Poor market performance is creating widespread consolidation happening in the storage market. Despite having bought all the other manufacturers (see my earlier post), the hard disk drive market is not enough for Western Digital (WD), Seagate and Toshiba. The latest acquisitions (Dot Hill by Seagate and SanDisk by WD) are a sign that these companies want to play a wider role in the market, rather than rely on mass production and OEM sales to system suppliers for their future revenues and profits – just as well really as revenues and unit shipments of this core business continues to decline. In Q2 capacities (at least) grew. In this post I’ll take a look at the SanDisk acquisition in more detail, showing what the addition of its business does for Western Digital’s diversification.
In the first Figure I show the combination of the 2 companies’ revenues on a quarterly basis from 2003 to Q2 2016. I’m pretty sure that SanDisk’s Q2 2016 revenues are included in WD’s results, which means that the 2 companies suffered a 21% decline – a more worrying stat than the 10% increase WD reported if they are not.
My second Figure shows the addition of the 2 companies’ headcount: SanDisk had far fewer employees than WD, illustrating the differences in their respective businesses. Unlike Hitachi Global Storage Technologies (HGST – which is a hard disk manufacturer like WD), SanDisk is principally an integrator of solid state NAND and DRAM components for the consumer market, who buy its memory cards for cameras and smartphones. It has a subsidiary role as a supplier of ‘close to the processor’ storage for X86 servers, which I covered a while ago. WD now has 74k employees – significantly ahead of Seagate with 46k. Of course WD will use its solid state disk manufacturing it shares with Toshiba in Japan to put into SanDisk products; however it’s difficult to play both roles of component manufacturer and retailer. In other markets Microsoft is competing with its OEMs with its Surface Pro PCs, but it’s more usual for a supplier to exit manufacturing before diversification of this sort: AMD for instance is a designer, OEM processor supplier and consumer brand for its graphics and memory products – something it would have found more difficult if it hadn’t offloaded its manufacturing operations to GLOBALFoundries. IBM similarly is now a designer of chips rather than manufacturer of its Power and mainframe processors (also offloaded to GLOBALFoundries); its big push into the establishment of OEM sales is now more like ARM’s overall approach. ARM has never manufactured its chip designs. Both HPE and Dell currently believe it’s better (in Europe at least) to be cloud builders rather than suppliers of IaaS and PaaS services themselves.
In our maturing market absolute net income, rather than revenue, is perhaps a fairer measure of success. It’s great to be leading a slowly declining large market as long as good profitability is achievable. In WD’s case the acquisition of SanDisk makes a lot of sense. Figure 3 shows a comparison of the 2 companies’ net profits from 2003 on a rolling 4 quarter basis. It’s perhaps not a surprise that WD posted a $351m net loss in Q2 2016: apart from anything else it has to manage the $19b cost of acquiring SanDisk. In the next year I expect its profits to improve, as long as it can handle the dual roles of supplier and retailer effectively. Its diversification is not particularly cannibalistic of its existing core business, which is more as the supplier of disk and solid state storage to PC, server and storage OEM and ODM suppliers rather than to other memory vendors and competitors of SanDisk.
In a slowing market diversification is hard and sometimes doesn’t pay off in the long-term. HPE’s offload of what was once EDS to CSC and Dell’s of what was once Perot to NTT shows how difficult to balance the needs of large subsidiaries with very different cost structures. In the declining storage component market it looks as if the largest suppliers will continue to acquire smaller vendors – as all part of its inevitable consolidation