Bill:
Do you know where Fujitsu's plants are located? I suppose Maxtor's plants are located in Korea.
We have to study QNTM's contract with MKE. My understanding is that QNTM buys MKE DDs at pre-negotiated prices and sells them here, but is not obligated to buy any MKE DDs if the demand for DDs declines or losses are expected. The worst QNTM can have from this contract is no profit. The high-end DDs were running at a loss because they were not under such a contract. But, they too have been consolidated/ transferred to MKE. This leaves the DLT made here and sold here and Europe. Thus, QNTM's business strategy is fully hedged against the calamities that the DD sector has faced or will face.
Obviously Maxtor (owned by Samsung) is located in Korea and has acquired Micropolis. Dumping of lowe-end DDs by Maxtor has hurt all the big four (SEG, WDC, QNTM, Fujitsu). I believe, Maxtor may continue to do so because they will need the hard currency, provided Samsung thinks that this is one of their major vantage points given limited resources.
There is no doubt that Samsung will have to make hard choices. Debt repayment by Korean companies is about US$100 bil in 1998 alone, and a large part of it is by Samsung. Samsung has higher margin business lines like electronics and is unlikely to enter the mid-range or hign-end DD business which will need more investment in hard currency. They will use, though, their existing capacity to mass-produce and sell anything they can for US$ at or even below cost. This is the reason for why WDC bled and chose to pull out of the low-end business.
QNTM does not operate at the low-end. At the mid-range, the main competition comes from SEG, Fujitsu and WDC. The main problem is that the demand for the low-end DDs remained strong this year and perhaps will continue for more time due to sub-$1000 PC popularity. This may change soon as consumers move to higher capacity DDs.
Until then, it is the production cut by the top four that will bring an equilibrium. In the interim, QNTM will stay cushioned by its DLT business. Further, it is known for its quality DDs. Its quality seems to have pushed QNTM to be number one in the mid-range DDs. We need to check on this because if it has gained market-share from SEG, WDC and Fujitsu, it is good news. I think SEG, WDC, QNTM and Fujitsu have been hurt by IBM's high-end penetration; is it true?
Thus, the high cost of capital will push Samsung to either (i) close Maxtor or (ii) not enter the mid- to high-end DD business. My feeling is that the high COC will push Samsung make low-end DDs for some time and then resort to (i).
In any case, QNTM's competition will be from the other DD makers. Only SEG may have an advantage (because of its plants in Malayasia), but it has been having quality problems which is hurting SEG, although the market may believe (until SEG announces earnings taking losses on the currency hedging) otherwise based on the WSJ article.
Please post your evaluation.
Sankar |
