Disk-Drive Makers Are On The Rebound
(02/05/99, 6:45 p.m. ET)
By Mark Hachman, Electronic Buyers' News
Less than a year after suffering from a huge
oversupply in the market, disk-drive makers
appear prosperous again, due to strong PC
demand and more effective inventory
management.
Some 43 million drives shipped in the fourth quarter, far
outstripping analysts' earlier projections, according to
preliminary figures from Dataquest. Five vendors sold
more than 5 million units each during that period,
leveling the playing field to an unprecedented degree.
But the bonhomie among suppliers won't likely be
passed along to OEMs. Instead of engaging in
another price war, suppliers are now effectively
managing inventory, and in some cases actually expect
to increase the average selling prices of their drives.
Although specific market-share data was not yet
available, the combined unit market share of the top-tier
suppliers -- Seagate Technology, Quantum, and
Western Digital, in that order -- slipped to 51.5 last
year, from 63 percent in 1997 and 68 percent in 1996,
according to John Monroe, an analyst at San Jose,
Calif.-based Dataquest.
As they did throughout most of 1997, the traditional
second-tier suppliers -- Fujitsu Computer Products of
America, IBM, and Maxtor -- gained share from the
established leaders, Monroe said.
Fujitsu was perhaps the biggest winner during the
quarter, thanks in part to a wholesale conversion to
giant magnetoresistive (GMR) heads, supplied by IBM.
But traditionally smaller players like Maxtor were also
pleased with their results.
"I kind of stuttered on those words when I read those
[15.1 percent] margins, they were so hot," said Paul J.
Tufano, vice president of finance and chief financial
officer at Maxtor, in San Jose.
To meet demand, Maxtor, Fujitsu, and other drive
makers increased their manufacturing capacity. But
analysts were quick to point out that drive makers and
OEMs alike seem to have learned their lesson from a
year ago, when a shift in market conditions left most
suppliers caught with excess inventory.
The oversupply was caused by a dramatic shift to
just-in-time PC manufacturing, as well as a general
industry downturn.
"From the fourth quarter of 1997 until the fourth quarter
of 1998, the industry experienced the longest period of
oversupply in its history, about 20 percent in unit
shipments," Dataquest's Monroe said. "Now,
distributors aren't looked upon as dumping grounds."
Executives agreed. "Demand was flat in the fourth
quarter compared with a year ago, but there's a very
different attitude now," said Michael A. Brown,
chairman and CEO of Milpitas, Calif.-based Quantum,
during a conference call with analysts last month.
"There's significant growth in the industry, as well as
very significant sell-through."
At Western Digital, channel inventories continued to
decline during the quarter, said Chuck Haggerty,
president and CEO of the Irvine, Calif., company. WD
finished the year with the lowest on-hand
finished-goods inventory in 18 months.
Drive makers were cautiously optimistic about the first
quarter outlook. Executives are predicting flat growth
for the quarter -- a bright forecast, given that this is
traditionally a period of seasonal decline.
"We clearly benefited from the seasonal PC growth
during the [fourth] quarter," Maxtor CEO Michael
Cannon told analysts during a conference call. "It's too
early to tell how PC growth will carry over to the first
quarter. Early indications are that demand is strong,
with flat to increasing shipment trends."
Even struggling drive makers predicted a rosy outlook.
WD's Haggerty described the quarter as part of a
"steady, gradual recovery" to profitability by the third
calendar quarter of this year. "A great deal of progress
has been made in the last three quarters, but clearly we
have a lot more left to do," he said.
More important, Haggerty predicted that a combination
of manufacturing-cost reductions, demand for
higher-end products, and strong sell-through in the
reseller channel would raise the average selling prices of
WD's drives by $1 in the current quarter. Historically,
prices have declined at a double-digit rate per quarter,
a trend that slowed to about 6 percent, in some cases,
in the fourth quarter, drive makers reported.
The need to reduce cost-now a staple across the PC
industry-was also reflected in Seagate's decision to
reduce its distributor list.
Future Plans
Drive makers talked up their plans to build margin
growth, a difficult task in a market in which capacity
and price are the differentiating features.
IBM's storage strategy is to "deliver things that aren't
available from our competitors," said David Walling,
manager of business line strategy and support for IBM's
Storage Systems Division, in San Jose. IBM, which
recorded 22 percent unit-volume growth during 1998,
is focusing on the higher-margin workstation, server,
notebook, and high-end desktop markets, while its
microDrive hard drive competes against flash memory
in embedded applications.
Likewise, WD and Quantum will attempt to break out
of the price/performance metric by luring buyers to a
new ATA-66 interface that's being built into the Intel
820 chip set as well as their own products.
But Maxtor's Cannon said the company has no plans to
make higher-margin drives for mobile PCs.
A major wild card will continue to be the effects of the
Y2K bug on corporate purchasing. "The conventional
thinking holds that we'll have a big first half of the year,
and then we'll fall off a cliff in the second half. I don't
buy that," said Larry Sanders, CEO of Fujitsu
Computer Products, San Jose.
"I think the first and second quarters will be driven by
corporate buying, but we'll see the biggest consumer
demand in the second half," driven by the growing
market of low-cost "consumer" notebook PCs and
Fujitsu's 2.5-in. drives inside them, Sanders said.
Though so many drives shipped from such a breadth of
suppliers, Monroe said, drive companies still need to
focus on three core strengths: quality, time-to-market
execution, and asset velocity, or quickly developing
new products. But the fundamental nature of the market
hasn't changed. "You can simply make some money at
it," Monroe said.
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