Contents - AL-Tax

7.3 Value of Customer Relationships 105manufacturing operations, which they naturally attempt to keep fully utilized. 2 SeagateTechnology produces approximately 85% of its disk requirements internally,and outsources the balance to a combination of vendors. Hitachi manufactures mostof its glass-based media requirements internally, while independent suppliers manufacturethe majority of Hitachi’s aluminum disk requirements. With its acquisitionof the Komag Group, Western Digital Corporation now manufactures a large proportionof its magnetic disk requirements internally. Samsung Electronics, Inc., ToshibaCorporation and Fujitsu are substantially smaller disk drive suppliers. While they donot produce disks, they are integrated forward into the manufacture of computers.The number of firms on both sides of the markets for disks and heads has progressivelydeclined over the past two decades, despite the recent, dramatic annualincreases in demand for digital storage capacity. Disk drive manufacturers numbered77 in the mid-1980s; there are now only 8 such firms worldwide. 3,4 Thenumber of magnetic disk and head suppliers has likewise diminished sharply overthe same period. Consolidation on both sides of the markets for magnetic mediaand read-write heads has been driven largely by the capital-intensive nature of diskand head manufacturing processes and the need for enormous investments in R&Don an annual basis. Read–write heads, which most disk drive suppliers now produceinternally, are manufactured with thin film and photolithographic processessimilar to those used to produce semiconductor integrated circuits. The manufacturingprocess entails more than 300 steps, virtually all of which take place in cleanroom environments. Disk drive customers, such as Dell, IBM and Hewlett-Packard,demand constant improvements in storage capacity, spindle rotation speed (whichin turn influences the speed of data access), average seek time (the amount of timeneeded to position a head over a selected track on a disk surface), etc.Magnetic disk manufacturing equipment is highly automated, facilities consistlargely of clean room environments, and manufacturing technologies are extremelysophisticated, a necessity in view of the fact that finished disks are made to2 There are advantages and disadvantages to having internal magnetic disk manufacturing capabilities.Disk drive manufacturers without internal capacity have a lower overall cost structure, in thatthey do not incur costs associated with the research, development and manufacture of magneticdisks, much of which are fixed. Conversely, if a firm relies entirely on internal capacity, it may notremain cost-competitive and its disk technology may evolve in ways that are not consistent withthe industry as a whole. IBM found itself in this position, and was motivated thereby to sell its diskoperations to Hitachi. Seagate attempts to avoid this dilemma by using independent suppliers asa benchmark to ensure that its internal operations remain competitive in terms of both yield andtechnology.3 See Wong, Nicole C., “Seagate: The Big Fish in the Shrinking Hard-Drive Pond,” Mercury News,April 15, 2007.4 Moreover, consolidation is still ongoing. At present, Toshiba and Fujitsu are likely targets. Additionally,Hitachi has reportedly been suffering large losses on its disk manufacturing operations,acquired from IBM. (These losses are in part attributable to the fact that Hitachi has not integratedthe acquired operations into its existing operations or rationalized its disk manufacturing facilitiesas a whole.) These losses have prompted speculation that it too may sell off its disk manufacturingoperations.