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DISK DRIVE INDUSTRY LOOKS FOR WAYS TO GET OUT OF THE SLUMP

It's been a dismal few years for the disk drive industry, suffering from an extended downcycle, falling prices, consolidation of major players, and a perception problem. And everybody in the industry is still talking about what can be done.

At an unprecedented panel recently, the chiefs of major disk drive companies expressed optimism about the long-term health of the industry -- a theme that has been repeated for years. After all, as computer programs get more complex and more information becomes digitised, demand for storage will only go up.

But no-one could shake off the discouraging fact that fewer units are being sold than were expected, while prices are falling faster than forecast.

While desktop PC sales have settled down and are now flat instead of falling, tight corporate budgets mean that even high-margin enterprise drives, used in server computers, are seeing slow sales.

The only bright spark is in the mobile computer arena, where sales are being spurred by users replacing desktop computers with notebooks.

Compounding the industry's frustration is an increasing perception that the disk drive industry is a commodity industry.

While drive companies have been doggedly trimming costs and moving to cheaper manufacturing sites in an effort to remain profitable, many don't understand that disk drive technology is highly sophisticated and requires significant investments in research and development as well as manufacturing processes.

Thus investors are valuing disk drive stocks at a much lower level than, say, PC stocks, despite the similar profit margins experienced by both sectors.

"We have become a cornerstone for many technology applications, but as an industry group we have gotten weaker," said Michael Cannon, chief executive of Maxtor, at the panel organised by Idema, the disk drive industry organisation. "In many regards, I think we have all the disadvantages of being a commodity business without any of the advantages."

"This business requires tremendous attention to detail from product development to technology development to supply chain execution," said Michael Cadigan from IBM's storage group. "The barriers to entry in this business, even though it's perceived to be a commodity business, are quite high."

At the core of the issue is how the industry can boost profits in order to survive. Overbuilding in an effort to gain market share has been a constant problem in this industry, causing overcapacity and accelerating price declines.

The answer, say company chiefs, lies in greater cooperation among drive makers.

"We have to compete in products, but we don't have to compete in processes," said Seagate chief operating officer Bill Watkins, referring to the heavy investment that must go into disk drive manufacturing technology.

He pointed out that the semiconductor industry had figured out long ago how to work together in areas such as equipment 'roadmaps', which make it easier for manufacturers to plan their new products.

"We should cooperate in areas that don't provide a competitive advantage in terms of time to market or customer satisfaction," said Western Digital chief executive Matt Massengill. "We are competing in a lot of areas today where we're not gaining any advantages."

These measures would help the industry cut more costs where it matters, said Seagate's Mr Watkins. "If we were to raise or lower drive prices by US$5, it won't change the number of drives sold. But if we can reduce our cost by, say US$20, we can change the market."

It looks like companies are also understandably wary of repeating the same mistakes in the hot mobile market, which uses a smaller disk drive that is more challenging to manufacture.

Only three drive makers -- Fujitsu, Toshiba, and IBM and Hitachi, which are merging -- are players in this field, and it is unlikely that there is room for many more.

"When we enter a market, we want to be able to gain competitive advantage in doing so," said Maxtor's Mr Cannon. "If a company comes into the mobile market with a me-too product, it drives profitability out of the segment, and it wouldn't be a very satisfying strategy."

In the meantime, Singapore, historically a main base for disk drive manufacturing, is seeing plants move to places such as China. But some analysts say this move may no longer guarantee lower costs, since production efficiency, rather than cheap labour, has become more important in the disk drive industry.

Added analyst Harry Blount from Lehman Brothers: "You have to weigh the cost savings from going into China with the political risks."

Still, not all is lost. In the fourth quarter, disk drive prices may well see a boost, since technical issues associated with migrating to a new, higher-density disk may limit supply in the short term.

Another bright spot is the emerging consumer applications market, fueled by the increasing popularity of game consoles such as the PlayStation and the Xbox, as well as digital video recorders in the US.

Industry research firm TrendFocus estimates that about 10 per cent of hard disk drives shipped in the next year or so will go to the consumer segment, and this percentage is only going to rise.

But the real question on everyone's minds was whether cool heads will prevail and companies will work together to try to keep prices stable -- or even increase prices.

After all, there is no competing data storage technology on the horizon that can even come close to the disk drive's performance, capacity and price.

"I wouldn't bet on it," said an analyst tracking the disk drive industry.

"Most of these companies are publicly listed, and collusion won't be tolerated. They're also not going to be that altruistic and stand aside while other firms try to gain share."