Analysis: Disk-drive suppliers face looming flash threat

SINGAPORE (Reuters) - Apple Computer's shift to flash memory chips instead of tiny hard drives for its latest iPod music players is casting a cloud over the medium-term outlook of some electronics components makers, analysts say.

The flash threat is not immediate, as most makers of disk-drive parts derive just a small portion of sales from one-inch, or matchbook-sized, drives.

But with flash memory possibly replacing hard drives in high-end laptop computers in five years, the outlook is getting murkier for top disk-drive makers like Seagate Technology, a leading one-inch drive producer, Western Digital Corp and Maxtor Corp.

Suppliers such as Taiwan's Min Aik Technology Co Ltd, US-based Hutchison Technology Inc and Japan's SAE Magnetics, a unit of TDK Corp, also have reason to worry.

"If NAND flash replaces hard drives in high-end notebooks, earnings growth for these suppliers would be crimped," said Kim Eng Securities analyst Dharmo Soejanto.

"But the biggest worry is that if flash can overtake hard drives in high-end notebooks in five years, they would be able to replace hard drives in mass-market notebooks in seven years, and that's a huge chunk of the market to lose," he added.

Nowhere is flash memory a bigger threat than in Singapore, which makes about 30 percent of the world's hard-disk drives and is home to plants making high-end drives for Seagate and Maxtor.

The city-state also has a range of hard-disk component makers like Magnecomp International Ltd, Unisteel Technology Ltd and MMI Holdings Ltd.

Casting a cloud

Unlike the bulkier and more fragile hard drive, which spins platters at high speed, flash chips can be as small as a fingernail and have no moving parts.

These chips, which retain data even when the power is off, also promise to slash boot-up times and power usage, making them a better choice for portable gadgets where battery life is key.

Flash memory cast a cloud over the survival of the one-inch drive in September when Apple unveiled its ultra-thin iPod nano player, which stores music on NAND flash chips instead of the micro drive that powered its predecessor, the iPod mini.

This turned Apple from the world's largest buyer of micro drives from Seagate into the world's largest buyer of NAND flash from South Korea's Samsung Electronics.

But most suppliers have shrugged off the move, as one-inch drives only account for about one to four percent of total sales.

Singapore's MMI, which makes baseplates for hard disk drives, said the slack from falling shipments of one-inch drives was taken up by strong demand for 2.5-inch and 3.5-inch drives.

"While there is overlapping competition between flash and hard drives in MP3 players, there is no challenge from flash in new applications like in automotives, set-top boxes and personal video recorders which use bigger capacity drives," chief executive Teh Bong Lim told Reuters.

Hybrid drives

But while the threat from flash memory is not immediate, it is gathering pace, if rapidly declining prices of NAND flash chips are anything to go by, analysts said.

NAND flash prices are falling about 4 percent every month, narrowing the cost gap between larger-capacity drives and flash memory. Analysts estimate that NAND flash now costs roughly about 4 times more than an equivalent capacity in a hard disk drive.

Samsung, which controls about 60 percent of the NAND flash market, also said in August it would introduce higher capacity NAND flash chips at progressively lower prices to boost demand.

"With prices declining at a clip of 50 percent per annum, NAND flash will become an affordable alternative to hard disk drives for primary storage in high-end, ultra-portable notebooks beginning in 2008," said CLSA Asia Pacific analyst Chong Kim.

Kim argued NAND flash would also start competing in earnest with hard drives for use in personal computers (PCs) through the launch of a hybrid technology in 2006.

In April, Samsung, together with Microsoft, announced a prototype of a "hybrid drive", combining a standard hard drive with a flash component. The device, which is expected to emerge in consumer PCs late next year, uses the flash component for boot-up and many basic computing storage needs.

No danger of extinction

Despite the challenges from flash memory, the hard disk drive is unlikely to become extinct, analysts said.

"Hard-drive technologies are definitely not sitting still — they are still squeezing more storage capacity out of the disk space, which leads to constantly falling price per storage capacity," said Kim Eng's Soejanto.

Unisteel, which supplies hard-drive screws to Western Digital and Seagate, remains optimistic about the industry's outlook.

"We believe hard-disk-drive storage will always be ahead of flash memory in terms of price per storage capacity, especially with the adoption of the perpendicular recording technology," managing director George Poh told Reuters.

Perpendicular recording organises data bits vertically instead of horizontally on the disk surface, increasing the capacity for the same disk space and driving costs down.