It has generally been supposed that Hitachi has been subsidising its hard disk drive - HDD - business from elsewhere in the group. Hitachi has just revealed a substantial loss and this has been attributed to three problem areas: HDD, flat panel TVs and LCDs.

Hitachi lost $97 million in the first half of its fiscal 2005 year although consolidated revenues were up 2 percent. Net income was down 40 percent year on year. HDD and disk array subsytems did post higher sales but there was a loss in HDD operations, conducted by Hitachi Global Storage Technologies. (Hitachi consolidated results include Hitachi GST results for January through June 2005.)

The projection for the full 2005 fiscal year has been revised to reflect losses in HDD, LCDS and flat panel TVs. The company plans to take 'wide-ranging counter measures' to quickly improve matters. 'Business structural reforms' are mentioned in Hitachi's financial statement as well as the phrase 'exit unprofitable businesses' being used.

Hitachi's statement says HDD revenues were 223.2 billion yen. The HDD operating loss was 24.4 billion yen - $217.14 million.

Hitachi attributes a significant part of the revised, and lower, forecast for the full year to 'falling prices due to intensifying competition, and 'slow improvement in yields of heads, disks (and) HDDS for servers.'

It aims to make its HDD products more competitive by strengthening its development capability. Development teams will be integrated with the server HDD team concentrated in San Jose. There will be integrated manufacturing tools and processes for heads and disks. There will be more external procurement in certain fields.

Hitachi will establish a special R&D project for perpendicular recording with 'commercialisation of product in the July-September 2006 quarter. A Consumer electronics design centre will be set up.

Head yields will be improved by 'expanding new material usage' and there will be better quality control and inventory management.

Hitachi will increase its production capacity and raise efficiency. It will expand disk production in China and build a new HDD assembly plant there with volume production starting in Q1 2006.

It aims to increase production capacity and reduce costs by making smaller sliders.

Regarding the HDD business Hitachi aims to 'continuously execute structural reforms', optimise the organisation and 'promote further integration of cultures and functions.'

Hitachi aims to return to profitability in its HDD operations in the second half of 2006.

What we learn from this is that Hitachi HDD production efficiency is lagging behind what it should be, there have been cultural problems and it has been slow in bringing perpendicular recording technology to its products.

It looks as if Seagate has stolen a march here with its six sigma manufacturing quality processes and perpendicular recording activities. The situation also contrasts with Western Digital which has just announced splendid results. Even Maxtor is looking up.

There is the threat in the longer term that, if things don't look up and Hitachi categorises its HDD business as a loss-maker, it could exit some HDD market segments or exit HDD manufacture altogether.