Industry Analysis

January 2006

Memory-Hard Disk Drive

The recently announced merger between Seagate Technology and Maxtor will assure that U.S. dominance in the Hard Disk Drive market is maintained, according to The Information Network (TIN). "Maxtor's eroding market share over the past few years led us to believe that they were a prime takeover target," notes Dr. Robert N. Castellano, President of The Information Network. "The entire hard disk drive industry is in a continuing consolidation process, with the sale of IBM's business to Hitachi in 2002 one of the more memorable and worrisome for the U.S. industry."

According to a recent TIN report, the hard disk drive market is forecast to increase to 372.2 million units in 2005 and 408.3 million units in 2006. Maxtor’s market share dropped from 21.2% in 2003 to 17.6% of the 306.8 million drives sold in 2004. Market share continued to erode to 13.5% by mid-2005. Seagate’s market share rose from 26.9% in 2004 to 30.5% in mid-2005. The three U.S. companies -- Seagate, Western Digital, and Maxtor -- had a combined market share of 62.4% in 2004 and 61.6% in mid-2005.

Nearly 80% of Maxtor’s revenue for 2005 came from desktop computer products, which has seen minimal growth compared to small drives for mobile applications. In addition, Maxtor transitioned to manufacturing in China and closed one of its two Singapore plants, reducing headcount. Finally, the company has been plagued with continued pricing pressures in the marketplace.

“We are concerned about a shrink in the supply chain of component parts, particularly those suppliers to Maxtor. We are watching the ramification of the acquisition on Agere, a supplier of chips to both Seagate and Maxtor,” added Dr. Castellano.

The Information Network report, "“The Hard Disk Drive Industry: Market Analysis and Processing Trends”, is available for purchase at the analyst Web site.

2005 and Earlier

The HDD industry, after shipping 305 million units in 2004, will expand to 378 million units in 2005, a growth rate of 24 percent, according to a study by TrendFOCUS, Inc.

Consumer electronics devices are rapidly incorporating HDDs, complementing core demand from PC and server markets,” states John Donovan, Vice President of TrendFOCUS. “It’s not just digital video recorders (DVRs) and Xbox, it’s the iPod and its legion of clones that are stimulating innovation and investment. HDD sales to CE applications will account for approximately 20 percent of unit output in 2005, and are on a trajectory to surpass 40 percent by 2008.”

HDD industry dynamics are rapidly evolving. “Growth momentum will be fueled by miniature HDDs, 1.8” and smaller devices used in a variety of CE products,” adds Donovan. Sales of HDDs to PCs and servers were exceptional in 2004, and will continue to be the backbone of storage demand for years. However, storage requirements for MP3 players, personal video players, and mobile phones, many of which will employ HDDs the size of postage stamps, are skyrocketing. TrendFOCUS sees demand for miniature drives doubling in 2005 and growing more than 50 percent yearly through 2008.

“And historical demand patterns, with the first half of each year typically weaker, may be changing. If customer demand does not slacken in the first half of the year, and HDD consumption in various CE markets develops as we expect, 2005 will be another banner year for the HDD market.”

HDD manufacturer market shares, in unit terms, changed from 2003. Seagate Technology remains the leader, but several smaller manufacturers gained additional share in 2004 with focused product lines and strategies. A summary is as follows:

As the PC market matures and the amount of digital content available to the consumer and the desire to store it continues to increase, the number of devices integrating hard disk drives in consumers’ homes will explode, according to In-Stat/MDR (http://www.instat.com). As a result, the high-tech market research firm expects that, while hard drives in the CE segment represented about 5 percent of the total hard drive market in 2003, they will represent about 33 percent of the market by 2008. With this segment representing a variety of opportunities for storage companies, shipments of CE with integrated hard drives are expected to represent a very attractive 67.1 percent Compound Annual Growth Rate (CAGR) over the 2003-2008 period.

“Hard drive manufacturers are increasingly looking to the Consumer Electronics (CE) market as a strategic segment of their business. While in the past, a typical home had only a PC hard drive, in the future; homes will have an increasing number of hard drives, especially in consumer electronics,” says Cindy McCurley, an Industry Analyst with In-Stat/MDR.” At the same time, as consumers increasingly accumulate more music and video content, demand for more drives and higher capacities will increase. In fact, consumers who may have previously been unfamiliar with hard drive technology are beginning to consider hard drive capacity as an important factor in their purchasing process.”

As hard drives evolve from their traditional 3.5-inch platforms to include smaller sizes, more mobile device manufacturers are becoming interested in integrating hard drives. While other storage options exist, from a price, mobility and capacity standpoint they are not as feasible for many of today’s CE devices, especially for those consumers interested in storing video.

Seagate, for instance, employs 8,500 people in Singapore, including contract workers at its one million sq ft facility in Ang Mo Kio. It makes HDDs, electronic assemblies and recording media in Singapore. Also located here is its only disk drive R&D center outside the U.S.

The world’s second-largest HDD maker, California-based Maxtor Corp., employs about 9,700 people at its facilities in Ang Mo Kio and Yishun. Singapore is one of Maxtor’s key regional hubs and hosts its Asia-Pacific headquarters with sales, marketing, manufacturing and logistics functions.

“We are moving the manufacturing of some of our desktop drives to China this year and into 2005,” a Maxtor spokeswoman said. “However, Singapore will continue to be the command and control center of our HDD manufacturing and we will continue to produce our multi-platter desktop and high-end drives here.”

Japan-based HDD company, Hitachi GST (Global Storage Technologies), which employs more than 2,000 people in Singapore, is in the process of transferring a big portion of its high-end HDD manufacturing operations from the Philippines to Singapore. 

“The effort to ramp up manufacturing capabilities in Singapore has already begun and is expected to be completed by the end of this year,” a Hitachi GST spokesman said. “Singapore will be the primary manufacturing site for Hitachi’s next-generation 10,000 and 15,000 rpm (revolutions per minute) HDDs used by most corporates.”

In the year 2004 the HDD industry in Thailand generated exports of almost 222,000 million Baht. The value-added of the HDD cluster was approximately 70,000 million both which accounted for 3.3 percent of Thailand’s total GDP. The HDD industry has been identified as a “priority industry” and has been promoted by the BIO as it plays an  important role in Thailand’s overall industrial plan.

The applications for Seagate, Hitachi, Western Digital and Fujitsu have already been approved. The approval of these applications led to an increase of the country’s HDD production capacity to 190 million units per year, which also led to an increase in the number of applications submitted to BOI promotion in HDD parts. Total investment in HDD parts industry accounted to 208,679 million baht. These investments are mostly from Japan, U.S., Singapore and Malaysia. The investment in HDD parts industry results in an increase of 110,000 employees. The HDD parts factories are located in central, northern, northeast regions, in provinces such as Ayutthaya, Patumthani, Prachinburi, Lumpoon and Nakhonrachasima. We are expected to see an increase in the number of applications submitted for HDD parts including Head Gimbal Assembly (HGA) and Head Stack Assembly (HAS), in order to support the increase in demand for HDD.

Though chipmakers like Infineon and STMicroelectronics have sizable design activities in Singapore, what is driving Hong Kong is the changing dynamics due to migration of hard-disk drive (HDD) manufacturing to China.

Production Distribution

The hard disk drive (HDD) industry is characterized by vertical integration. In-house assembly of HDDs has also been the dominant model in the industry, regardless of nationality. While contract assembly relationships have been common, they have not accounted for a large share of total production.

All of Quantum's disk drives are assembled by Matsushita-Kotobuki-Electronics. IBM has used its former English disk drive subsidiary, spun off in 1994 and now called Xyratex, to assemble drives. In 1997 Xyratex assembled about 2 million drives for IBM. IBM has also used a Thai subcontractor, Saha Union, to assemble 2.5" and 3.5" drives designed by its Japanese disk drive operation in Fujisawa.

In 1982 and 1983 Seagate, Computer Memories, Ampex and Tandon, all independent producers, became the first companies to move HDD assembly to locations for reasons other than access to host country markets. These firms began to assemble drives in what they saw as the best location from a cost standpoint, selecting low-wage areas in Asia, particularly Singapore. By the end of 1983 assembly was scattered geographically, but still overwhelmingly in the countries where the firm had its headquarters.

The experiences of Seagate, Tandon and Computer Memories in Southeast Asia began to influence other American HDD firms. The perceived success of Seagate's Singapore facility, in particular, spurred several other HDD producers to adopt a similar cost-based siting strategy. Many American firms followed Seagate's lead and chose Singapore as their first overseas manufacturing site. In addition to Computer Memories and Tandon, both Maxtor and Miniscribe began to ship drives made in Singapore plants in 1984, followed by Micropolis (1986), Conner Peripherals (1987), Cybernex Advanced Storage Technology (1987). American HDD companies also opened overseas facilities in other low cost Asian locations such as Taiwan (Microscience 1987, Priam 1987), in addition to Ampex's investment in Hong Kong.

In the span of just seven years, a dramatic change in the locus of assembly occurred. By 1990 Singapore was the world's largest producer of hard disk drives, accounting for 55 percent of global output, measured in shipments, with the rest of Southeast Asia accounting for only a percentage point more. As more firms located in Southeast Asia the supporting industries emerged in the region so that by 1990 three-fourths of the parts needed to produce a disk drive could be purchased in Asia. The revealed global strategies of American and Japanese firms could not have been more different. By 1990, eight years after the first HDD was produced in Singapore, American firms assembled two-thirds of their disk drives in Southeast Asia. What began as a variation from the norm became a collective phenomenon. In contrast, Japanese companies assembled almost none there, and only 2 percent in the rest of Asia. Japanese companies instead continued to manufacture predominantly in Japan, where they produced 95 percent of their disk drives.

Southeast Asia was clearly the location of choice for American companies, and their strategy increasingly confined the Japanese to niches in the high-capacity segments. This was a surprising switch since high-volume, low-cost manufacturing is an area where the Japanese traditionally excel. Eventually the success of the American firms impelled the Japanese to follow with investments in Southeast Asia. Between 1991, when Fujitsu began production in Thailand, and 1996, all the principal Japanese HDD firms gradually shifted manufacturing to Southeast Asia, principally the Philippines.

By 1991 Fujitsu had reached the maximum capacity of its Yamagata, Japan HDD facilities and was searching for ways to expand HDD production capacity. In addition to expanding the Japanese facilities and investing in the U.S. as it had done in the past, Fujitsu decided to manufacture drives in Thailand and retooled an existing recording heads facility for production of low capacity 3.5 inch drives. Production stayed at low levels until 1993 when the appreciation of the yen forced Fujitsu to move a large share of its manufacturing to Thailand. By the end of 1995 Fujitsu was doing nearly all of its volume manufacturing at the Thailand facility and a new facility in the Philippines. The President and CEO of Fujitsu Computer Products of America cited the move to Southeast Asia as one of the prime factors behind the company's rapid growth in 1996. Fujitsu doubled its worldwide hard drive revenues for 1996 and experienced a 123 percent growth in shipments (compared with overall 1996 market growth of 17 percent). NEC, Hitachi, and Toshiba soon joined Fujitsu overseas. NEC completed its own HDD facility in the Philippines in 1995 and increased its off-shore production to 75 percent of total HDD output. Hitachi also made its first HDD investment in the Philippines in 1995 and now has 90 percent of its 2.5" disk drive production in the Philippines, and now makes all 3.5" drives there as well.

By 1995 over 64 percent of the world's disk drives were produced in Southeast Asia generating nearly 61 percent of the industry's revenue. HDD production in the U.S. fell to below 5 percent of world shipments which generated less than 9 percent of world revenues, while production in Japan fell to 15.7 percent of shipments and 13.3 percent of revenue. By 1995 Japanese firms had greatly increased their presence in Southeast Asia, producing nearly 55 percent of their HDDs in the region. Virtually all of the remaining drive production of Japanese firms was still located in Japan — 45 percent compared with 18 percent still located in the U.S. or Japan for U.S. firms.

Between 1990 and 1996 employment in the HDD sector in Malaysia rose to 31,000 and sales rose to 4.5 billion Malaysia Ringgit.

Despite a relatively long history as a site for foreign direct investment in electronics, the first hard disk drive (HDD) investment came to the Northern Region of Malaysia only in 1988, seven years after the industry first came to Singapore and five years after Seagate first invested in Thailand. The pioneers included both drive assemblers and component suppliers, but for a number of fortuitous reasons, the region has never become a major center for hard drive assembly (HDA). Seagate maintains one of its four major overseas assembly facilities in Perai, but except for production of cartridge drives by Syquest, Iomega and the newly launched Castlewood, no other drive assembly takes place in the region.

Nonetheless, Northern Malaysia has come to occupy an important niche in the regional and global division of labor as a producer of two key subassemblies:  the "head complex" (heads, head gimbal assembly [HGA] and head stack assembly [HSA] and an emerging media cluster housed in part in the Kulim Hi-tech Park in the state of Kedah.

The two pioneering firms — Maxtor and Conner — entered through an extension of Singaporean operations, beginning initially with component production. The storage divisions of DEC and H-P did not have Singapore operations, but H-P's decision was influenced by long experience in Penang itself. Seagate, finally, entered through the acquisition of Conner although the HDA operations in Perai reported to Singapore as well.

Head Complex

The "head complex" encompasses four steps. Wafer fabrication is a highly capital-and technology intensive activity, and remains concentrated overwhelmingly in the U.S. and Japan. Slider (head) fabrication — whether older ferrite metal-in-gap (MIG) technology, thin-film inductive heads, or the now-dominant thin-film MR heads — has both capital (ion milling, photolithography and vacuum technology) and labor-intensive steps, but the two typically are located together. Head-gimbal assembly (HGA; attaching a single head to a flexure or suspension arm and a wire/tubing assembly) and head stack assembly (HSA; attaching the HGA to an actuator arm and increasingly to flexcircuit subassemblies) and testing, by contrast, have traditionally been labor intensive activities. However, HSA involves componentry, including the actuator that holds the heads and flexcircuit assembly, which are increasingly demanding in terms of both basic technology and production capabilities. There is a growing tendency for HSA to be a stand-alone subassembly, and headstack assemblers are increasingly working with suppliers to add value, for example, by integrating flexcircuit and actuator design. At present, only Quantum and Seagate are fully vertically integrated in HSA.

Seagate is the behemoth of the drive industry in Northern Malaysia, and its slider-HGA-HSA operations are substantially larger than its assembly ones in terms of employment although not sales; at the end of 1996, Seagate had 10,000 workers in slider fabrication and HGA-HSA in Penang and another 3,500 at new facilities in Ipoh in the neighboring state of Perak which are managed by the Penang facility; these numbers compare to 4,500 workers at its assembly operation in Perai on mainland Penang.

Media

Like the production of heads-HGA-HSA, media manufacturing is a multi-staged production process that is increasingly spread across multiple locations, both globally and within Southeast Asia. As with heads, this is partly due to differing skill and natural resource requirements at different stages; for example, polishing, texturing and cleaning of substrates is relatively labor intensive, while other stages in the process are highly intensive in the use of water. As with heads, and with HDA itself, firms differ in their degree of vertical integration. (Figure V-1)

In the 1990s, Northern Malaysia witnessed a strong clustering of media production, beginning with a crucial investment by Komag that became operational in 1992 and sparked the interest of other producers (a demonstration effect) and suppliers (linkage effects). The opening of a science-based industrial park at Kulim in the neighboring state of Kedah, roughly 40 minutes from Penang, attracted several key investments in aluminum substrates in the mid-1990s. The Northern Region of Malaysia (along with Singapore) now houses one of the largest concentrations of media manufacturers in the world.

Figure V-1.  World Producers of Blanks, Substrates and Media