Yeah, it's still fashionable to assume that cheap overseas drives are to blame for the industry's woes. Everybody's favorite fashion victim, the Motley Fool, is particularly guilty of dispensing this amazingly stubborn point of view.
Another way of looking at this is gross margins. My understanding is that Fujitsu and Maxtor -- the two fastest growing drive makers -- currently still have the best capacity utilization rates in the industry. As this rate goes higher, each incremental sale of drops more quickly to the bottomline. That translates into pricing flexibility that a drive maker like WDC -- which is still operating at around 50% capacity even after taking huge one-time charges to drastically reduce its manufacturing breakeven point -- simply does not have.
QNTM is in no better position. The closure of MKQC means that QNTM is now totally outsourcing everything from heads/platters -- still the two most expensive components of a disk drive -- to final assembly (still at around 10% of drive cost, Stitch?). QNTM is my favorite working answer to the practical question: When one outsources manufacturing, including the most critical components with the highest value add, of one's product, does one outsource its own competitiveness? Anybody who wants to use Cisco and EMC as examples of how manufacturing can be totally outsourced better understand that the key tech in both cases is software, not hardware.
Strictly as a sidebar, just exactly how long will QNTM shareholders tolerate the use of the cash flow of a growth biz like DLT to subsidize the survival of a cyclical biz like disk drives? It seems to me that the smart way is the conventional way and that is to use the profits of a cyclical biz like disk drives to fund growth businesses in the same way that SEG developed its software businesses.
For SEG, it's a question of execution. It has commanding positions in the fastest growing and most lucrative segments of the enterprise (3rd gen 10,000 rpm and Fibre Channel, which grew at a 25% rate quarter to quarter), but it still lags on the desktop which means that it has to do what every tech lagger does: lower price. SEG has reduced its manufacturing break-even to a point where if and when it grabs the density lead on the desktop, its earnings leverage will be outsized.
That may take some time coming, though. Fujitsu has the pole position on GMR. IBM is poised to go 100% GMR soon. There's also this rather plausible rumor being re-floated again that Samsung and Hyundai are on the verge of merging their disk drive units and that has obvious implications for the desktop.
Apparently, the central planners in South Korea believe that Samsung has the more cogent PC strategy -- similar to the Japanese strategy of trying to capture most if not all the manufacturing profits of the non-Wintel part of the PC supply line as a way to establish a line of defense against the inevitable effort of the likes of Intel, MSFT, Compaq and IBM to eventually go looking for growth in its franchise consumer electronics business in the emerging battlefield of convergence -- and stands a better chance of becoming the Korean integrated PC company. What adds credence to this is that Hyundai has not only scaled back its DRAM operations but it also sold off key pieces of its PC business: Symbios Logic, which I had previously considered as Hyundai's foundation for going into the enterprise storage space, and Axil Computers, which beat mightly Intel to market in developing a way to lash 8/16 processors together for the NT market (HWP was the first licensee).
Again, this is just a rumor I've heard, but, if true, that may explain why it took 5 major investment banks to walk the Maxtor IPO down the aisle and presumably (perhaps unfairly) to support the stock as part of the pricing negotiations between Hyundai and Samsung who happen to be fierce corporate rivals.
All that said, the demand for drive stocks has improved significantly. That may be due to stabilizing fundamentals and seasonal patterns, but over the past two years, the real opportunities to make money (trading and/or buy and hold) have been in enterprise storage where the fundamental stories are stronger. I don't see that changing soon.
Have a good weekend.
Regards,
Gus
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