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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

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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

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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.

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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.

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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.

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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;

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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).

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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.

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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.

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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.

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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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HARD DISK DRIVES 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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320 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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322 U.S. INDUSTRYIN2000 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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HARD DISK DRIVES 323 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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324 U.S. INDUSTRYIN2000 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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HARD DISK DRIVES 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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326 U.S. INDUSTRYIN2000 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. REFERENCES Anderson, P. (1995). "Microcomputer manufacturers" in Organizations in Industry: Strategy, Struc- ture and Selection, Glenn R. Carroll and Michael T. Hannan, eds. New York: Oxford University Press. Aoki, M. (1988). Information, Incentives and Bargaining in the Japanese Economy. New York: Cam- bridge University Press. Aoki, M. (1990). "Toward an economic model of the Japanese firm." Journal of Economic Literature 28(March): 1-27. Aoki, M., and N. Rosenberg. (1987). "The Japanese firm as an innovating institution." CEPR Discus- sion Paper No. 106. Stanford University. Bashe, C., L. Johnson, J. Palmer, and E. Pugh. (1986). "Disk storage," in IBM's Early Computers. Cambridge, MA: MIT Press. BT (Business Times). (May 3, 1993). "Plugging into and Asian gold mine." BT (Business Times). (April 1, 1997). "NSTB spins off seven research institutes." 2. BW (Business Week). (February 6, 1984). "The disk-drive boom has suppliers spinning." 68. BWI (Business Wire). (September 12, 1997). "Maxtor to enter server disk drive market." BWI (Business Wire). (June 17, 1997). "Fujitsu ranked the fastest growing hard drive manufacturer." CDSN (Computer Data Storage Newsletter). (1996). Vol. 9, no 10. Mike Cannon, President & CEO of Maxtor: "We'll be profitable in 1997." 1. Chandler, A. (1990). Scale and Scope: The Dynamics of Industrial Capitalism, Boston: Belknap Press. Christensen, C.M., and J.L. Bower. (1996). "Customer power, strategic investment, and the failure of leading firms," Strategic Management Journal 17:197-218. Christensen, C.M., and R.S. Rosenbloom. (1995). "Explaining the attacker's advantage: Technological paradigms, organizational dynamics, and the value network," Research Policy 24:147-162. CI (Computergram International). (January 13, 1992). "Thailand: Fujitsu slashed local production of small hard drives as prices collapse." COM (COMLINE Daily News Computers). (October 9, 1995). NEC hard disk drive plant in Luzon now operational. COM (COMLINE Daily News Computers). (April 15, 1988). "Competition Increasing Between Japa- nese and U.S. Magnetic Disk Drive Makers."

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