Will Hanging Up on Huawei Boost Transformation at Western Digital?


Sacrificing a partnership with Huawei to the Trump administration’s blacklist elevates Western Digital’s goal of migrating from silicon to systems a strategic imperative.

Chief executive Steve Milligan might be forgiven for striking a downbeat note at a conference in Japan about President Trump’s order banning American firms from doing business with the Chinese technology giant.

It’s been a forgettable few quarters for the world’s largest disk maker. It has posted a string of poor results amid sagging sales for PCs and devices which have glutted the market. And. it seems, the rain keeps falling.

But amid the bottom-line impact of the dissolution of Western Digital’s recent strategic partnership with Huawei, Milligan pointed to a transformational glimmer in the gloom. He told reportersOpens a new window at the Nikkei Global Digital Summit in Tokyo last week that Western Digital was evolving into “a digital infrastructure company.”

From Device to Data Center

Rather than simply provide storage for PCs, devices, servers and memory sticks for consumer markets, Western Digital is building a range of products and services that spans the data industry’s stack.

Despite recently announcing that third-quarter earnings had fallen by 27% in 2019, the company has 400 engineers at work on the technologies that underpin its Data Center SystemsOpens a new window business.

The processes include data management and mobility, software-defined networking, predictive analytics and cloud connectivity. An architectural approach also is giving rise to open data center composability and optimized modeling for applications that process massive data flows.

Established three years ago, Western Digital’s data center systems business grew 17x in 2018. It shipped three exabytes of storage and platforms, signing agreements with channel partners and software vendors to support uptake that averaged 150 new global customers each quarter.

They will be needed to offset what Milligan referred to as a reassessment of its relationship with Huawei. The two corporations in April signed a strategic partnership agreement that called for closer cooperation on the development of Western Digital’s storage technologies for Huawei’s mobile devices.

The Chinese company accounted for about 10% of Western Digital’s earnings last year. And its absence means that US suppliers, including Google (operating systems) and Intel (processors), will miss out on around $11 billion in sales due to the ban, which took effect at the end of May.

Feeding the Dragon

While Western Digital and other US original equipment manufacturer s (OEMs) can petition for an exemption from the ban and resume business with Huawei, rival suppliers are working to help the Shenzhen-based company meet an anticipated production run of 200 million smartphones in 2019.

With #2 drive producer Seagate also subject to the ban, Korea’s Samsung and Toshiba of Japan stand most to benefit even as prices for disk storage continue to plummetOpens a new window .

In addition, Huawei is devoting a portion of its considerable R&D budget to lessening its reliance on vendorsOpens a new window . The company spent $15.3 billion on new product development last year, primarily on fifth generation phone technologies, and is expected to match that level even as executives forecast a fall in earnings of double that figure in 2019.

The dip is a direct result of the U.S. ban that has spread to Australia and New Zealand. Prompted by similar concerns over the prospects of spyware on Huawei motherboards piping secrets to Beijing, German and British authorities also are reviewing the company’s participation in their impending 5G rollouts.

Western Digital is losing money, too. Absent a sudden reversal in market trends or a change in President Trump’s hard-nosed diplomacy, executives anticipate that earnings will fall by 25% when the company’s fiscal fourth quarter comes to a close at the end of June.

Nevertheless, Milligan tried to remain positive in his chat with reporters.

He predicted that as more processing and storage takes place on devicesOpens a new window – where Western Digital silicon commands significant real estate  – helping customers manage the flows of data between mobile chipsets and data center servers will prove a prime means of leveraging that presence.