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

To: Z Analyzer who wrote (1783)	12/14/1997 12:30:00 PM
From: Gus	Read Replies (1) \| Respond to of 9256

Z, Re: MKE MKE is a subsidiary of Matsushita that is publicly traded in Tokyo. I think it got downgraded by an analyst last week. MKE also manufactures SEG's low-end tape drives. Matsushita is rock-solid so I don't think there's a problem there especially since optical memory (DVDs, CDs, etc) and semiconductor memory (DRAM, SRAM, merged IC-DRAM, etc) are expected to recover in 1998 (est. market $60 billion) and 1999 (from $20 billion to $50+ billion) respectively. I think the risks to QNTM with regard to MKE lies in how busy it can keep MKE's highly automated factories going. The fact that QNTM has been referring in its 10Qs to MKE's need to expand its facilities after this fiscal year ends (March 98) suggests that QNTM's current volume is keeping MKE fairly busy and thus, QNTM is at optimal efficiency. In a downturn, though, it could come back to bite QNTM if it does not hit its volume and/or price mix targets. That's what those repricing mechanisms are for. QNTM absorbs the drive design risks, qualifies the components of its designs, absorbs the yield risks of those components, absorbs the risks of raw materials, WIP and finished goods inventory, and absorbs the risks of market acceptance. MKE assembles those components and absorbs the manufacturing risks for which it receives a relatively risk-free rate of return pegged to QNTM's overall returns. In other words, as the exclusive contract manufacturer, MKE has a floor (X% over cost?) plus it gets a proportionate share of anything over that. At least that's what I can infer from the portions of the Master Agreement included with the SEC filings. The fact also that QNTM/MKE have to add capacity just to scale with unit growth despite the fact that there is overcapacity illustrates, though, how this industry can really blow during a down cycle. If QNTM/MKE doesn't increase capacity, it is basically conceding no unit growth and risks leaving money on the table when the industry trends up. If QNTM/MKE increases capacity, it basically worsens an already bad supply-demand imbalance in the industry. And once they put on that capacity, they basically have to keep them busy to start recouping those high fixed costs. No easy choices. Gus