage (NAS) systems, geared to the home and small business user. Although pricing remains somewhat elevated for HDDs, the increasing demand for greater data storage continues to be a challenge for small businesses. The growth of the NAS systems holds strategic opportunities for the HDD storage sector by addressing cost, integration, and compatibility concerns that are not as readily met by SSD solutions for the small business and home market.

Furthermore, Western Digital's collaboration with other NAS device leaders ensures compatibility is built into its Red line devices (see the Red line compatibility page). These devices are still only entering the market, though, so supply for them remains tight. We see this further reflected in the new product entry price point. There continues to be demand for the newer hybrid HDDs, such as those from Seagate, which are now in their third generation.

Although internal HDDs continue to face some market pressures due to the still-strong demand for SSD-rich tablet PCs, the data storage demands being generated are supporting an increase in external drive solutions, beyond the move to cloud computing.