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OCR for page 287
Hard Disk Drives
DAVID McKENDRICK
University of California, San Diego
The hard disk drive (HDD) industry represents an interesting exception to
received wisdom about American industrial competitiveness. Until recently,
scholars have been pessimistic about the competitive prospects of much of U.S.
industry, observing that "lilt is too late for the United States to regain its position
as the exemplar of best practice in the world" (Kogut, 1993~. Florida and Kenney
(1990) concluded that America may be good at generating new industries but is
bad at sustaining them as they become more mature. American industry in gen-
eral was said to have "attitudinal and organizational weaknesses" leading to
"shortcomings in the quality and innovativeness of the nation's products" (Der-
touzos et al., 1989~. Yet, the experience of the disk drive industry suggests that
these characterizations of American industry need not be its paradigmatic form.
Like many industries that emerged in the twentieth century, the disk drive indus-
try was dominated by American firms during its early years. Unlike other indus-
tries, however, the United States never relinquished its leadership. American
companies hold more than 85 percent of the global market, an even greater share
than they did in the late 1970s.
Why has the United States been so consistently successful in this industry?
This paper argues that the industry's globalization was an important factor in
iThis research was supported by the Alfred P. Sloan Foundation, grant numbers 95-6-13 and 97-1-
10. The author is grateful to Allen Hicken, John Richards, Peter Gourevitch, Roger Bohn, Frank
Mayadas, and David Mowery for careful and insightful comments on an earlier draft. For assistance
with data collection and compilation, the author thanks Allen Hicken. He also thank James Porter,
president of Disk/Trend, Inc., who not only reviewed this paper but also has generously shared his
data, time, and knowledge about the disk drive industry. Mark Geenen, president of TrendFOCUS,
Inc., kindly provided data on the media and heads segments of the industry.
287
OCR for page 288
288
U.S. INDUSTRYIN2000
sustaining the American competitive advantage. This is not to say that other, less
global factors often invoked to explain the success of certain nations in particular
industries do not apply to the disk drive industry. Home market demand, form of
industrial organization, innovative capabilities, and the role of institutions, such
as universities, government agencies, business associations, and other regional
and national entities all play or have played some role in the industry's evolu-
tion. The principal point here is that foreign investment not only complements
innovation, style of industrial organization, and the favors conferred by historical
chance, but it is also critical to sustaining industrial performance.
The disk drive industry offers a fascinating context for charting globalization
as well as industrial evolution more broadly. American disk drive firms in par-
ticular have accumulated the organizational skills necessary for managing the
geographic separation of R&D, production, and distribution to achieve econo-
mies of location. This kind of dispersion has been increasing in other industries
as well, but, because the HDD industry is farther ahead than most in globalizing
its activities, its experiences may provide a glimpse of what may come for other
parts of the American economy and a touchstone for the maintenance of indus-
trial leadership.
NATIONAL EMBEDDEDNESS AND PATH DEPENDENCE
The home market confers advantage upon national firms, and the success of
customer industries confers success upon their suppliers. This national embed-
dedness is especially true for nascent industries. An industry emerges through
the cumulative interactions of entrepreneurs and organizations. Interdependen-
cies are established through the sharing of information and resources, and clus-
ters of firms begin to form (Van de Ven and Garud, 1989~. Clusters are largely
national or regional phenomena, with firms serving national customers before
growing through foreign trade and investment (Chandler, 1990~. Ties among
national firms persist as they expand into international markets. In his study of
competitive advantage, Porter (1990: 138) finds that "a group of internationally
successful domestic firms, selling worldwide, channelLed] global demand to the
domestic supplier industry."
The Origins of the Disk Drive Industry
One possible explanation for the success of the American HDD industry,
therefore, is American success in the computer industry. This explanation seems
reasonable on the face of it. At the time IBM shipped the first rigid disk drive in
1956, the United States was already the world's dominant computer producer and
exporter. Although Europe contributed enormously to the technical development
of the early computer industry, American firms led the world in computer instal-
lations, and many of these same firms developed their own HDDs. General Elec
OCR for page 289
HARD DISK DRIVES
289
trio, Control Data, Burroughs, and Digital Equipment followed IBM's entry into
HDDs in the 1960s. Some independent companies, such as Bryant Computer
Products and Data Products, also emerged in the early 1960s to develop disk
drives for sale to computer manufacturers that had not yet made their own, nota-
bly Sylvania, RCA, Honeywell, and Univac. In the late 1960s, after IBM secured
its position as the clearly dominant mainframe maker, a new wave of independent
companies emerged to make disk drives that were "plug compatible" with IBM
systems: Memorex, Potter Instrument, Marshall Laboratories, and Information
Storage Systems. Without incurring IBM' s R&D expenses, the plug compatible
companies were able to offer disk drives identical to or better than IBM's at a
much lower price. Plug compatibility was not limited to IBM systems but ex-
tended to systems made by other computer manufacturers as well.
A parallel trend, but on a smaller scale, was evident in Japan and Europe. In
Japan, the principal computer companies made their own disk drives: NEC,
Fujitsu, Hitachi, and Toshiba all entered in the mid-to-late 1960s. Only in the
1970s did Japanese companies attempt to market disk drives to non-Japanese
customers in the U.S. market; until then the size of the market for Japanese com-
puters limited the market for their disk drives. A smaller domestic market also
meant fewer independent Japanese disk drive companies entered in the 1970s as
alternative sources of supply; the principal ones were Mitsubishi and Hokushin
Electric Works.
In Europe Siemens and Philips made disk drives for their own computer
systems, while Data Recording Instruments and BASE produced for the original
equipment market (OEM). Data Recording Instruments was Europe's first firm
to ship HDDs in 1968. Honeywell-Bull (later CII-Honeywell Bull and then Bull
Peripherals) engaged in both captive and OEM production. In Eastern Europe
COMECON organized the computer industry in such a way that DZU of Bulgaria
was designated as the principal disk drive supplier for all computers in the region
and became the most vertically integrated producer in the world. Only in rare
cases did European disk drives find their way into American or Japanese com-
puter systems.
Thus, throughout the 1960s and 1970s, the relative positions of the U.S.,
Japanese, and European disk drive industries could be explained by incorporation
of their products into the systems manufactured by their respective national or
regional computer industries.2 During the 1970s captive production remained the
largest channel for disk drives, though the relative importance of the original
equipment market grew. Led by Control Data, Diablo Systems, CalComp, and
Memorex, the OEM segment reached $631 million in sales revenues in 1979 but
was still well below the $2.8 billion associated with captive production (Disk/
2A major exception to this general tendency was the success of Control Data in selling to European
computer manufacturers. It claimed the bulk of the world's shipments of "noncaptive" drives in the
1 960s and still almost half by the late 1970s. IBM's disk drives were solely for IBM computers.
OCR for page 290
290
U.S. INDUSTRYIN2000
Trend, 1980~. In 1979, American firms had 81.1 percent of the global HDD
market, Japan 14.3 percent, and Europe the remainder. Between them, IBM and
Control Data controlled just short of 40 percent of the market.
The Personal Computer and the Desktop Disk Drive
Up to this point the story conforms strongly to an explanation of competitive
advantage through path dependence and increasing returns; the large U.S. market
for mainframes, and later minicomputers, gave the American disk drive firms an
unassailable long-term advantage. But it does not account for the divergence in
the fortunes of the American disk drive and computer industries after 1980 when
both came under greater global competitive pressures.
For the computer industry, a watershed event was the debut of the IBM PC in
1981. The PC defined the dominant design in the industry for many years
(Langlois, 1992; Anderson, 1995~. In addition to setting the standard for what a
desktop computer should look like, it featured an open architecture that attracted
the entry not only of some of IBM's established mainframe and minicomputer
rivals but de novo start-ups that set out to manufacture IBM clones. Compaq and
Dell became two of the most important American entrants, but more interesting
are the many new clone makers that emerged outside the U.S., especially Taiwan,
Korea, and Japan. Daewoo, Epson, Hyundai, Acer, and scores of other smaller
companies collectively dispersed the production of computers. As a result, the
global market share of U.S. computer makers steadily eroded during the 1980s
and early l990s. The U.S. share of the worldwide computer market, including
mainframes, fell from 88 percent in 1983 to around 56 percent by 1992. During
the same period Japanese market share in the computer industry increased from 8
percent to 30 percent.3
The same open architecture that attracted the new clone manufacturers also
stimulated entry into peripheral equipment. Where mainframe and minicomputer
manufacturers made many of their own peripherals and components, the assem-
blers of personal computers almost entirely outsourced their production. Japa-
nese, Korean, and Taiwanese producers of keyboards, floppy disk drives, moni-
tors, DRAMs, and motherboards displaced U.S. firms in peripherals and
components even more dramatically than American companies had been dis-
placed in the PC market.
Given these trends, and the development of national clusters of computer-
related capabilities in these countries, one might have expected other Asian com-
panies to erode America's position in HDDs. Much the same competitive dy-
namics faced the HDD industry as disk drives were adapted to fit into a PC.
Drive sizes decreased from 14-inch and 8-inch diameters in the 1970s to 5.25
inches in 1980 and 3.5 inches in 1983. An explosion of some 100 new entrants,
3Global computer market shares were calculated from the Datamation 100 for various years.
OCR for page 291
HARD DISK DRIVES
291
intense competition, and shakeouts occurred between 1980 and 1996. By 1996
fewer firms made disk drives than at any time during the previous 20 years (Fig-
ure 1~. The HDD landscape became littered with the graves of once prominent
· · .
Amencan compames.
But whereas most of the rest of the Amencan computer peripherals industry
has largely vanished, the Amencan HDD industry remained dominant in the face
of competition from Asia and Europe.4 Although U.S. firms such as Pnam,
Pra~netek, Conner Penpherals, Ministor, and Hewlett Packard exited, so did firms
from other countnes. Mitsubishi, Matsushita, Rodime (the first firm to introduce
the 3.5-inch disk dnve), Olivetti, BASE, Sony, Philips, and Siemens are among
the formidable foreign companies unable to remain in the industry. Asian and
European PC makers bought HDDs from U.S. firms. South Korea, for example,
depended almost entirely on Amencan companies to meet the HDD requirements
of its major PC exporters (MR, l991~. In Europe PC companies such as Amstrad
also purchased Amencan disk dnves. Compared with the computer industry, the
Amencan HDD industry held a roughly steady 75 percent of the global market
throughout the 1980s and then increased its share to more than 80 percent by
1992 (Figure 2~. By 1995 U.S. global market share reached 85 percent, where it
had been in the early 1970s.
80
70
60
to
- 50
LL
° 40
a)
~ 30
no
20
10
~
Total Number of Firms
/
Entries
_~
\
-
Exits
CD ~ 0 0 0 ~ ~ ~ ~ Us (D
~ ~ ~ rot oo oo oo of co oO oO
0 ~ ~ ~ ~ 0 ~ ~ ~ ~ ~
Year
FIGURE 1 Number of firms in the HDD industry, 1976-1996.
rat oo 0 0 ~ cot ~ ~ us (D
oo on oO ~ ~ ~ 0 cr
~ 0 cn ~ 0 ~ 0
4An important exception is the printer industry. Although the United States lost the impact printer
market, it has a huge lead in laser printers.
OCR for page 292
292
90
80
70
60
50
a,
40
30
20
10
O
U.S. INDUSTRYIN2000
i
_ _ _ _
U.S Compute
Japanese Computer
-
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
thy) O ~CO ~lO By ~ 0 A) O ~N ~Jo 10 CC)
r- Go of) ~a:) oc) Go Go co oo oo o) CD o) ~CO CO CO
01 ~CD ~ ~CD CD ~can ~
Year
FIGURE 2 HDD and computer market shares, 1979-1996.
Source: The Data Storage Industry Globalization Project Worldwide; Disk/Trend, Inc.
Although the market share for American computer manufacturers fell
throughout the 1980s, the American floppy drive industry practically disappeared,
and the world increasingly turned to non-American suppliers of other computer
components and peripherals, American firms continued to be the overwhelming
source for HDDs. It is clear that the disk drive industry owed its birth to the
American computer industry. But given the fate of other computer peripherals, a
path-dependence argument is incomplete. The United States has been the inven-
tor of other promising technologies that it relinquished to the Japanese. Why
could it hold onto HDDs but not floppy disk drives, monitors, or optical storage
devices? One possible factor is innovation.
INNOVATIVE CAPACITY
Many argue that Japanese and American firms have distinctly different meth-
ods of innovation and innovative capabilities compared with their Western coun-
terparts. Japanese firms are said to possess several organizational, incentive, and
communication advantages that are conducive to innovation (Aoki and Rosen-
berg, 1987; Aoki, 1990~. The Japanese system has its strengths and weaknesses
relative to the stylized facts about American innovative capabilities. New prod-
uct introductions tend to be faster; strengths in incremental product modifications
based on careful engineering make Japanese firms better at innovations along a
predictable technological trajectory (Imai et al., 1985; Odagiri and Goto, 1993;
OCR for page 293
HARD DISK DRIVES
293
Mansfield, 1988~. However, the links between scientific research and invention
are weaker in Japan than they are in the United States. Although Japanese firms
are adept at "the better known, closer-at-hand technologies," they are less suited
to choose "bolder, riskier, and more visionary technologies" that lead to pivotal
new products or process technologies (Okimoto and Nishi, 1994~.
Given these characteristics, Japanese firms would be expected to perform
better in situations where continuous incremental improvements, tight engineer-
ing tolerances, and manufacturing strength are the bases of competitive success
and less well in segments incorporating radical or unproven technologies that rely
on more fundamental technical research.
Innovations in Disk Drives
Rapid product or process innovation is a necessary condition for competitive
success in all high-technology industries. This is especially true for disk drives.
Although technological advances in semiconductors have generally been credited
for most of the price and performance improvements in computers, fewer people
are aware that progress in disk drive speed and capacity kept pace. The amount
of data that can be stored on a square inch of a disk grew almost 30 percent a year
between 1957 and 1990; since then it has increased about 60 percent a year. Data-
transfer rates have increased while average access times have fallen. Between
1980 and 1995, the price per megabyte of storage fell at an annual rate of 40
percent (CRN, 1997~. All of these advances were accomplished on increasingly
smaller disk drives. Since the 1970s the disk drive's size, called form factor, has
decreased, from 14 inches to 5.25 and 3.5 inches in the 1980s. These "architec-
tural innovations" (Henderson and Clark, 1990) challenged the competencies of
incumbent disk drive companies, and the inability of firms to make the transition
to smaller form factors has been cited as a central reason behind firm failure
(Christensen and Bower, 1996~. Can U.S. success in the industry be explained by
the greater innovative capabilities of its firms?
One American company, IBM, served as the technological fountainhead for
the industry and continues to demonstrate remarkable technological leadership.5
As Table 1 shows, IBM established the industry and introduced many key inno-
vations the first removable disk pack drive, the Winchester standard, the first
drive with ferrite, thin film, and magneto-resistive heads, and the first 8-inch disk
drive, which proliferated with the development of minicomputers. More than any
other institution, IBM displayed engineering brilliance in overcoming critical
technical constraints. The 1301 disk drive in particular pioneered in areas that led
to follow-on improvements in storage density and access times. Nonetheless, the
co-evolution of technology and competition in the HDD industry confounds the
5For a technical history of IBM's first 25 years of innovation in the industry, see Harker et al.
(1981) and Stevens (1981).
OCR for page 294
294
TABLE 1 IBM "Firsts" in the HDD Industry
U.S. INDUSTRYIN2000
Disk
Number Diameter
Firsts in HDD Model Year Megabytes of Disks (inches)
First disk drive
First disk drive with a~r-beanng heads
First disk drive with removable disk pack
First disk cartridge drive
First disk pack drive
First disk drive with ferrite core heads
First track following servo system.
First disk drive with low mass heads,
IBM RAMAC
IBM 1301
IBM 1311
IBM 2310
IBM 2311
IBM 2314
IBM 3330-1
IBM 3340
lubricated disks, sealed Winchester
First disk drive with thin film heads IBM 3370
First 8-inch HDD IBM 3310
First disk drive to use MR heads and PRML IBM 681
1956 5
1962 28
1963 2.68
1965 1.024
1965 7.25
1966 29.2
1971 100
1973 70 4
1979 571.4
1979 64.5
1990 857
50
25
6
1
6
11
12
7
24
24
14
14
14
14
14
14
14
6 8
12 5.25
Source: Quantum Corporation web page based on information in Disk/Trend, Inc.
conventional wisdom about differences in Japanese and American innovative ca-
pability in two ways.
First, Japanese firms have been stronger than theory would predict in techno-
logically advanced new products. One measure of this strength is the shift to
different form factors, each representing architecturally distinct product genera-
tions. IBM introduced the 14-inch and 8-inch form factors, but since then young
entrepreneurial firms, rather than older incumbents, have pioneered most archi-
tectural innovations (Christensen and Rosenbloom, 1995~.
Theory suggests that Japanese firms would lag behind their American com-
petitors in the shift to new form factors. At first glance this seems to be the case.
Eight of the first ten companies to introduce 5.25-inch drives were American, led
by Seagate in July 1980. The other two were European Rodime and Olivetti.
Three other firms shipped 5.25-inch drives by the end of 1981, but only one of
those, Nippon Peripherals, was a Japanese firm. By the end of 1982, 13 more
firms had begun shipping 5.25-inch drives, 7 of these were Japanese firms, in-
cluding Fujitsu and Hitachi. In 1983, 14 more firms, 5 of which were Japanese,
made the shift to 5.25-inch drives. Thus, from 1980 to 1993 only 13 of 41 HDD
firms that shipped 5.25-inch drives were Japanese, and these firms were a year or
more behind in introducing their drives. Among firms that still made disk drives
at the end of 1996, however, the Japanese were quicker than most of their U.S.
counterparts in moving to 5.25-inch drives. Fujitsu, Hitachi, and NEC all shipped
5.25-inch drives before or concurrently with Quantum, Maxtor, Micropolis, and
IBM. Western Digital, another leader in 1996, did not make disk drives until
1988 when it acquired Tandon's HDD operations.
OCR for page 295
HARD DISK DRIVES
295
A similar story can be told regarding the shift to the 3.5-inch form factor.
The European company Rodime was the first to ship 3.5-inch drives, in Septem-
ber 1983, and the next three were American Microcomputer Memories, Micro-
science International, and MiniScribe all of which shipped in 1984. The first
Japanese firm to ship a 3.5-inch drive was Nippon Peripherals in February 1985.
All five of these early innovators have since exited the industry. Of the HDD
firms surviving at the end of 1996, the first to ship 3.5-inch drives was Hewlett
Packard in March of 1985; but Hitachi, Fuji Electric, NEC, and Fujitsu followed
close behind. More important, as occurred with the transition to 5.25-inch drives,
these Japanese firms were quicker to make the shift to 3.5-inch drives than every
U.S. firm that is a leader today. IBM did not introduce 3.5-inch drives until May
1986. Seagate first shipped 3.5-inch drives during the third quarter of 1987, the
same date the Japanese firm Toshiba began shipping and one year after the Japa-
nese firm Seiko Epson had begun shipping 3.5-inch drives. Quantum and Maxtor
did not make the move into 3.5-inch drives until 1988, and Micropolis waited
until 1991. In the shift to the 2.5-inch form factor the Japanese firm JVC was
among the first movers. Other Japanese firms were no slower at adopting the new
form factor than surviving American firms.
Japanese firms have also been among the leaders in incorporating advanced
technology in their disk drives, specifically the new, thin film magneto-resistive
(MR) recording heads. MR heads are designed to read media with very high
recording densities and are the reason that growth in are al density the amount
of data that can be squeezed onto a given space of a disk had jumped up to a 60
percent annual rate since 1990. Unlike previous head technologies that function
like small electromagnets, MR heads use a thin strip of magneto-resistive mate-
rial deposited on the head that senses the strength of the magnetic patterns on the
disk and creates corresponding electrical pulses. The MR strip cannot write data,
however, and so a traditional thin film component must be placed on the head
next to the MR strip (Quantum, 1997; EBN, 1996; BET, 1996~. Because the
switch to MR heads requires corresponding changes in media and electronics
technologies and because they are very difficult to make, many companies have
been slow to commit resources to the new technology, choosing instead to try to
increase capacity through conventional technologies.
Stylized notions of American and Japanese innovative capabilities suggest
that U.S. firms would be more likely to move first into smaller market segments
with more sophisticated technology while abandoning to firms from other coun-
tries the market segments dominated by older technology. American firms would
thus be expected to lead the way into MR technology. Similarly, some would
argue that Japanese drive designers would push technological improvements us-
ing the inductive thin-film technology with which they are familiar rather than
make the complex shift to MR heads. In one sense these suppositions are true;
IBM invented MR technology and entered the market with it almost three years
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296
U.S. INDUSTRYIN2000
before the nearest competitor. Yet, three of the next six companies to introduce
disk drives with MR heads were Japanese companies.
Moreover, Japanese technological strength is further revealed by looking at
the are al density of a disk drive. Areal density encapsulates in one picture a
company's ability to bring together head and media technologies and is a major
feature of the technology race in HDDs. As Table 2 shows, the Japanese are also
among the leaders in areal density. The table ranks firms according to the disk
drive with the highest areal density each offers as of 1997 (Disk/Trend, 1997~.
Once again, though IBM is clearly far ahead, three of the top five are Japanese.
This ranking changes frequently, as the newest product to the market seems to
embody the highest areal density, but the illustration nonetheless demonstrates
Japanese innovativeness.6
A second exception to the conventional wisdom is that Japanese firms have
also been weaker than theory would predict. Within a given form factor, technol-
ogy has evolved in ways that should have given the Japanese an advantage. All
companies have technology roadmaps, and technological progress has moved
along well-known paths, especially in the technological development of the cur-
rent generation of disk drives employing inductive thin film heads and disks.
IBM was the first company to ship disk drives with thin film inductive heads in
1979; drives with thin film media appeared four years later. Innovations in areal
TABLE 2 Highest Areal Density, as of May 1997
Company
Areal density (megabits per square inch)
IBM
Hitachi
Quantum
Toshiba
Fujitsu
Maxtor
Seagate
ITS
Micropolis
Samsung
2638.0
2013.0
1646.0
1308.0
1300.0
1193.0
1108.0
1008.0
959.2
884.0
Source: Disk/Trend Report, 1997.
6Firms also competed in the desktop market in terms of "volumetric" density or how much capacity
one could cram into the slot allotted to the disk drive. One trick in mechanical design was the
introduction of "half-high" disk drives in which more disks were stacked closer together. A company
might be a leader in areal density (data on a disk) but a laggard in volumetric density. Some say that
IBM did not understand this distinction. Unfortunately, systematic data to test this notion are unavail-
able. I thank Frank Mayadas for bringing this to my attention.
OCR for page 297
HARD DISK DRIVES
297
density during the next decade involved improvements to these two increasingly
understood technologies. Japanese firms would thus have been expected to ad-
vance more quickly along this technological trajectory while simultaneously ob-
taining cost advantages through more efficient manufacturing, but the reverse is
in fact true. American firms have dominated this largest segment of the disk
drive market and are making interesting adaptations to the basic technology.7 In
this way, American firms have been most responsible for extending the life of
inductive head technology, which innovation theory would not predict.
Overall, there is little evidence that the Japanese are less innovative than
successful American companies according to these key measures. They have not
been far behind their U.S. competitors on the technological frontier, and they
have even introduced advanced new products before leading U.S. companies.
Although innovation has been necessary for all companies to stay in the game, it
has not been a sufficient condition.8
FORM OF INDUSTRIAL ORGANIZATION
Many scholars argue that the Japanese form of industrial organization, with
its complex interfirm relations, may have distinct advantages (Aoki, 1988;
Gerlach, 1992; Teece,1992~. Although the evidence comes almost entirely from
the automobile industry, the general claim is that Japanese firms are less verti-
cally integrated than their American counterparts and maintain closer relation-
ships with suppliers, often through some equity holdings (Aoki, 1990; Hill, 1995;
Dertouzos et al., 1989~. By combining market incentives with relational con-
tracting, Japanese companies are reportedly more cost effective, flexible, and
faster in coordinating operations than their more vertically integrated competi-
tors. Was there, ironically, something about the American form of industrial
organization that sustained U.S. advantage in the HDD industry?
Backward Integration: Components and HDD Assembly
The basic issue is whether Japanese and American disk drive firms practiced
different methods of organizing production and delivery. I focus on four of the
most important disk drive components the recording heads that read and write
the data, the disk to which data are written and stored, the motor used to rotate the
7Improvements to inductive technology include "proximity" or virtual-contact heads. These in-
volve significant enhancements to etched air-bearing and transducer technologies.
sit is important to note that I have not addressed the ability of firms to introduce successive genera-
tions of products. When product cycles are so short, firms face intense pressures to stay competitive
in terms of capacity, performance, and interfaces. Keeping design teams together in such a pressur-
ized environment is difficult. It is possible that American firms have been better at this than those
from Japan and Europe. I hope to explore this possibility in a later paper.
OCR for page 318
318
U.S. INDUSTRYIN2000
side of Japan. In 1995, although it held only a small percentage of the market,
Fujitsu announced its plan to capture 20 percent of the worldwide market for hard
disk drives by the end of 1996. One part of the plan was a commitment to in-
crease manufacturing capacity in the Philippines and Thailand, consistent with
the convergence in global strategy described in the previous section. The other
component was the development of second generation MR head technology and
its incorporation into a larger range of drives. Fujitsu has strong internal mag-
netic recording research and development capabilities, skills surpassed only by
IBM's. In fact, the company experienced more than 100 percent unit growth in
1996 and offers drives with among the highest areal density of any manufacturer
as well as a broadened product line that includes high-end drives for servers.
Although it has a smaller presence in disk drives than Fujitsu, Hitachi has
greater research depth according to some observers. It is strong in science and
has contributed more articles to TMRC than any other Japanese disk drive com-
pany. Hitachi is also the most likely firm to be first after IBM in introducing
giant magnetoresistive (GMR) heads. According to one manager of a U.S. corpo-
rate R&D lab, Hitachi lags behind Fujitsu and American firms primarily because
it has less effective technology transfer.
In 1995, the four largest Japanese HDD firms Fujitsu, Hitachi, Toshiba,
and NEC agreed to form a consortium to research and develop HDDs and data
storage devices. Like NSIC, the Storage Research Consortium intends to spon-
sor work in which industry and universities collaborate. With an expenditure of
$2.2 million, its resources are currently smaller than are NSIC's. But the com-
panies hope to attract as many as 30 others, expand the consortium's resource
base, and involve other parts of the value chain including makers of disks, heads,
circuit boards, and test equipment. Membership in the consortium is open to
foreign companies that have Japanese development or production facilities.
Thus, Seagate is effectively excluded, while IBM, which develops drives in
Fujisawa, and Komag, the world's largest independent maker of disks and with
a Japanese joint venture, presumably are eligible. It is too early to judge the
consortium's impact.
Korean Firms. South Korean firms have been at the edges of the disk drive
industry for more than a decade, but only in the last few years have they made the
financial investments necessary to compete in this high-tech commodity busi-
ness not only for volume manufacturing but also for R&D.
Hyundai entered the industry in 1995 through its acquisition of Maxtor, one
of the most successful American start-ups of the early 1980s. The parent firm has
announced its goal is to become the world's second largest HDD supplier by
2000 and the world's leader by 2005. It intends to invest $1 billion by 2000 and
set up a global network linking production bases in China and Thailand, compo-
nent suppliers in Singapore and Hong Kong, an R&D base in the United States,
and headquarters in Korea (CDSN, 1996~.
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319
Maxtor's U.S. R&D team is the center of Hyundai's disk drive operations.
Maxtor will concentrate on R&D, marketing, and production of high-end HDDs.
Singapore will be the headquarters for procurement and a production plant for
high-end drives. Thailand and China will focus on assembly of low-end units.
Hyundai will also maintain production in Korea, where the firm's storage divi-
sion will be headquartered. Although Hyundai will certainly attempt to strengthen
the technical capabilities of its Korean-based operation, it is unlikely that its U.S.
R&D work can be overtaken in the near term. In fact, Maxtor recently announced
plans to establish a new engineering center in California headquarters, joining its
California-based Advanced Technology engineering group, which focuses on
heads/media integration. The new California engineering center will comple-
ment Maxtor's existing engineering operations in Colorado, where it develops
high-end drives for the desktop PC market (BWI, 9112197~.
For its part, Samsung has announced that it intends to become the fourth
largest HDD company in the world by 2001 (KEW, 1996~. It entered the disk
drive industry initially as an investor in and contract manufacturer for a small
U.S. start-up. After the American company failed in early 1990, Samsung con-
tinued to make its drives and then began to develop its own. But the company
limped along for several years with products just behind the market and scouted
around for acquisitions in recording heads and another disk drive company while
reportedly losing money in the business. It renewed its commitment in 1996
when it completed a $370 million investment in a new HDD plant. Besides
adding to its manufacturing muscle, Samsung continued to build up its develop-
ment center in San Jose, California, where it had been developing disk drives
since the early 1990s. The center is responsible for advanced engineering, prod-
uct development and qualification, marketing, product planning, and technical
support. With its new manufacturing and R&D resources, some observers think
Samsung has the potential to be a force. But given its earlier problems in product
development, R&D is likely to stay centered in California for some time.
Singapore's Data Storage Institute. Singapore has organized an intensive
effort to move up the technology ladder in the HDD industry and has established
a Data Storage Institute. Started in 1992 as the Magnetics Technology Centre, its
role expanded in 1996 when it became one of three new research institutes at the
National University of Singapore. It will receive government support to the tune
of an initial S$30 million for the building and S$55 million over three years. The
new institute will do research and participate in joint programs with multinational
corporations involved in HDD, opto-electronic, and disk media technologies. It
has more than 160 researchers and is expected to train about 40 engineers every
year for employment in the HDD industry.
One interesting aspect of the institute is the help it is receiving from leading
American HDD firms and researchers. IBM and Carnegie Mellon University are
on its advisory panel, more than half its corporate members come from the Ameri
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U.S. INDUSTRYIN2000
can industry, and its first project in 1992 came from Seagate. The institute will
not focus on fundamental research as much as U.S. universities do. Instead, it
will leverage Singapore's strength in HDD manufacturing to improve process
technologies, including testing, as well as offer more direct and immediate sup-
port to industry than do American research universities. It is also exploring inno-
vations at the component level, such as a collaborative effort with IBM, Motorola,
Fujitsu, Hitachi, and a local Singaporean company to "push the benchmarks" on
channel chips that do the read/write function on hard disks.
Early in 1997 the government hived off the Data Storage Institute and other
research facilities into separate and independent companies. Their primary roles
will be to support industry in technology development through "greater respon-
siveness" (BT, 1997~. Given Singapore's place in the global HDD network, and
the government's unique commitment to the industry, the Data Storage Institute
will likely evolve into a center of excellence. At this stage, the institute comple-
ments rather than competes with American university research.
The European "Scotsman" Project. Despite its considerable research base
in magnetics, Europe has only two indigenous disk drive development companies
remaining, Calluna Technologies (Scotland) and Nomai (France), and very few
suppliers of primary components. The "Scotsman" (Strategic Components, Tech-
nologies and Systems in Magnetic Storage) project is a collaboration initiated in
February 1996 under the Esprit research program of the European Union to work
on head technology. In addition to Calluna and Nomai, the other members are
Myrica (U.K.), which is Nomai's development subsidiary; Silmag S.A. (France);
and Xyratex, Ltd. (U.K.), the IBM spin-off. Half the $5 million in funding is
provided by the European Commission and half is provided by the partners. The
primary technology is expected to come from Silmag, which has developed what
some say is a leading recording head technology. Although no one expects Eu-
rope to obtain a leading position as a result of the project, it is intended to main-
tain European expertise in magnetic storage and in the removable disk drive niches
in which Calluna and Nomai operate.
The Relationship between Product Development and Volume Manufacture
In the course of the industry's evolution, pockets of technical sophistication
developed in the United States (the Los Angeles area, Silicon Valley, Minnesota,
Colorado, and, to a lesser extent, the Boston region), Japan, and Europe (the
United Kingdom, the Netherlands, France, and Germany). Through industry con-
solidations, surviving firms have found themselves in possession of R&D assets
in more than one location. At the same time, the shift of assembly away from a
firm's home base means that the management of technical knowledge between
geographically dispersed facilities has become a critical organizational task.
Table 8 lists all HDD firms in operation as of mid-1997 and the location of their
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HARD DISK DRIVES
TABLE 8 Location of HDD Product Development and Assembly, 1997a
321
Product Product
Company development Assembly Company development Assembly
Seagate California, Singapore Hitachi Japan Japan
U.S. Philippines
Colorado, Thailand
U.S. Samsung S. Korea S. Korea
Singapore Ireland California,
Oklahoma, Malaysia U.S.
U.S.
Minnesota, Oklahoma, Micropolis California, Singapore
U.S. U.S. U.S.
China
Iomega Utah, U.S. Malaysia
IBM California, Singapore
U.S. ITS California, India
New York, Thailandb U.S.
U.S.
Japan Hungary SyQuest California, Malaysia
EnglandC U.S.
Quantum California, Japan Avatar California, Thailand
U.S. Singapore Systems U.S.
Ireland
Calluna Scotland, UK EnglandC
Western California, Singapore Technologies Scotland, UK
Digital U.S.
Minnesota, Malaysia Gigastorage California, Chinae
U.S. U.S.
Toshiba Japan Japan Integral Colorado, Singapore
California, Philippines Peripherals U.S.
U.S.
Sequel California, California,
Fujitsu Japan Japan U.S. U.S.
Colorado, Philippines
U.S. Thailand Nomai France EnglandC
Scotland, UK
Maxtor Colorado, Singapore
U.S. Raymond Connecticut, Connecticut,
Engineeringf U.S. U.S.
NEC Japan Japan
Philippines Sagemf France France
aFirms listed in rough order of HDD revenue.
bContract manufacture by Saha Union.
CContract manufacture by Xyratex.
Contract manufacture by Matsushita-Kotobuki Electronics.
eNot yet shipping: in negotiations with the Chinese government.
fMakes small numbers of "ruggedized" drives.
Sources: Author's data.
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product development and volume manufacturing facilities. Locations for compo-
nent development and manufacturing in vertically integrated firms are omitted.
One of the most remarkable characteristics of the HDD industry is that, with very
few exceptions, product development is geographically separated from volume
manufacturing and, among the leaders, by great distances.~5
An important question is whether the trend witnessed over the last 15 years
in the internationalization of assembly will extend to other core organizational
tasks. What are the implications of the growing importance of university re-
search for how globally dispersed a firm's R&D can be? Specifically, will R&D
follow manufacturing offshore, or do other forces act as countermagnets? Is the
industry defying those who argue that remote manufacturing can cause quality
and service problems that outweigh any apparent savings? Three outcomes are
possible: R&D could follow assembly abroad; assembly could return to be closer
to product development; or the industry could reach some manageable equilib-
num.
The likely scenario is that the current organization of the industry will per-
sist. That is, most disk drive design and development, along with pilot produc
tion lines, will remain concentrated in the United States and Japan, and volume
manufacturing will continue to be physically separated and situated in countries
where assembly is cheaper. Firms offer a number of interrelated reasons for why
this kind of organizational arrangement is effective and durable. The short expla-
nation is that product transfer has become straightforward, and any costs associ-
ated with transfer and coordination are paid for with just one day of high volume
manufacturing in a lower cost location.
Typically, companies conduct pilot production proximate to product devel-
opment because of the greater risk with design during initial assembly. Compa-
nies also form product transfer teams consisting of product developers and pro-
cess engineers from both the home product development facility and the volume
manufacturing facility. Today, a product transfer team might be as big as 40
people, and the team stays with the product from pilot through ramp-up overseas.
Then the manufacturing team takes over responsibility for volume assembly.
Seagate's Malaysian facility, for example, has had a good experience with
product transfer and can ramp up quickly. Six to eight engineers in the United
States write the code, do mechanical design and testing, and work with the pro-
cess people in the domestic facility to stabilize yields during pilot production,
which might involve as many as 10,000 drives if the product is especially ad-
vanced. A few weeks before the transfer to Malaysia, quality, operations, and
lead operators in Malaysia go the United States to prepare for transfer. Then six
to ten people from the U.S. team go to Malaysia for 3 to 5 weeks to ensure a good
i5The exceptions are for the very smallest disk drive firms. The last ten companies listed in the
right-hand side of Table 8 had less than one half of one percent of the global market in 1996.
i6This information was provided by the plant manager during the author's visit.
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start. The product release date is typically met because, according to the plant
manager, "transfer is almost routine now, very smooth." Transfer is also effec-
tive to Seagate's Thai facility, which makes less sophisticated products and hosts
fewer U.S. engineers during transfer but sends more staff to the United States
before transfer because its workforce is less skilled.
Western Digital uses a formal new product introduction process that allows it
to achieve 92 percent yields in overseas assembly.~7 The firm has a special group
to manage the process which it claims gives the company an advantage in time to
market, time to volume, and time to high yields. In product design, the company
uses a typical "gating" process common to well-managed high technology firms.
The product concept and then the product itself need to pass certain gates on its
way to manufacturing. These are milestones that have to be met at each step.
Design, engineering-level build, test, and tooling buildup take place in the United
States because there are still bugs that need fixing. Concurrent engineering is
occurring in Asia where production level equipment is introduced and compo-
nents are chosen. Transfer teams to and from Asia then ensure a smooth product
transition. The transfer team from Asia visits San Jose to work on the pilot line to
"wring out" the process, while the U.S. team stays with the product all the way to
ensure manufacturability. The transfer process involves 40 people for 30 days.
An important reason for the success of this model is that both the technology
and the assembly process are better understood than they were 15 years ago, new
products are increasingly designed so that they do not disrupt existing manufac-
turing processes, and computer information systems lower the costs of long dis-
tance management. Although firms vary somewhat in their ability to minimize
changes to products that might otherwise require substantial changes in tooling
for the assembly process, companies try to maintain substantial commonality in
components across products. Western Digital, generally thought of as the leader
in this regard, has 70 to 80 percent commonality between products.
At the same time that companies have accumulated skills in design, transfer,
and ramp-up, the quality of the infrastructure in Singapore and Malaysia has fa-
cilitated technology transfer and rapid ramp-up to volume manufacture. The disk
drive industry has developed a large base of skilled professionals in the region
with specialized industry knowledge, and the Malaysian and Singaporean gov-
ernments have been aggressive in offering complementary services, such as rapid
investment approvals, access to land, and labor training programs. As a conse-
quence, there appear to be considerable cost savings with little lost in product
yields or volume output. As product cycles shorten, ramping up has become even
faster in Asia. In 1995 Western Digital ramped up production from zero to
750,000 units within three months (CRN, 1995~. In 1996 Quantum/MKE went
from zero to 7 million disk drives in nine months (NST, 1996~. Moreover, over
i7This information was provided by a Western Digital vice president during the author's visit to the
firm's Malaysian facility.
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seas assembly does not appear to cost companies in terms of yield. When IBM
shifted production from California to Singapore, it not only ramped up quickly
(from October to December), but it did so with no loss of yield. Like other drive
companies, IBM could find all the engineering and managerial skills it needed in
Singapore, and the Singaporean government facilitated the move by approving
the investment quickly and even leasing IBM a plant that the government had
specifically prepared for disk drive assembly. According to one IBM manager,
the company could ramp to volume manufacturing in Singapore faster than any-
where else in the world, including the United States.
Coordinating technical activities with volume manufacturing across national
boundaries has become standard practice for the industry. The model for Ameri-
can firms is design and pilot production in the United States, fast ramp-up in
Singapore, and matured products and process transferred out to Malaysia, Thai-
land, or China. The system has become routinized, and American firms excel at
it. Other than niche players, firms that did not adopt this organizational model, or
executed it poorly, have all exited the industry.
Summary
Some industry managers and academics involved in magnetic recording see
the current era as a watershed in industrial applications in magnetics, with univer-
sities contributing to industry in fundamental ways. Although differences remain
in the priorities and interests of academe and industry, they have become more
and more aligned. America's university centers have also had profound influ-
ences on the industry in another way; their graduates populate the data storage
industry and in the near future will be its leaders. Some in industry, however,
express mild concern that some U.S. companies, plus the independent U.S. media
and recording head manufacturers, are not investing enough in in-house applied
technology to enable them to absorb and commercialize university research
quickly enough. By contrast, Fujitsu and Hitachi are much more heavily in-
volved in applied technology work, and some American observers fear that the
growing importance of more fundamental technological research will play into
their strengths, especially now that they have also adopted low-cost manufactur
ing strategies.
In the near term the United States and Japan are unlikely to be displaced as
the centers of research and product development. University research in the
United States has become a more significant factor in the industry's technical
evolution; the research labs of the big Japanese firms continue to make important
advances in data storage; and Korean producers depend primarily on U.S. R&D.
The only major impetus to shift the locus of R&D out of these countries comes
from Singapore, which assembles more disk drives than any other country in the
world. Yet even though Seagate and others may elect to do more product devel-
opment in their Singapore subsidiaries, and the Data Storage Institute is making
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325
progress, the technical resources and depth in the United States and Japan con-
tinue to attract investment in R&D.
It also seems clear that American HDD firms know how to manage interna-
tional operations and coordination between home-based product development and
foreign assembly, including its international supply chain. Barring a discovery
that product yields would in fact be greater if assembly were brought home to be
closer to product development, there is little indication that the physical separa-
tion of development and manufacturing cannot be sustained.
CONCLUSION
Path dependence, industrial organization, and innovation all contributed to
American success in the disk drive industry. The American HDD industry was
built by successful computer firms, which enabled the industry to achieve an
early lead over European and Japanese drive manufacturers. In addition, product
development capabilities and some degree of vertical integration have been nec-
essary conditions for industrial performance. Each of these contributed to
America' s initial industrial advantage, yet taken together they are insufficient in
explaining the ability of American firms to sustain their dominance. Differences
between American and Japanese firms along these dimensions do not appear
strong enough to explain the persistence of American leadership in the industry.
This chapter suggests that a potentially important yet overlooked variable in stud-
ies of national industrial advantage may be the scope, timing, and direction of an
industry's overseas manufacturing operations.
By being the first to shift assembly offshore, American firms were able to
learn the organizational technology of international coordination and production.
Although their activities were dispersed, they were at the same time concentrated
in key regions research and development in the United States, labor-intensive
assembly in low-cost Asia, and somewhat more skilled assembly activities in
Singapore (Gourevitch et al., 1997~. American firms combined the benefits of
low-cost, high-volume assembly with sophisticated management of these value
networks. Innovative firms that failed to shift assembly abroad exited the indus-
try or else claimed imperceptible shares of the market.
The history of the disk drive industry differs from other high-technology
industries in additional ways. First, the American HDD industry excels at manu-
facturing. This is contrary to what researchers have observed in other industries,
where Japanese firms are leaders in manufacturing. The business press initially
expected that pattern to hold for disk drives as well: "Once in production, a disk
drive is basically a commodity product that must be assembled as quickly and as
cheaply as possible something that the Japanese are expert at doing" (BOO,
1984~. If anything, they lagged behind American firms in their ability to ramp to
volume manufacturing. Especially interesting is that the vast majority of assem-
bly was conducted in-house. Although companies have frequently resorted to
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contract manufactunng, such arrangements have played a small role quantita-
tively.
Second, the American industry was largely ignored by the federal govern-
ment and university departments during its first two and a half decades. Cer-
tainly, disk drive programs in private firms benefited at least indirectly from fed-
eral monies earmarked for computers and semiconductors. Yet technical progress
in disk drives went largely unnoticed by those outside the industry and was
achieved through heroic mechanical and materials engineering efforts in firms,
especially in IBM, rather than through publicly funded research. Moreover, un-
like software (Mowery, 1996), where the federal government played a prominent
role in developing computer science as an academic field, in data storage the
private sector initiated the establishment of academic programs specifically for
magnetic recording, although the federal government then stepped forward with
critical funding. These programs also emerged much later than those targeted at
the computer, semiconductor, and software industnes.
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Representative terms from entire chapter:
disk drives
