Duker,
Seagate has gone through quite a bit of correction recently but I see no reason for the stock to singled out from the profit taking, tech worries, etc. that have beset the market this week. I like at at these prices and recently added some more. I do not have the volumes I had earlier this year but I am accumulating with a long term view now.
I recently saw a presentation from a senior SEG ops exec who spoke about the "factory of the future". It recounts a DD operations strategy for the future and clearly shows some new fundamental strategic thinking on the part of Seagate. Apparently it is a product of an effort SEG has underway as, in the credits, the guy lists several members of a team called FOF (Factory of the future). Emphasis is being placed on Responsiveness (change in market conditions, time-to-mrkt) Material control (JIT, supplier management), Optimization (capital, people, space), and Quality (six-sigma).
The presentation outlined the emphasis on owning or having availability to key enabling technologies. Ditto emphasis on process selection and design. (for example: flexible manufacturing system versus cost optimized system). They identified trends that have significance. For example: Samsung's and Fujitsu's new found competitiveness and highly automated factories. Also OEM's supply chain model shift to BTO/JIT and their desire to pass risks down the supply chain. In addition they discussed some change in market factors such as the aim at a $50.00 disk drive, the growth in network computing, and the emergence of new apps that will finally begin to happen this year. (desktop video, home servers, palm tops).
In their study they concluded that a mfg. line that is optimized for cost (i.e. high automation) is not optimal for innovation and rapid changes. By the same token a line that is optimized for flexibility is not cost competitive. They state that most manufacturers have opted for one approach or the other. They believe there is a third option that is available consisting of both strategies in a highly leveraged capital outlay model. This, in overly simplified terms, consists of maintaining the flexibility in the front end of the product life cycle, slowly phasing it to a more automated, cost approach process during the product cycle maturing phase. They say it can be accomplished through proper identification of the right metrics and the proper prioritization of these metrics. The emphasis ion the metrics will actually change through the product cycle, reflecting the shifting needs of that products market. They say that the challenge is in managing the assets for this third option assuming that the right metrics have been chose ( a non trivial issue). They identified the following key components of manufacturing as the primary objects of these metrics: Locations, Servo write, HDA assy, PCBA assy, Test, Info technologies, human resources. The metrics the apply to these categories will be key.
I am still digesting much of this presentation but am trying to understand what it might mean in terms of change and have drawn a few preliminary conclusions. They are highly speculative on my part and are as follows:
- SEG may go to a two phase product mfg. scheme where it is likely that either Singapore or Malaysia plants will manufacture for phase 1 and WuXi China for the more mature phase 2. Or, it may be the reverse of this. In Phase 1 the operation would be difficult to maintain in a highly automated environment, thereby requiring more labor. Capital equipment focus would be on test and trouble diagnosis (labs). Skilled technical folks would be high level engineers but not as many skilled technicians as you would require for maintaining an automated environment. This is important as WuXi may not have the skill set that Singapore and Malaysia can offer.
- SEG may put new emphasis on lowering the cost of servo write, up to and including self servo mechanisms whereby the HDD could write its own servo during the mfg process (so far a dream and not yet real. It has many technical hurdles) They may be working on other initiatives here as well, such as going to embossed disk, or disk level written (or embossed) servo. The idea in this latter is to disconnect servo write from the mainstream assembly operation. Extra focus on costs (time/money) will be exerted. If they accomplish this then the idea of a two phased mfg. strategy is much more easy to accomplish. Servo write and verify has always been a major bottleneck and critical point in the HDA process.
- SEG will re-evaluate (or already are doing so) its entire location and logistics scenario as a major component of developing this model. Locations as related to customer sites and supply chain will be important, along with issues like tax incentives, skill base, etc etc. Same old stuff but with a new sense of urgency against a new operating paradigm IMO.
- SEG's new designs will likely leverage chip density, seeking the futuristic single chip disk drive with a greater sense of urgency. (I say this as a paradigm. It is a way off but some initiatives are available now.) Design strategy will likely take some risk in this regard and "push the envelope" a bit. They payoff would be huge. In any case, component reduction is key here.
- SEG will continue its commitment to six-sigma quality and may make new investments here, including new cap equipment outlays. I expect their next capex budget to show a significant jump (beyond the increased spending one always does when business gets better). This is great in that cash rich SEG is better prepared then its competition to accomplish this. Hope they are as intellectually blessed.
- I think we will see SEG reversing a trend that had been in place to reduce the head count of ex-patriates in places like China and SE Asia. To do what they have to do they will need a cadre of experts over here. These folks will be assigned in cross functional teams if SEG's presentation is truly a peek at the future. They are placing a big emphasis on this.
As I think more about what I heard I will post some more comments. In general I like what SEG is saying. They seem focused on the right things and quick to acknowledge the real world of competition.
Best,
Stitch |
