NAND and HDD makers saw a sales decline throughout 2023, with HDDs seeing declines in shipments each quarter and the price of NAND collapsing. Experts thought the market would start to turn around during the second half of this year, but that prediction never materialized. Still, they believe the cycle will shift in 2024 -- thanks in large part to generative AI's continued popularity.

The decreases in demand stem from overpurchasing of HDDs and NAND-based storage during the COVID-19 pandemic. Not long after, the economy for tech companies became volatile, leading large HDD and NAND consumers such as Microsoft to lay off thousands of workers.

As 2023 progressed, companies such as Seagate, which laid off 3,000 at the end of 2022, reported seeing potential signs for recovery. But by October, the company reported a revenue of $1.45 billion for the first quarter of 2024 compared with $2.035 billion in 2023, as CEO Dave Mosley pointed to the "longer-than-typical downcycle."

While generative AI became the main IT focus of 2023, the craze hasn't propped up storage media makers. At least not yet. Experts believe AI will begin to shift away from its growth phase into production in 2024, and they expect that when this happens, storage hardware demands will go up.

AI sucks oxygen, money out of the room

In 2023, vendors produced little in the way of storage hardware innovation. B.S. Teh, executive vice president and chief commercial officer at Seagate, said this was due to the explosion of generative AI, as companies moved the budget for capital expenses away from things like storage to supporting AI technologies.

"Everybody is rushing to invest in and provide AI services to meet the demand," Teh said. "It slows down the recovery of storage." But, he added, this might help storage going into next year.

Another story unraveled for flash in 2023. While AI servers that use flash need faster storage, they don't need an overwhelming amount more, according to Joe Unsworth, an analyst at Gartner. Instead, AI servers require midrange capacities with high performance when it comes to flash. This further drove storage down.

"AI servers are very expensive, and [purchasing these servers] comes at the consequence of a lot of general-purpose servers," he said, noting that general-purpose servers tend to use more storage.

Many AI models are pre-trained, so they don't need massive amounts of storage upfront to get them operating, Unsworth said. But they do cost money -- another place where IT budgets have shifted to something other than storage.

Hard drives continue to struggle

It is not solely AI that is moving money away from storage. Revenue and sales have remained down in 2023 for Seagate and Western Digital, the two largest global HDD suppliers. The downturn was caused by a mix of economic turbulence for technology companies and stockpiling during COVID-19, which provided a backdrop for some notable market changes.

In March, Toshiba, which makes up roughly 20% of the HDD market, was taken private. In April, Seagate was found to be in violation of the U.S. Department of Commerce's Entity List for supplying Huawei with HDDs, which led to a $300 million fine. Then, in October, Western Digital leadership explained its plan to split the company in two, with one company focused on HDDs and the other on SSDs; the WD split will happen during the second half of 2024.

The HDD slowdown has also led to complications down market. Resonac, headquartered in Tokyo, is rumored to be shutting down its Taiwanese factory where it makes aluminum substrates for disks and laying off 600 employees. But layoffs in a slow market are not surprising, and the plant shutdown won't have a major impact on the two main HDD manufacturers going forward, according to Thomas Coughlin, president of analyst firm Coughlin Associates.

When your biggest customers are only a handful of customers, and they pause buying, it hurts growth.

"With HDD sales down, demand for substrates declined, and layoffs seem like something a company would do," Coughlin said.

The largest problem HDD vendors are having is that their primary customers are major cloud providers, including AWS and Azure, according to Dave Raffo, an analyst at Futurum Group. They might place a significant order for a quarter or two and then work that volume down, which was the case in 2020 and 2021.

"When your biggest customers are only a handful of customers, and they pause buying, it hurts growth," Raffo said.

Fewer sales and cheaper media might appear to spell doom for hard drives, but vendors see a brighter future for their products. While NAND-based media such as SSDs continue to improve in performance and density, up to 90% of business data is still stored on hard drives, Seagate's Teh said.

Indeed, the HDD market appears to be poised to gain momentum next quarter, according to Ed Burns, an analyst at IDC.

"I think we're seeing some glimmers of hope on that front," he said.

One reason for the potential shift is that demand from the major cloud vendors has been down, but appears to be picking back up, Burns said.

NAND is down -- not out

Like HDDs, NAND saw a decrease in demand in 2023, partly stemming from the pandemic glut and partly due to the slowdown in overall consumer demand on the client side in PCs, laptops and other devices. This became the backdrop for Kioxia and Western Digital merger talks that have since collapsed, as well as vendors highlighting upcoming products long before they were expected to be available. The largest global SSD vendor, Samsung, also cut production in 2023 to better match demand.

Much like HDD vendors, NAND flash suppliers have become dependent on cloud companies in terms of sales, according to Jim Handy, general director and semiconductor analyst at Objective Analysis.

"The cloud companies tend to move together, ... so when they stopped buying for a while, all at the same time -- that has been disastrous for semiconductors," Handy said.

Analyst firm TrendForce reported that the NAND market saw a revenue growth of 2.9% in Q3 2023 and is expecting another 20% in Q4 2023. Gartner is forecasting a rebound in the overall NAND market as well from its 38.8% decline in 2023 to a 49.6% growth year over year in 2024.

AI, storage and 2024

As customers pass through the initial stage of setting up AI and move to production, they will need storage for large language models (LLMs) and research data, driving the demand for storage back up, Teh said.

"The focus [of generative AI] has been on the compute and AI infrastructure side," he said. "Once that is built, the storage demand will start to flow."

Storage hardware is ready to work with AI now, Teh said. But how that hardware is architected is a different story. Data for training LLMs will need to be saved, and customers will need dense storage at a good total cost of ownership. This is where Teh sees HDDs playing a pivotal role with increases in areal density such as HAMR, which would store more data on fewer devices and use less power.

Seagate is already moving in this direction. This week, it released a new drive, the SkyHawk AI 24 TB HDD, to bring high capacity to surveillance drives that work with AI-powered applications.

Like HDDs, flash is also poised to change due to AI, Unsworth said.

"You will eventually [need massive amounts of storage] as you get more data points and want to refine those models," Unsworth said.

This data will need to be stored somewhere, expanding opportunities for storage media makers once more, experts said.

By: DocMemory
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