Western Digital Seeks Togetherness Spirit : Technology: Some say the firm is a crazy quilt of acquired businesses. But the critics may be silenced if it captures the contract to manufacture IBM’s notebook laptop.
Roger W. Johnson believes in corporate togetherness. So much so that the chairman and chief executive of Western Digital Corp., which makes the electronic innards of most personal computers, is moving his company’s decision makers and chip designers into a house that Johnson built: a gleaming headquarters that springs 14 stories in the Irvine Spectrum business park.
By corraling the company’s executives, engineers and designers in one spot, Johnson hopes to overcome traditional rivalries that block innovation. This new sense of togetherness is especially important for Western Digital, which employs a motley crew of chip architects brought together by six acquisitions over the past five years. The concept is also key to setting the company apart from its competitors.
Johnson wants to instill in Western Digital’s culture his idea of “interarchitecture,” or designing and manufacturing a family of electronic parts to work together so that the net result is better overall computer performance than if they were built independently. Johnson knows that it will take more than fancy terms and a splashy new building to sway outside skeptics who think that the latest incarnation of 20-year-old Western Digital is a crazy collection of companies bound by aimless acquisitions.
While the company’s financial performance has improved this year, some industry observers criticize Western Digital management for spending too much time acquiring companies instead of executing its business. And by trying to be all things to all computer manufacturers, Western Digital, they fear, may only make itself vulnerable to competitors in each of its five business categories.
“It’s too early to claim a victory for Western Digital’s strategy,” said Steven Ossad, an analyst with Montgomery Securities in San Francisco. “They are having a change in fortunes, but a lot remains to be seen. They’ve been a disappointment before.”
Says Johnson: “We’ve spent time swallowing acquisitions. Now we have to execute.”
To be sure, Johnson’s scheme for gathering various pieces of the production process together at a single site is not original.
Other manufacturers, such as Hewlett-Packard and Apple Computer, have designed new products by combining resources from all levels of the company, said Jim Mottern, a manufacturing consultant with Ernst & Young in Irvine. Companies that do so have found they can get products to market much more quickly and cut development costs, he said.
“We’re all going to be a lot closer together (in the new headquarters), and interarchitecture should be a lot easier,” said Kathryn A. Braun, senior vice president and general manager of Western Digital’s largest division. “People were skeptical about it at first, but they’re learning that we all have to be headed in the same creative direction.”
Johnson also hopes that the new headquarters will be a symbol that bolsters the stature of Western Digital. The billion-dollar company’s printed circuit boards and disk drives make possible smaller and faster computers, yet its name remains largely unrecognized outside the industry because it doesn’t make consumer products such as personal computers.
Western Digital’s financial performance a year ago didn’t help the image. The company lost $2.6 million in the quarter ended Sept. 30, 1989, and reported lower year-to-year earnings for two quarters before that. Fourteen months ago, the company laid off 12% of its work force, and all five business units rarely perform well at the same time.
“The financial performance (in the past few years) has been bumpy,” said David W. Schafer, vice president of worldwide sales. “It’s not so hard to understand, but it’s painful that people on Wall Street didn’t see what we were up to. It’s becoming clear now.”
While not everyone on Wall Street is sold on Western Digital’s strategy, most analysts agree that the Irvine firm is at a transition point in its history. The company has shown profits for two quarters, and its stock has risen sharply on persisting rumors of some big contracts from International Business Machines.
“I think they have made excellent progress in turning around their business and their image in the past two quarters,” said Edmund C. Spelman, analyst for Oppenheimer & Co. in New York. “There is a healthy degree of skepticism because of their erratic track record, but they aren’t promising more than they can deliver.”
While Western Digital’s financial recovery can be attributed in part to improving conditions in the PC industry, Johnson believes that the company also is finally beginning to reap the benefits of a strategy that he put in place when he joined the firm in 1982.
Johnson’s plan from the start was to assemble a collection of computer component suppliers and make Western Digital a one-stop supermarket for personal computer makers worldwide. This strategy was intended to help Western Digital in two ways.
The company could gain efficiencies from co-manufacturing the various products, packaging them together and selling them at reduced cost to PC makers. And, once it owned each of the component businesses, it could develop an advantage over competitors through interarchitecture.
To expand into the computer graphics market, Western Digital acquired Paradise Systems in 1986 and Verticom Inc. in 1988. To strengthen its business in devices that control data storage, the company acquired Adaptive Data Systems in 1986, and it entered the business of making core logic chips that control communication between computer peripherals and the central processing unit with the 1987 purchase of Faraday Electronics Inc. It moved into the fast-growing market for networks that link PCs, printers and related equipment by buying ViaNetix Inc. in 1987. And finally, by buying Tandon Corp.’s disk drive business in 1988, the company entered the intelligent disk drive business.
Johnson says Western Digital remains unique among PC components manufacturers because of the wide array of products it makes--about 70% of the cost of the parts that comprise a PC. The only parts it doesn’t make are the central processing chip and mass memory chips.
To a casual observer, Western Digital’s acquisitions might look like a hodgepodge of loosely connected companies. But Johnson said the businesses share much in common: They are in markets where success means exploiting advances in semiconductor design.
And in that respect, Johnson says his company has a leg up on its competitors through its alliance with AT&T; Corp. in which AT&T; makes state-of-the-art chips for Western Digital.
But Western Digital has been careful not to become overly dependent on AT&T.; So Johnson is building a $119-million wafer fabrication manufacturing plant in Irvine, which is scheduled to open in January.
The core logic chips introduced by Western Digital in March allowed the company to integrate the functions of more than 30 chips into three. The Western Digital-designed chips are faster when used together than when they are used with non-Western Digital products, making them the first products that exhibit interarchitecture.
“For the first time, our parts are all designed by Western Digital people,” Johnson said. “We’ve been planning to get into this position for eight years. We think we have built an engine that will give us an inherent advantage over our competitors.”
Some skeptics, such as Montgomery Securities’ Ossad, say there is little concrete evidence that Johnson’s business strategy or interarchitecture plan will give the company a competitive advantage over Silicon Valley rivals like Conner Peripherals, a disk drive maker, or Chips & Technologies, which makes core logic chips that control communication between computer peripherals and the central processing unit.
Western Digital’s challenge is to get each of its major product lines profitable at once, but that’s easier said than done because of fierce competition in each area. As senior vice president Braun puts it, “If all Roger’s kids can perform in the same quarter, we would blow Wall Street away.”
The task is made more difficult by a lack of industry design standards and the need to redesign the same components for different types of computers, such as laptops or workstations.
The disk drive business, for example, has been a particularly volatile segment of the industry with thin profit margins. But disk drives are quickly becoming Western Digital’s bread-and-butter business, accounting for 37% of its sales now compared to 8% in fiscal 1987.
Despite its growing dependence on disk drive sales, Western Digital was hampered in its efforts to become a major player in the field when it was slow to develop a line of 3.5-inch “intelligent” disk drives. The delay allowed Conner Peripherals to grab a bigger share of the market, said Crawford Del Prete, an analyst at International Data Corp. in Framingham, Mass.
But Del Prete said Western Digital has performed a good balancing act in making the transition to more profitable, higher-capacity disk drives and is in a good position to enter the market for next-generation 2.5-inch disk drives, which are expected to emerge in the next two years.
Analysts say it will take more than two consecutive profitable quarters to convince them that the seesaw days are over at the Irvine computer company.
The company says last year’s layoffs were the final move to eliminate duplication associated with its many acquisitions. Almost as quickly as its fortunes sank, Western Digital recovered, and its employment has grown to 7,500, above the pre-layoff level of 7,000 in April, 1989.
“This company looks like it’s on the verge of a turnaround,” said Richard L. Whittington, an analyst at Kidder, Peabody & Co. “But looks aren’t everything. I’d like to see them report good results for three to five quarters in a row.”
With 50% of its business overseas and sales to all personal computer manufacturers except Apple Computer, the company is no longer dependent on any one source or geographic region for its future well-being. In addition, the business is balanced between computer manufacturers, accounting for 62% of sales, and resellers with 38% of revenue.
For the quarter ended March 31, Western Digital earned $8.8 million, doubling its profit from a year earlier.
And analysts are encouraged by the company’s ability to reduce inventories and debt despite a heavy capital spending program that includes building a new semiconductor plant.
Analysts are estimating earnings of from $20 million to $25 million for the fiscal year ending June 30, down from $34.3 million last year. Revenue is expected to be $1.1 billion for the current year, up from $992 million last year.
Although the domestic PC market is not expected to grow as quickly as it did in the early 1980s, Johnson believes that the unification of Western European markets after 1992 and political liberalization in Eastern Europe offer opportunities for increased sales abroad.
Johnson said the days of big acquisitions are behind Western Digital, but that doesn’t mean the company will not dabble in new markets. Eventually, Johnson believes, Western Digital components will be used not just in PCs, but also in a range of consumer electronics products.
Meanwhile, the company has been attracting attention recently because of rumors that it has been awarded a large contract to manufacture IBM’s long-expected notebook-sized computer. Western Digital and IBM refused to comment on any such deal.
But, last month, Western Digital announced a cross-licensing agreement with IBM, and company officials have been dropping hints that the company has won some major design coups. And rumors of an IBM deal have helped Western Digital’s stock, which closed Thursday at a 52-week high of $14.75 per share, although it dropped back a half to close at $14.25 on Friday.
Phil Devin, an analyst for market researcher Dataquest in San Jose, said he expects an announcement during the next several months that Western Digital has the IBM notebook computer contract. In addition, he said, Western Digital has dedicated an entire floor of its disk-drive manufacturing plant in Singapore to a single customer--a sign, he believes, that a major disk drive deal with IBM also may be in the works.
If Western Digital has beaten its competitors to the IBM deal, analysts say it would be proof that Johnson’s strategy, particularly the interarchitecture approach to chip design, is beginning to pay off.
WESTERN DIGITAL PERFORMANCE
While revenues have continued to climb speedily over the past five years, Western Digital’s profits peaked in 1987 and have been declining since.
Revenue in millions of dollars: 1985: $189.2 1986: $300.3 1987: $481.4 1988: $769.3 1989: $992.1
Net Income (Loss) in millions of dollars: 1985: -4.2 1986: $23.2 1987: $45.8 1988: $43.4 1989: $34.3
Net Income as Percent of Revenue
As percentage of revenues, net profits have declined to less than 2% from a 1987 high of 9.5%.
1990 *: 1.8%
* ending 3rd Quarter 1990.
Stock Price Rebounds
Western Digital’s stock has bounced back from a 24-month low of $7 at the end of October. 5/31/88: $15.25 10/31/89: $7.00 6/12/90: $14.50
Source: Dow Jones News Retrieval
