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Technology Stocks : Disk Drive Sector Discussion Forum -- Ignore unavailable to you. Want to Upgrade?

To: Sarmad Y. Hermiz who wrote (7534)	12/13/1999 10:17:00 AM
From: Robert Douglas	Read Replies (3) \| Respond to of 9256

Re: Industry producing at a loss: The disk drive industry isn't unique in its current state of selling below cost. Most manufacturing industries, at one time or another, go through this very cycle. The classical remedy is for these companies to quit expanding capacity during these downturns and even retire older, less productive facilities. This industry is odd in two respects. First, it has a history of expanding even when times are bad. (What's the latest on Conner's new company?) And second, many of the drive companies buy parts from the same group of companies and assemble them. This will require not only that there be consolidation at the assembly level, but that there be consolidation or elimination of capacity at the parts level. As long as there are plentiful parts available, it seems there is someone who thinks they can run an assembly line better than the next guy can. It has been a while since we argued on this thread which business model was better - Seagate's vertical integration or the assembly model used by WDC, Maxtor and Quantum. Back before Mr. Kam went off to pursue his gardening career - said something about hedges, I believe - we sort of concluded that each model would flourish under certain business conditions. What I find strange, is that the non-vertical strategy should be in its heyday with the parts makers selling their wares at losses. Yet Seagate, with its vertical strategy, is by far the most profitable DD company. (Small profit versus huge losses) What happens when these parts are no longer sold at a loss but are actually sold with a margin of profit? Outside of Seagate or playing these companies for a bounce, it seems like we still have a ways to go before this industry will return to general profitability and become a good long-term investment. In my opinion, the resolution of over-capacity must first take place at the parts level - and with the trend for fewer parts per drive still going strong, it may take some time. -Rob