Sales Drop Komag sets industry fretting By Terry Costlow, EE Times San Jose, Calif. - Some drive industry observers are wondering if the business is in the midst of a slowdown. But others say neither a slowdown nor a round of price cuts is forthcoming. The reason for the nervousness: Komag Inc.'s recent prediction of reduced sales and a loss in its third quarter, which it attributed to changes at Seagate Technology Inc. Komag, a leading supplier of disk-drive media, will close a factory in Milpitas, Calif., and lay off 350 people this month. The company also predicted that it would see "a significant decline in net sales, as well as an operating loss in addition to expenses tied to the layoff and plant closure." Komag attributed those developments largely to a decline in demand for enterprise-class disks. A second Milpitas facility will be closed next year, and Komag will take a one-time charge of $45 million to $60 million in its September quarter to account for the restructuring. The high-capacity disks used by servers are made primarily by Seagate Technology (Scotts Valley, Calif.), which dominates this market segment. Seagate's disks made up 52 percent of Komag's 1996 sales, according to Komag's 10-k filing with the Securities and Exchange Commission. Seagate itself had experienced some setbacks in the server segment of the market, so Komag's recent announcement had many wondering if the high end of the drive market was flattening. But, according to most analysts, that's far from true. "The server market is not hurting at all. It's growing at the usual rate," said Jim Porter, president of Disk/Trend Inc. (Mountain View, Calif.). "It's Seagate's market share that is hurting. Seagate has real competition at the high end now." For the past couple of years, Seagate faced little competition at the high end of the market, where only IBM Corp. was a solid competitor. Hewlett-Packard Co. had dropped out, Quantum Corp. was busy digesting the drive business it had acquired from Digital Equipment Corp. and Western Digital Corp. was a late entrant. But in the past six months, Quantum has made substantial strides, and WD has begun shipping solid volumes. Those gains came at Seagate's expense, and Seagate's position was a big cause of the recent restructuring moves by Komag. "Seagate has been as high as 30 percent of Komag's business," said Dennis Waid, president of Peripheral Research Inc. (Santa Barbara, Calif.). "When they started to suffer, so did Komag. Added to that, Seagate has been producing a lot more of its own media, so they didn't have to buy as much from Komag." Komag should survive its current problems, analysts said. "They are close to the status of an innocent bystander being hit by a bus--this isn't really all their fault," Porter said. "Komag has one of the best management groups in the industry, and what they're doing makes a lot of sense. They're phasing out their oldest facility and beefing up their plants in the Far East." Komag said that its restructuring would include an expansion of its manufacturing operations in Malaysia. "The silver lining in this is Komag made the probably prudent decision to move their manufacturing up to [Malaysia's] lower-cost and lower-tax environment," said Mark Geenan, an analyst at TrendFocus (Palo Alto, Calif.). After closings its two plants in Milpitas, Komag will do all its design work in the United States while handling up to 75 percent of its manufacturing in Malaysia--a strategy that mimics that of other disk-drive suppliers. (Next article.) (c) 1997 CMP Media, Inc [This article comes from EE Times in a joint cooperative effort with the Motley Fool. For more articles like it, please look at Fool's Gold every weekend or simply go to the Fool's Gold Mine and page through our back issues, which all have clever and cool EE Times articles in them.]

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