With Hitachi buy, Western Digital moves further ahead of rivals

If its proposed acquisition of Hitachi GST is successful, Western Digital will immediately gain status in the hard disk drive (HDD) enterprise market, where it has been striving to grow for the past couple of years.

While Western Digital also faces significant hurdles in trying to rationalize a significant overlap in HDD products, it gains manufacturing and sales scale—which in a commodity marketplace can only be a benefit, analysts said. And it gains ground on its chief competitor in the enterprise-class hard drive marketplace, Seagate.

In the fourth quarter of 2010, Seagate had a wide lead over its competition in the enterprise-class arena with 56.2 pecent of the 2.5-inch drive market and 61 percent of the 3.5-inch drive market, according market research firm IDC. Hitachi GST had the second largest share, with 24.1 percent and 32.3 percent, respectively, followed by Fujitsu/Toshiba.

Overall, in that same quarter, Western Digital led the industry with a roughly 31.2 percent market share, followed closely by Seagate with 29.2 percent of the market, according to IDC. Hitachi GST was third with 18.1 percent, and Toshiba and Samsung followed with 10.8 percent and 10.7 percent, respectively.

By buying Hitachi GST, Western Digital can also broaden its market reach into Macs. Hitachi GST is a major supplier to Apple.

According to David Reinsel, the vice president of storage and semiconductor research at IDC, Western Digital stands to gain more than just market share; it’ll also get a great deal of intellectual property and manufacturing efficiencies. Currently, Hitachi manufactures most of its drives in China. Western Digital makes most of its drives in Thailand, Malaysia, and Singapore.

Reinsel said consolidation in a commodity marketplace, like hard disk drives, is usually a good thing in that it helps bring stability.

There are several forces driving the need for consolidation in the HDD market, including slower product cycles made necessary because vendors can’t squeeze more capacity onto a single platter as fast as they used to.

“With more competition, pricing worsens,” said Brian Babineau, an analyst with research firm Enterprise Strategy Group. “On the demand side, there is significant competition from flash within the PC business accelerated by the transition to tablets. Enterprise storage systems now include SSDs and other flash-based technology. With lack of differentiation on the supply side coupled with threats to the demand side, this industry was ripe for consolidation”

Both Western Digital and Hitachi GST have been profitable, with Western Digital in the black since 2001 and Hitachi GST profitable for the past couple of years, according to Steve Shattuck, director of public relations for Western Digital. “Between the gains in management and global talent, we feel we can enhance our product scalability and therefore maintain profitability,” he said.

For example, Hitachi GST’s CEO, Steve Milligan, will join Western Digital as president, reporting to its CEO John Coyne.

Though solid-state drives (SSDs) are likely to dominate the market in the years ahead, HDDs aren’t going away anytime soon, said Reinsel. “This acquisition should keep WD in the pole position for a very long time,” he said.

“WD has never fumbled an acquisition that I can remember, and they’ve done plenty. I would look for them to be successful with this one as well,” Reinsel added.

Shattuck sees numerous synergies between the two companies.

“They offer us tremendous scale,” he said. “In this industry that’s increasingly commoditized, scale helps us enhance our leadership with respect to cost. And, by combining our [intellectual property], we can achieve product expansion at a faster pace.”

But Shattuck also acknowledged a good deal of overlap, particularly in the consumer HDD space. He would not say whether that would result in product consolidation or personnel layoffs. “It’s too early to comment on that,” he said.

Babineau said it is important to remember that mergers like this are much more complicated than most basic technology deals because the product overlap is almost 100 percent, “which requires a significant level of rationalization across manufacturing lines, supply chains, and product roadmaps, amongst others.

“This particular deal will likely face the same hurdles, but over the long term it is a very smart move because success in the disk drive business is measured by scale,” he said.

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