Which Storage Company Is Better Positioned for NAND Flash? – Seagate Technology PLC (STX), Western Digital Corp. (WDC)

Seagate Technology PLC (NASDAQ:STX) has been manufacturing HDDs (Hard Disk Drives) for a long time, but it was only in the past few years that the company went on to manufacture SSDs (Solid State Drives) and hybrid disks (Hard Disk + on-board NAND Flash). Seagate’s CEO Steve Luczo said, by 2017 over 85% of Seagate’s HDD production will be of hybrid drives, covering both consumer and enterprise products. Seagate is now producing its third generation 2.5-inch Momentus XT hybrid drive, arch-rival Western Digital Corp. (NASDAQ:WDC) being late to the party.

HDD industry will face a myriad of challenges in 2013 and beyond with the total addressable market (TAM) forecast to witness a significant slowdown going forward. With digital content creation at its peak requiring huge storage space, I feel Seagate will outperform Western Digital in the stock market in 2013, which has not yet registered any significant progress with SSDs and hybrid disks.

SSDs: The Future of Storage

One popular argument to explain why SSDs have not displaced the HDDs in all PCs is that there isn’t enough NAND flash production capacity to support this business and there never can be.

This argument has been circulating in the tech-world since 2007 when Western Digital CEO John Coyne first discussed it at an IDEMA conference, followed by SanDisk (NASDAQ:SNDK)’s Eli Harari at the Flash Memory Summit in 2008. Recently in last April Seagate’s CEO Steve Luczo also echoed the same argument in a Forbes interview. These people are captains of the industry. Their arguments make people stand up and take notice.

It’s a really flawed argument. It goes like this:

• In 2011 400 exabytes of HDDs shipped
• A typical NAND flash wafer fabrication plant (a “fab”) outputs 3.4 exabytes in a year and costs $6 billion
• To replace HDDs with NAND would require 117 of these fabs at a total cost of $700 billion
• Nobody has that kind of money

Although $700 billion is not going to be invested in a $25 billion market organically, there is no reason to rule out a $700 billion investment from sources external to the market, provided there is a clear path to profits from that investment.

The real argument is that there has not been such an investment because there was no reason to expect consumers to change their behavior. Today consumers select a PC based on price and HDD capacity, and this rules out their choosing an SSD. This is the real reason that HDD makers don’t fear that their business will be snatched away from them by NAND flash makers.

But things are changing fast. SSDs are increasingly being used in thin and light notebook and Ultrabook computers because they are lighter, start-up and run applications faster, and have a longer battery life. As flash storage becomes cheaper over time, the demand for 10,000 rpm hard drives and desktop PC disk drives will fall. Should a HDD supplier, facing this developing threat, fight the oncoming flash flood or redefine themselves and adopt flash technology, thus cannibalizing their own HDD sales?

According IHS iSuppli Storage Space Market Brief, SSD shipments could increase to 83 million units in 2013 and 239 million units by 2016 (over 65% CAGR). How are Seagate and Western Digital preparing themselves in adapting this sea change?