AT&T;, Western Digital Join Hands in Semiconductor Pact
In a technology-sharing alliance expected to serve as a model for the U.S. semiconductor industry, giant AT&T; has agreed to supply Western Digital Corp. of Irvine with at least $50 million a year in advanced computer chips.
As part of the agreement, announced by the two companies Thursday, Western Digital said it intends to build a new Orange County manufacturing facility to make prototypes of the “digital wafers” to be jointly developed by the companies.
Western Digital, which employs about 1,700 people in Orange County, said the new facility would not significantly increase its local work force. It will be staffed primarily by personnel transferred from other locations.
New York-based AT&T;, however, intends to substantially increase production at a little-used semiconductor plant in Orlando, Fla., to make large quantities of finished chips for Western Digital.
The agreement is an extension of a three-year production pact announced in January. Western Digital officials said the arrangement is expected to last at least 10 years and could result in annual production valued at several times the initial estimate of $50 million.
Edward L. Marinaro, executive vice president of Western Digital, said the company expects to purchase $50 million in chips this year for use in circuit boards and other products it sells to computer manufacturers.
Marinaro said 75% of chips used by the company are purchased from five suppliers other than AT&T;, with the rest manufactured at the company’s Costa Mesa wafer plant. Western Digital will continue to make chips in Costa Mesa, but AT&T; will become its sole supplier after contracts with the other chip makers are phased out.
Will Expand Markets
Semiconductor industry analysts said the combination of AT&T;’s “unsurpassed” technology and Western Digital’s significant customer demand will have a major impact on each company’s role in the computer industry.
The alliance is expected to result in the production of high-quality but inexpensive computer components that will be more competitive in international markets.
William J. Warwick, president of AT&T; Components & Electronic Systems, said the agreement will allow both companies to expand their markets without making major new investments. AT&T; will enhance its position as a computer parts merchant, while Western Digital will have access to AT&T;’s Florida production facility without paying anything for it.
The AT&T; division will make the chips at the Florida plant and at other AT&T; facilities in Allentown, Pa., and Spain. The plants will be operated by AT&T; managers and engineers trained in Orange County by Western Digital. The AT&T; managers will report to a committee of executives from both companies.
Analysts said this could be the most significant semiconductor pact ever reached between U.S. technology companies in terms of dollar value and production volume. It may set a precedent because of the close relationship forged between both companies’ management.
Western Digital President Roger Johnson said the agreement will make his company’s products more competitive. Western Digital manufactures circuit boards and other components that control computer core logic, data storage, video display and communications.
Competing Internationally
Johnson said the market served by the company is valued at $2 billion to $3 billion annually and is expected to grow to $9 billion by the early 1990s.
Marinaro noted that Western Digital and AT&T; compete with foreign manufacturers that operate in similar arrangements with one another or with their governments. “By teaming together, we’re doing what U.S. companies must do to be competitive,” he said.
Marinaro acknowledged that the agreement makes Western Digital heavily reliant on AT&T; as a supplier, but Mark Reagan, an analyst at Dataquest, a San Jose technology research firm, said, “There are less stable suppliers than AT&T.;”
Wall Street responded favorably to the announcement. Western Digital stock closed Thursday at $23.875 cents per share, up 87.5 cents, in trading on the American Stock Exchange. AT&T; closed at $31.625, up 12.5 cents, on the New York Stock Exchange.
WESTERN DIGITAL AT A GLANCE Based in Irvine, Western Digital manufactures electronic components used to control computer core logic, data storage, video display and communications functions. The company has about 1,700 Orange County employees and is the county’s largest electronics manufacturer.
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