Hitachi, IBM consolidate disk drive operations

Posted on April 24, 2002

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By Lisa Coleman

Hitachi Ltd. and IBM announced the intent to combine their hard disk drive operations into a stand-alone, joint venture company that may become the third largest drive manufacturer in the world, according to analysts.

Separate from the joint venture on disk drives, Hitachi and IBM are also forming a multi-year alliance to research and develop standards-based technologies for next-generation storage networks and systems.

Details are still sketchy on the specific terms for both collaborations. Hitachi Ltd. will hold 70% of the disk drive joint venture, which will be located in San Jose. Within three years, IBM is expected to sell its portion to Hitachi. Hitachi would not disclose the amount it will pay for IBM's hard disk drive assets, although investment firm Needham & Company has speculated that the price tag will be close to $1 billion.

"The connection of the two organizations will not only bring faster development of new technologies, but also economies of scale that will enable the new joint venture to be a leader in the [disk drive] market," claims Phil Townsend, senior director of global marketing for Hitachi Data Systems (HDS), a subsidiary of Hitachi Ltd.

Hitachi and IBM have annual hard disk drive sales of approximately $800 million and $4 billion, respectively, according to Hitachi. Currently, Seagate and Maxtor are the leaders in the disk drive industry. In the last quarter, Seagate shipped approximately 15 million drives, and Maxtor shipped 3.7 million drives, according to Peripheral Research Corp., a market research firm in Santa Barbara.

Peripheral Research also reports that IBM shipped 4 million to 4.5 million drives in the first quarter of 2002, and Hitachi shipped between 2 million and 2.5 million drives. The Hitachi-IBM joint venture would be on par with Western Digital, which shipped approximately 7 million drives in the last quarter.

IBM has been struggling with its disk drive operations for several years, according to analysts. IBM's overhead and manufacturing costs are higher than other drive manufacturers while their volume is lower, says Dennis Waid, president of Peripheral Research.

"For IBM, in terms of total margins, the joint venture will be positive because they are going to divest themselves of the low-margin end of the business," says Waid. "They really didn't have a substantial market share that would give them the economies of scale in terms of cost structure."

Although details are sketchy, the other part of the Hitachi-IBM R&D alliance will focus in part on the Common Information Model (CIM) standard and interoperability issues. However, IBM's high-end "Shark" disk array and HDS's Thunder 9200 and Lightning 9900 disk arrays will remain separate competitive products. "There is no announced change in our strategy as it pertains to those products," says HDS's Townsend. "Going forward, we do expect a closer working relationship with IBM that will allow customers to see tighter integration of the IBM and HDS storage infrastructures."

HDS officials also said they will work with IBM to develop a definition of virtualization, but they would not confirm that HDS will use IBM's virtualization technology--code-named StorageTank--as the basis for future products.

"Virtualization is an emerging market," Townsend contends. "There isn't any clear winner at this time, and no one has yet defined all the necessary standards, protocols, etc., to make it a viable commercial offering."

HDS made it clear that it will continue to collaborate on virtualization with its other partners as well as IBM. "Hitachi Data Systems will continue to collaborate with its other partners in trying to seek the optimal model for virtualization," says Townsend.

"Hitachi will probably not want to come out and be an open advocate [of IBM's virtualization technology] until they see the technology in the marketplace," says Richard Lee, president and CEO of The Storage Consulting Group, in Ridgewood, NJ.

There are about 30 competing virtualization technologies today, according to Lee, and there is no one technology that vendors and users are rallying behind. However, Lee believes that the Hitachi-IBM alliance may give both companies a foot up in the market if they support one virtualization technology.

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