El Segundo (CA) – Hard drive makers are seeing solid growth in demand, but are facing tougher competition and eroding margins.

Market research firm iSuppli reports that hard drive shipments increased by 12.2% to more than 114 million units in the first quarter on a year-over-year basis. The shipments were down 4.7% from 118 million units in Q4, which was about in line with seasonal patterns of a strong fourth quarter and a following weak Q1.

iSuppli noted that the first quarter saw pricing pressure “due to intense competition and changing demand patterns”.  There are only six major hard drive manufacturers left (Seagate, WD, Hitachi GST, Samsung, Toshiba, Fujitsu, Excelstor) and these companies apparently are tied up in what the market research firm called a “vigorous competition” over mobile-PC storage.

The business environment impacted profit margins immediately, with Seagate’s gross margin dropping from 24.3% in Q1 2006 to 21.3%. Net income for Seagate dropped to $212 million, down from $274 million a year earlier. iSuppli estimates Seagate’s unit market share in the hard drive market at 34.6%.  

Western Digital’s first-quarter gross margin was 15.7%, down from 19.3% one year ago. However, Western Digital’s net income in the first quarter was $121 million, up from $103 million a year earlier. The firm’s unit market share grew from 20.5 to 21.5% in the same period.

Hitachi GST, the third largest hard drive maker, kept its market share at 17.2%, but reported a Q1 loss of $150 million, up from a loss of $46 million in Q1 2006.

iSuppli believes that especially Seagate and Western Digital will “be challenged to improve their gross margins.” The market research firm expects hard drive makers to hand down the pressure to suppliers to reduce the cost of the materials they purchase, including disks, heads, motors and casings. iSuppli said that suppliers “will be pushed to lower their costs by as much as 5%.”

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