Hitachi, IBM consolidate disk-drive operations

Posted on June 01, 2002

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By Lisa Coleman

In April, 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, the companies 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, although Hitachi would not disclose the amount it will pay for IBM's hard-disk-drive assets. Investment firm Needham & Company, however, 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 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 and Maxtor shipped approximately 15 million and 3.7 million drives, respectively, according to Peripheral Research Corp., a market research firm in Santa Barbara, CA.

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, according to the research firm. The Hitachi-IBM joint venture would be on par with Western Digital, which shipped about 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 didn't have enough market share to 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."

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