Komag, Inc.

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Komag, Inc.

275 South Hillview Drive
Milpitas, California 95035
U.S.A.
(408) 946-2300
Fax: (408) 946-1126

Public Company
Incorporated: 1983
Employees: 3,600
Sales: $385.4 million
Stock Exchanges: NASDAQ

SICs: 3695 Magnetic & Optical Recording Media; 5045
Computers & Computer Peripheral Equipment

Komag, Inc., is the world’s leading manufacturer of magnetic thin-film disks for computer hard drives. The company’s most important product is sputtered thin-film media, which are data storage components made by depositing successive layers of magnetic material on a disk, then covering it with a protective overcoat. The entire sputtering process must be done in a vacuum. Using this technique, Komag makes and markets thin-film products for several types of disk drives. The most common are the 5/4 inch, 31/2 inch (by far the largest market), and the smaller, increasingly popular Winchester disk drive. Komag currently controls just over a quarter of the market for these products. The company’s customer base is dominated by firms needing the highest capacity and performance available, including such major disk drive manufacturers as Hewlett-Packard, Conner Peripherals, and Seagate Technology. Komag’s disks are among the highest density of their kind commercially available.

Through a joint venture with Japan’s Asahi Glass Co., Ltd., Komag also controls Dastek, the world’s third largest producer of thin-film recording heads, although changes in technology and market conditions make continued production of thin-film heads unlikely. Komag’s product line also includes rewritable optical disks. Komag maintains important strategic connections with Asahi Glass and another Japanese company, Kobe Steel. Those two companies each control over ten percent of Komag’s common stock. Komag operates production lines in three countries: ten in the United States, four in Japan, and one in Malaysia. Together, those facilities ship disks at a rate of over one a second.

Komag was founded in 1983 by Tu Chen and Scott Chen, who are not related to each other. Tu Chen, a former senior researcher at Xerox, served as chairman of the board from Komag’s inception into the mid-1990s. He also served as the company’s secretary in the mid-1990s. Another member of Komag’s initial core group was Stephen Johnson, who joined the company a few months after its creation and held the position of president into 1994. Komag’s early success can be attributed to Tu Chen’s decision at the outset to manufacture thin-film disks instead of the oxide-coated disks that were more common during the early 1980s. To make thin film disks, an aluminum wafer is sprayed in a vacuum with very thin, uniform layers of a metallic film that retains data. Chen saw that the limited storage capacity of oxide-coated disks (five megabytes of data on two disks) would fall short of high-end customers’ data storage needs within a few years. The use of thin-film components enabled Komag to produce disks capable of storing much more data than the standard oxide-coated variety could carry. The company was therefore able to seize a big share of the market for high-capacity disks at a relatively early stage in its corporate life.

By 1986 Komag was bringing in revenue in the range of $20 million a year. Around that time, an industry trend was taking place in which many large, well-established Japanese companies attempted to diversify by forming alliances with young, aggressive American firms. These cash-craving American upstarts were more than happy to receive the funding that such alliances would make available to them for further development. Komag launched this type of partnership with Asahi Glass Company in 1987. That year Komag, Asahi, and Vacuum Metallurgical Company, another Japanese concern, teamed up to form Asahi Komag Co., Ltd. (AKCL). Under the terms of the joint agreement, Komag received a 50 percent interest in the new subsidiary in exchange for use of its sputtered thin-film technology. The two Japanese partners each put up about $11 million to cover the costs of building a 50,000 square-foot production facility in Yonezawa, Japan. The plant sputtered its first disk in June 1988, and a second production line went into action a year later.

Komag’s association with a major Japanese outfit like Asahi, which reported about $4 billion in sales in 1986, gave the company a rather smooth entry into the Japanese market, a difficult task without this sort of corporate escort. Although some of Komag’s competitors, such as Lin Data Corp. and Akashic Memories, had already licensed their magnetic disk technology to Japanese companies for manufacture in Japan, Komag’s arrangement was the industry’s first to be set up as an equal partnership rather than simply a licensing agreement. For 1987, the year of its initial public stock offering, Komag reported sales of $47 million.

As the 1980s continued, Komag sought out further alliances with large Japanese companies, both to ensure its flow of capital for research and facilities and to solidify its market presence in that country. In 1988 Komag formed Komag Material Technology, Inc. (KMT), a wholly owned subsidiary whose purpose was to supply Komag with aluminum substrates used in the disk manufacturing process. Komag sold 45 percent interest in KMT to Kobe Steel in 1989 for $1.4 million. Because Kobe is one of the largest producers of aluminum substrate blanks in the world, this arrangement guaranteed KMT a reliable supply; Komag agreed to purchase KMT’s entire finished substrate output. As a result of this alliance, Komag obtains over 80 percent of its necessary substrate from KMT and Kobe combined.

Between 1986 and 1988, Komag quadrupled its sales to $83.6 million. In 1988 the company turned a profit of $8.6 million. In January 1989 Asahi Glass paid $20 million for one million shares of newly issued Komag stock. The purchase agreement gave Asahi the right to buy additional shares on the open market sufficient to up its stake in the company to 20 percent. Kobe struck a similar deal the following year, paying the same price for the same amount of stock. The deals also assured that Komag would make every effort to get representatives from each of those companies elected to its board of directors. Komag’s impressive growth rate stalled for one year in 1989, when sales inched to only $84.6 million. Much of the computer industry was mired in a slump during that time, and the dramatic slowdown in sales of minicomputers and workstations throughout the United States dragged the demand for Komag’s wares down with it.

Komag entered the thin-film recording head business in 1990. Thin-film heads, a component used in manufacturing disk drives, had been in short supply for a year, and Komag planned to take matters into its own hands. That year, the company purchased the thin-film head facilities of Siemens AG, which was getting out of the disk drive business. By that time, Komag’s growth was back in high gear. After losing $6 million the previous year, the company earned a record $13.4 million in 1990, as sales took a big jump to about $150 million.

A series of transactions beginning in late 1991 sharply increased Komag’s presence in the thin-film recording head business. In December 1991 Komag merged with Dastek Inc., one of the three largest independent thin-film head producers in the world. Komag paid for the deal by issuing about $40 million in new common stock, and Dastek became a wholly owned subsidiary of the company. A few months after the merger, Dastek Holding Company (DHC) was created as an umbrella for Dastek and Komag’s previously existing thin-film head development program, which mainly consisted of what the company had earlier bought from Siemens. Komag then sold 40 percent of DHC, worth about $60 million, to Asahi’s American subsidiary.

By 1992 Komag’s annual sales had reached $327 million. The majority of the company’s net sales, 56 percent, were to firms based in the Far East. Thin-film media accounted for 86 percent of its sales, with thin-film heads making up the remainder. Although Komag’s sales increased to over $385 million in 1993, the company lost nearly $10 million after earning a record $16.9 million the year before. The unexpected and rapid deterioration of Dastek’s finances was the sole cause for this disappointing result. During 1993 Dastek fell victim to a steep erosion in thin-film head prices, caused in part by increased competition from newer metal-in-gap (MIG) recording heads. Dastek had deteriorated so badly that Komag announced late in 1993 that it would be withdrawing from thin-film head production once its existing orders had been filled. Dastek would then concentrate on developing a new generation of recording heads based on magnetoresistive (MR) technology, once funding for the necessary research could be secured.

In spite of Dastek’s woes, Komag achieved a number of milestones in 1993. The company celebrated its tenth anniversary and shipped its 100 millionth disk. In addition, Komag’s Malaysian plant began full production. The plant shipped 500,000 disks and turned a profit, the first one ever recorded by a Komag factory with only one active production line. Komag continued to lead the pack in high-capacity disk production. The transition taking place at the company’s Dastek subsidiary in the mid-1990s was pivotal in determining Komag’s future performance. If the transition to MR recording head production went smoothly, and if MR did indeed turn out to be a key technology in the next generation of data storage devices, then Komag was poised to maintain its strong position in the rapidly changing high-tech marketplace.