Disk-Drive Makers Are Cheerful As Industry Pulls Out Of Downturns
By Lee Gomes, Staff Reporter of The Wall Street Journal
Computer disk-drive makers are a cheery bunch these days, and it
isn't just because of the December holidays. Rather, all the celebrating
is a result of the $25 billion industry finally pulling out of one of
the nastiest downturns in its long history of booms and busts.
"The recovery is real," said Barbara Nelson, vice president at
Quantum Corp., a Milpitas, Calif., drive maker, in comments echoed by
many competitors. "This quarter is the best one we've had all year.
Demand is as strong as it's been in a long time."
Investors certainly think that the worst of the recent slump is over,
as shares in disk-drive companies and their suppliers have risen sharply
in the last two months, outpacing even the big gains among tech stocks
generally.
Shares of industry leader Seagate Technology Inc., for example, were
trading near $17 at the end of the summer; its shares have jumped about
80% since, closing yesterday at $30.75, down $1.625 in composite trading
on the New York Stock Exchange. Shares of Western Digital Corp., another
drive maker, have nearly doubled in the same period, closing yesterday
at $15.25, down 50 cents on the Big Board.
In fact, some of the recent increases bring to mind the behavior of
Internet stocks. Most notably, shares of Komag Inc., a San Jose, Calif.,
maker of the storage platters used inside drives, have quintupled since
their $2 levels of late summer. Komag shares closed yesterday at
$10.6875, down 25 cents in Nasdaq Stock Market trading.
Of course, all of these stocks are still well off their all-time
highs. Komag shares, for example, were around $33 in 1995, while
Seagate's stock was above $50 just last year.
But those peaks came before a triple whammy hit the industry.
The sudden popularity of sub-$1,000 personal computers forced
computer makers, the biggest customers for disk drives, to cut back on
component costs as they struggled to maintain profit margins in the face
of plummeting prices. As a result, they started buying less expensive
drives.
At the same time, those same PC companies remade their manufacturing
methods, adopting a just-in-time inventory system. That meant they
stopped ordering additional drives while they whittled down their
existing inventories.
Finally, new entrants flooded the market, especially at the
profitable high end. These included not only Asian manufacturers, whose
products became less expensive owing to currency fluctuations, but also
International Business Machines Corp., whose disk-drive operation in San
Jose mounted an ambitious expansion effort.
The end result was a decimation of both orders and prices, causing a
flood of red ink at drive companies. Overall, drive shipments for this
year should rise just 6% from 1997, a far cry from the 20% annual
increases of recent years, said Dennis Waid, analyst with Peripheral
Research Corp. in Santa Barbara, Calif. A spokesman for Western Digital,
based in Irvine, Calif., said the company saw quarter-to-quarter price
declines of nearly 15%, more than double its accustomed declines.
But demand is now starting to pick up as PC makers have completed the
task of working through old inventories. Mr. Waid, for one, expects
shipments to increase 12% next year. And drive makers have revamped
operations and learned to deal with lower prices by slashing payrolls,
shutting down some plants and tightening internal operations. They have
also found new ways to innovate: Quantum, for example, pioneered a new
quality-assurance program to keep customers happy.
Alexa McCloughan, who follows the industry for International Data
Corp. in Framingham, Mass., said the overall restructuring at Seagate
has been especially far-reaching.
Still, Seagate was one of the companies most affected by the
downturn, and is coming out of this cycle with a diminished position
compared with where it once was. For example, the Scotts Valley, Calif.,
company's overall market share at the start of last year was 25%, a full
five percentage points ahead of No. 2 supplier Quantum. Now the two
companies are in a virtual dead heat.
Seagate is still far ahead in revenue, owing to its strong position
in the lucrative high end of the market. But even that is changing. Two
years ago, the company had a 4-to-1 lead over its nearest rival, IBM. By
next quarter, though, IDC is predicting Seagate's share of the high end
will drop to just 44%, compared with IBM's 37%.
Indeed, analysts say that the surge by IBM has been one of the most
striking changes to come over the industry in the past year. The
computer giant once made disk drives mostly for its own use; now, more
than half of its disk-drive units, valued at more than $1 billion a
quarter, are sold to outside suppliers, said Greg Enriquez, vice
president in the company's drive division.
But Steve Luczo, chief executive of Seagate, said that because of all
the restructuring, his company is coming out of the downturn in a
stronger position than when it entered it. With gross margins up sharply
of late, "we think that long term, we'll have an even stronger business
plan than we've ever had," he said.
Analysts agree that, over time, the industry can again see the sorts
of profits it enjoyed two years ago. But some worry that investors, who
have recently bid up the price of disk-drive stocks, may be getting
ahead of events. While Western Digital's shares have doubled, for
example, the company is still expected to post losses for another two
quarters.
"There is a recovery going on, but this industry still remains very
competitive," warns Paul Fox, analyst at NationsBanc Montgomery
Securities.
For the long term, a key to making disk-drive makers healthier and
less vulnerable to cyclical demand swings will be for them to find new
markets outside of PCs. That already may be happening, as disk drives
are starting to show up in all manner of devices. For instance, some
high-end printers now ship with drives, for faster operations.
Drive makers also hope to find big future markets in a new breed of
digital consumer devices, such as digital cameras and television set-top
boxes.
Of course, to prosper in these new markets, the industry is going to
have to avoid some bad old habits, especially the knee-jerk urge to cut
prices when things get tough. "Anytime anyone gets profitable, they want
more market share," said Finis Conner, an industry veteran who recently
launched a new company aimed at the low end of the market. "People are
going to need to resist that temptation."
Copyright (c) 1998 Dow Jones & Company, Inc. |
