Hitachi to phase out small hard drives

Hitachi's one inch hard drive is unveiled during the 2005 Consumer Electronics Show (CES) in Las Vegas, January 4, 2005. Hitachi said it is phasing out its small hard disk drive business as competition heats up with flash memory chips, and that the electronics maker will focus resources on larger-sized 2.5- and 3.5-inch drives..

TOKYO (Reuters) - Hitachi said it is phasing out its small hard disk drive business as competition heats up with flash memory chips, and that the electronics maker will focus resources on larger-sized 2.5- and 3.5-inch drives.

Separately, another Japanese electronics maker, Fujitsu Ltd, said it has shelved its plan to launch 1.8-inch hard drives, underscoring the growing presence of NAND-type flash memory chips as the storage device of choice for portable electronics.

"We are not trying to recruit new customers for our small drives any more ... and as long as we don't win new customers, the size of the business is set to dwindle," a Hitachi spokesman said.

He said, however, Hitachi will continue to offer 1.0- and 1.8-inch hard disk drives, which are mainly used in portable music players and other mobile devices, for its existing clients.

Large-sized hard disk drives used in PCs and servers hold a cost advantage over NAND flash chips, but profitability was hit hard in the market for 1.0- and 1.8-inch drives as storage capacity has increased and prices have come down for NAND chips.

Hitachi's loss-making hard disk drive unit, which competes with larger rivals Seagate Technology and Western Digital Corp N> , shipped about 560,000 units of 1.8-inch drives in July-September, or 2.3 percent of its total hard drive shipments.

Hitachi shipped only 3,000 units of 1.0-inch drives in the three-month period.

Hitachi, which bought the hard drive unit from IBM for $2 billion in 2002, is in talks with U.S. private equity firm Silver Lake about the possibility of selling a stake in the division, sources familiar with the situation said in December.

Fujitsu announced in January 2006 that it will jointly develop 1.8-inch drives with U.S.-based Cornice Inc for consumer electronics and aims to launch a 120-gigabyte model by April-September 2007.

But a Fujitsu spokesman said on Friday the plan is now on the shelf due to growing use of NAND flash chips.

Fujitsu currently makes 2.5- and 3.5-inch drives.

Shares in Hitachi closed down 4.7 percent at 794 yen, while Fujitsu fell 3.1 percent to 730 yen, outperforming the Tokyo stock market's electrical machinery index IELEC, which lost 5.1 percent.

(Reporting by Kiyoshi Takenaka)