U.S. Disk-Drive Makers in Hot Competition : Computers: Top companies are struggling in a cycle that threatens to see them decimate each other, to the benefit of foreign competition.
At the first mention of disk drives, all but the most avid computer buffs will be tempted to turn the page. Like carburetors or cathode-ray tubes, disk drives are part of the essential but unsexy underbelly of technology, generally considered worthy of attention only when they fail.
But keep reading. The $25-billion disk-drive industry is among the most innovative and competitive in the world, one where products become obsolete in a matter of months and companies with radically different strategies all ride a wild roller coaster of boom and bust.
It’s also an industry where a feisty group of American entrepreneurs has continually outpaced the huge Japanese electronics conglomerates. In Silicon Valley, where many of the legendary computer chip makers continue to struggle in the face of Japanese competition, the disk-drive industry is the leading employer and--arguably--the standard-bearer for American technological competence.
Not surprisingly, some view this success as evidence that American-style entrepreneurial capitalism is still the best model for retaining global competitiveness and that government policies to support high-tech--a favorite hobbyhorse of the chip industry--are unnecessary.
But the factors underlying the success of the American disk-drive industry are in many respects unique. And now, as the industry struggles through a down cycle that promises to be more difficult than most, changes are afoot that will test the long-term resilience of this remarkable group of companies.
“The Japanese have been getting closer and closer to us in terms of technology,” said Alan F. Shugart, the gruff, battle-hardened chairman of Seagate Technology, the largest independent disk-drive vendor.
The Japanese are hardly the only thing companies such as Seagate, Conner Peripherals, Quantum, Western Digital, Maxtor and Micropolis have to worry about. They also face a renewed challenge from America’s own electronics conglomerate, International Business Machines Corp. And to maintain their dominance over competing technologies such as optical disks and memory chips, the disk-drive companies must continue to bring new products to market rapidly even as ferocious competition drains away profits.
“The industry is every bit as innovative as it’s ever been,” said Stephen M. Berkley, chairman of Quantum. “But there are too many competitors, too much capacity, not enough (product) differentiation. Until there is more consolidation, there will be intense price competition, and that’s not sustainable.”
Rapid innovation has long been a hallmark of the disk-drive industry, which was born more than 30 years ago in IBM’s San Jose laboratories.
The basic principle of the technology is simple. Like a vinyl record, a computer disk stores information in circular tracks, except those tracks are magnetic fields rather than grooves. A “head” mechanism hovers just a breath above the spinning disk, altering the magnetic field to store information or “reading” it to retrieve data.
Early disk drives were cabinet-sized machines that served as the data banks for room-sized mainframe computers, and the dominant vendors were the mainframe computer companies, especially IBM. But just as computers have become dramatically smaller and more powerful, so have disk drives.
Today, with the magnetic tracks being squeezed closer and closer together and more information being crammed onto each track, the most advanced palm-sized drives for portable PCs can store 120 million bytes of data--about 48,000 pages of text.
And in the market for PC and workstation disk drives--the fastest-growing segment of the market--a group of relatively small, independent companies have taken leadership away from IBM.
Seagate and Conner Peripherals, which was founded by Finis Conner, a one-time partner and now bitter rival of Shugart, have been the biggest beneficiaries of the PC disk-drive boom.
These two firms pursue radically different business models, with Conner relying heavily on outside suppliers for components while Seagate remains vertically integrated, building most of its own parts. Finis Conner touts the speed and flexibility he gains by working with other vendors; Shugart counters that control over component production is critical to long-term technological advancement.
Quantum, the No. 3 independent drive maker, has a different theory: The company focuses on design and marketing and relies heavily on partner MKE, a Matsushita subsidiary, for manufacturing. And Western Digital takes still a different tack, seeking a competitive edge by supplying not only the drives but also the computer chips needed to control them.
Despite their strategic differences, though, executives at each of these companies agree on one thing: The success of the American disk-drive companies is due to their ability to move more quickly than the Japanese in developing the smaller, faster, higher-capacity products that personal computer manufacturers want.
And what has enabled them to do that? Industry executives and analysts point to several factors:
* All the major personal computer manufacturers are American, and thus U.S. disk-drive suppliers can more easily build relationships with them.
* Disk-drive manufacturing is much less capital intensive than chip-making, and thus Japanese manufacturers don’t benefit from the lower interest rates that have given them such a big cost advantage in building chip factories.
* Top-flight design and leading-edge software are critical elements in building a better disk drive, and those are areas where America still holds an edge. Though the basic technology is stable, incremental design improvements have been significant enough to prevent disk drives from becoming true commodity products.
* American companies have done a good job of managing low-cost overseas manufacturing operations, especially in Singapore.
Underlying all of this is the intense competition, which has forced companies to continually pursue the newest technologies, eliminated those firms that couldn’t keep up and sustained a strong infrastructure of disk-drive component and service companies.
William A. Sahlman, a professor of entrepreneurial finance at the Harvard Business School who has studied the disk-drive business, cited his colleague Michael Porter’s theory of competitive advantage to explain the success of the U.S. drive industry.
“Countries do well in areas where there is a lot of internal competition,” Sahlman said. “The fact that we’ve had 120 firms competing with each other over the past 10 to 15 years and driving down the cost-performance curve has been very salutatory for the whole industry.”
But Sahlman also cited a more ambiguous element in the disk-drive industries’ success. Investors have billions in dollars in losses on disk-drive companies over the years--many once-powerful players, such as Miniscribe, have gone broke. Presumably, such relatively cheap capital from investors won’t be available in the future.
And competition also has its down side. Today, with demand soft as a result of slumping PC sales, layoffs and losses have been rampant in the disk business. Seagate laid off 1,600 workers and reported a $48-million loss for the quarter ended Sept. 30.
Western Digital, which purchased the old Tandon disk-drive operation, has been so wounded by the price wars that Chairman Roger Johnson has made a public appeal for a truce.
“Companies like ours have to make a lot of investments, but somehow we’ve gotten ourselves in the position where we don’t get the value for those investments,” he said.
Even in the face of losses, all the companies said they are still investing about 5% to 8% of revenues in research and development and thus are not sacrificing their ability to compete long-term.
Nonetheless, the Japanese now see an opportunity. Toshiba recently announced plans to build a disk-drive facility in San Jose, and Hitachi and Fujitsu--long players in the mainframe disk-drive business--are redoubling their efforts to compete in the PC arena.
“Until recently our focus was in the niche areas, the high-performance areas,” and in supplying drives for Fujitsu’s big computers, said David Roy of Fujitsu America. “Now the importance of the PC industry is much greater. We’re starting to see Japanese companies focusing on smaller form factors.”
An equally ominous development for the American companies is the emergence of the Japanese as strong competitors in the laptop and notebook computer markets, the fastest-growing segment of the PC business. Benefiting from the strong domestic market that never materialized in traditional PCs, the Japanese companies will clearly have a good position in portable computing over the long term, thus helping to whittle away the U.S. drive manufacturers’ home-field advantage.
And then there’s the IBM factor. Big Blue’s $11-billion San Jose-based storage products division dwarfs all the independent vendors, and the company is the undisputed king of the underlying technologies. IBM has long talked about being more aggressive in selling disk drives to other computer companies, and the recent companywide decentralization plan--which made the storage products group an independent line of business--should help IBM turn the talk into action.
“We have the know-how, we have the capability, and we are going to compete across the board, not just at the high-end,” said Ray AbuZayyad, head of IBM’s storage products unit.
IBM and the Japanese companies have some of the same handicaps: Large bureaucracies that can make it difficult to move fast and a reluctance on the part of customers--computer vendors--to share product information with a major competitor. IBM also has a high cost structure, in part because of its heavy research and development expenditures.
But IBM President Jack Keuhler said the years of investment will have their payoff, citing a new head technology that will enable IBM to offer drives with an “order of magnitude” capacity more than current products’.
Analysts and executives at the independent drive companies have mixed views about the potential impact of IBM and the Japanese.
Jim Porter of the market research firm Disk/Trend said even though IBM’s drive business might be more independent, “they still will be considered IBM” and viewed with suspicion by PC makers. He also does not believe that the Japanese present a major threat.
But most executives, while not quite as pessimistic as Shugart, are less sanguine about the Japanese challenge.
Ultimately, they say, it will be the ability of the American disk-drive vendors to keep racing forward that will determine the U.S. industry’s fate. Like a streaking hydrofoil, the independent vendors must maintain their ability to turn new technology into products faster than the competition, or they’ll sink almost instantly into oblivion.
