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  1. Technology
September 6, 1988


By CBR Staff Writer

Seagate Technology Corp is facing a slump in the hard disk market that is having critical consequences for all manufacturers. Analysts have identified a number of reasons for the Scotts Valley, California company’s situation. It has been slow to respond to the shift from 5.25 Winchesters to those in the 3.5 form factor – 90% of Seagate’s production is in the 5.25 format, while many of the major manufacturers – such as IBM and Apple primarily use 3.5 drives on their low-end machines. Notoriously short disk drive life cycles are hitting Seagate – many point to the tendency for companies to be one-product successes, andSeagate pioneered the 5.25 Winchester. More computers are coming with hard disks built in rather than packaged separately. Another reason identified is the design shortfall, with the company missing the transition from 16-bit to 32-bit according to former Seagate executive Finis Conner, now running Conner Peripherals. The Fremont, California plant has been producing 1m disks a month – well in excess of demand that has not grown as fast as the company expected. Chairman Alan Shugart blames this on a shortage of memory chips and disk drive controllers, factors that are holding back personal computer manufacturing – demand for drives is down from manufacturers hit by a shortage of memory chips and unable to build as many machines as they would like. Consequently, it has a glut of drives and as well as cutting production, is slashing prices. Although the company has turned in record sales in the last three years – to over $1,000m for the year ending June 1988 – it has now hit the buffers with a vengeance. Despite rock-bottom prices, it finds itself with $50m of excess inventory. Production of 5.25 drives in the Far East was cut by 30% last month, and the company is to phase out a number of 5.25 drives, including the 20Mb ST225, its flagship product, and the ST4096, already the subject of price cutting, while output of 3.5 drives has been raised. Lay-offs of 200 domestic staff, cutbacks in overseas operations and greater vertical integration have also occurred. Production cuts have raised the unit costs of the drives, and the company is worried at the prospect of a reduction in its gross margins. Industry gossip has it that Seagate has a full three months’ inventory in hand, and that undue pressure is being placed on distributors to push products harder. Seagate has also resorted to selling components in the effort to get out of the slump. Nevertheless it remains a fact that production and sales of 5.25 drives overall are rising. Seagate maintains that European turnover for 5.25 products tripled last year and that spot prices for its leading 20Mb ST225 actually rose by 5% in July. No price reductions are planned in Europe: only one measure is to be taken, a price promotion whereby buyers of three units are given a $200 coupon to offset against the price of future purchases.

Bloated inventories But the difficulties have been reflected in the company’s results: quarterly net profits fell from $40.4m in April 1987, to $37.2m in July 1987, down 39.5% to $14.8m in October, down 39.3% to $22.8m in January 1988, down 42.7% to 23.2m in April, and down 55.6% to 16.5m in July 1988. It now hopes that demand for 3.5 drives will boom, as a result of Omni’s introduction, for instance: sales of the 3.5 family grew to 147,000 in the June quarter from 15,000 units in the December quarter to account for nearly 10% of revenue from 4% – but 3.5 market leader MiniScribe Corp is thought to have shipped 440,000 units in the June quarter. And if times are tough for Seagate, smaller manufacturers of 5.25 drives look set to suffer severely Seagate is the largest independent producer of hard disks and its excess inventory is putting pressure on competitors’ already bloated inventories: analysts are predicting bankruptcies and consolidations among smaller manufacturers, while aggressivepricing is hitting profit margins not only on comparable drives, but across the board. The dumping of 96Mb 5.25 drives is putting pressure on

85Mb and on higher capacity drives. The industry appears to largely accept that prices are about to fall: Control Data Corp forecasts a 15% to 20% per annum linear fall in prices for 5.25 96Mb models over the next 12 months, and will continue to place greater emphasis on 40Mb drives. By not selling to end-users but only OEM, Priam Corp hopes to be cushioned from price falls, though it concedes that as Seagate and other volume manufacturers approach Priam’s capacity prices will inevitably be driven down. Priam will continue to concentrate on high capacities, and its Californian plant now deals exclusively with robotics – disk production is handled off- shore; firms will be forced to reduce prices till they reach the point of economic suicide.

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