From today's IBD, an article on IBM and MR heads. There's one sentence near the end you'll like.
>>> On a hot streak with its computer and services businesses, International Business Machines Corp. now hopes to give its storage systems division a boost.
Two weeks ago, the company announced it would pump $440 million into its disk drive business. That brings the total amount invested in storage this year to $1.32 billion - quite a shot in the arm.
To hear IBM tell it, all its storage unit needs is some brawn to back up its brains.
The San Jose, Calif.-based division, which claims to have invented the disk drive in 1956, has a long history of innovation. Its latest big breakthrough - magnetoresistive heads - is revolutionizing the industry
But on other fronts, IBM has failed to make the grade. The storage unit, which supplies products to other manufacturers in addition to its parent company, hasn't had enough capacity to meet demand.
IBM has just 10% of the disk drive market. Its competitors - companies like Seagate Technology Inc., Quantum Corp. and Western Digital Corp. - sell many more drives.
This year's infusion of cash will make the company more competitive, IBM officials say. The money will boost manufacturing volumes. Part of the most recent investment will go toward a new facility in Thailand.
The firm also has launched an effort to sell disk drive heads. Currently, IBM's storage systems division sells drives, but not the parts that go into them.
''The only thing limiting our market share is capacity,'' said James Vanderslice, general manager of the storage unit.
IBM will make 11 million drives this year, Vanderslice says. He plans to build 14 million next year and 18 million to 20 million in '98. The company is focusing its storage efforts on mobile computers, servers and high-end PCs.
Analysts agree the capital investment is a sign that Big Blue believes in its storage division. It wasn't too long ago that IBM thought about selling the unit, notes Phil Devin of Dataquest Inc., a San Jose, Calif., research company.
But it may take much more for IBM to significantly boost its market share.
Production problems kept IBM's drive volume low this year, says Devin. Big Blue may be able to make 18 million drives in '98, he says, but the total market will be larger.
According to Devin, the industry will build about 106 million hard-disk drives this year. That number will grow to 160 million by '98. ''So IBM's market share will still be just barely over 10% - even according to its own plans,'' he said.
The capital investment will help IBM, but other companies - Scotts Valley, Calif.- based Seagate, for instance - also are spending heavily.
Market leader Seagate should make close to 30 million drives this year. Quantum of Milpitas, Calif., will produce about 23 million, and Irvine, Calif.-based Western Digital should build almost 20 million.
IBM's storage division makes a number of different products - everything from tape drives to software. But disk drives are the most important chunk of its business. And that industry has long been a hard place to compete.
For one, the market is very cyclical. Intense price wars erupt regularly.
''It makes it very tough to maintain earnings momentum,'' explains Don Collier, president of Prolytix Corp., a Santa Barbara, Calif., firm that tracks financial trends in technology.
The annual growth rate for the disk drive market swings wildly, Collier says. Revenue grows 60% some years, he notes, and 5% in others. This year, he expects sales growth of about 15%.
There are signs, though, that the industry may be calming down. There's been tremendous consolidation in recent years. Four companies - Seagate, Quantum, Western Digital and IBM - now control about 80% of the market.
For now, margins are still pretty tight. Collier pegs gross margins at about 15%.
To get an edge, IBM is leveraging its technological savvy. At the heart of this effort are its magnetoresistive heads.
MR heads are more sensitive than thin-film heads and let disk drives store more data. In a few years, pundits say, all drives will use them.
IBM pioneered the technology and initially guarded it jealously. But now Seagate and Japanese manufacturers like Fujitsu Ltd. also are building them.
Companies without deep pockets, however, may have trouble developing the technology. The start-up costs associated with making MR heads are high. And that could help IBM.
Last summer, IBM announced it would sell MR heads to other disk drive manufacturers. That effort hasn't gotten off the ground yet, but Vanderslice says he's forming partnerships with a number of U.S. and Japanese companies.
The margins earned on the components are higher than on the finished drives, Vanderslice says. ''As you go down to the lower levels of integration, the gross profit dollars are very attractive,'' he said.
But experts aren't sure if the effort will be successful. IBM may get greedy, they say, and keep all the MR heads for its own drive business.
And there are other issues. All else being equal, disk drive manufacturers would rather not buy parts from companies that also make drives. Many have close relationships with firms that only make components.
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Copyright (c) 1996 Investors Business Daily, All rights reserved.
Investor's Business Daily - Computers & Technology (12/17/96)
IBM Drives To Boost Output Of Personal Computer Disks
By
Nick Turner
Transmitted: 12/16/96 8:40 PM (u2aah5dp) |
