DISKCON: Industry Partly to Blame For Its Own Woes

SINGAPORE (03/09/2000) - Disk drive manufacturers contributed to their own problems during the industry's recent hard times, partly by competing in a no-win area which led to lower prices all round, analysts said here today at the Diskcon 2000 conference.

"I was very surprised to see Maxtor (Corp.) and Quantum (Corp.) get into a contest on price last year," said John Dean, managing director at Salomon Smith Barney Inc. "Don't try to take market share by price -- it's not good for the industry."

The industry in 1999 made erroneous decisions leading to unnecessary price erosion, according to John Monroe, chief analyst for Dataquest Inc.'s Rigid Disk Drives Worldwide program.

It was "curious" that executives from all the publicly-held drive makers claimed to have responsibly walked away from price quotes that did not make good business sense, and yet entry-level desktop pricing fell to unprecedented levels in June 1999, Monroe said. This showed a lack of patience and foresight combined with a stupefying quantity of disinformation, he said.

Somehow, the industry has to halt the decline in profit margins, Dean said.

"Declining margins have become a death spiral for the disk drive industry," he said. "The industry has to figure how to cope with this."

Profit margins were consistently above 20 percent in the 1980s, but have not hit that level since early 1993. In 1999, profit margins fell below 10 percent consistently for the first time ever, according to Salomon Smith Barney figures.

The industry needs to shift from a vertical to virtual to external business model, according to Dean. Instead of manufacturing all of a drive's components such as heads, boards and disk media, it should spin off subsidiaries, go to outside suppliers, and invest in promising companies in these areas of the business, he said.

This is especially important as new high-growth sectors such as network-attached storage (NAS) and storage area networks (SAN) are emerging, he said.

The shift away from vertical integration in the manufacturing business increases flexibility, while lowering cost and capital requirements, Dean said.

"They all know that to go to more virtual relationships in manufacturing is very important," he said.

Inventories are indeed under much better control than they were in 1997, according to Dataquest's Monroe, but quickly shifting OEM requirements are getting harder to read. In particular, the specter of the Year 2000 event raised unanswerable and idiotic questions for the industry, he said.

Financial results for the industry were dire in 1999, with the four largest independent companies -- Maxtor, Quantum, Seagate Technology Inc. and Western Digital Inc. posting cumulative losses of US$260 million in the third quarter, improving to losses of $41 million in the fourth quarter.

But better cost control and new markets point the way towards a brighter future for the industry, Dean believes.

"We are at a low point in the industry -- right at the bottom," he said.

"Things are going to get better from here."

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