Western Digital Corp.

views updated

Western Digital Corp.

8105 Irvine Center Drive
Irvine, California 92618
U.S.A.
(714) 932-5000
Fax: (714) 932-6629
Web Site: http://www.wdc.com

Public Company
Incorporated: 1970
Employees: 15,000
Sales: $4.1 billion
Stock Exchanges: New York
Ticker Symbol: WDC
SICs: 3572 Computer Storage Devices; 3672 Printed Circuit Boards

Western Digital Corp. is a leading manufacturer of computer hardware equipment, which is then used by the manufacturers of personal computers (PC’s) and network systems to produce their own products. Western Digital not only sells hardware to computer manufacturers, but also serves consumer markets directly through its product replacement items and add-on data storage products, which are sold under the Western Digital brand name. In the late 1990s, Western Digital ranked third behind Seagate and Quantum in terms of numbers of drives shipped and market share. Fortune magazine, however, found in 1997 that among its readers, Western Digital was more admired than either Quantum or Seagate in the computer peripherals sector, citing management and investment value as several of the criteria. Over 15,000 people are employed by Western Digital in ten countries, including Singapore and Malaysia. The company is divided into two business units: the Personal Storage Division—responsible for PC memory storage and comprising 90 percent of the company’s business—and the Enterprise Storage Group, which makes high-capacity hard drives for servers and workstations.

The Early Years

The invention of the computer microprocessor and all that followed is surely matchless in the history of U.S. manufacture. The computer industry is loaded with sweeping epics like that of the rise and tumble of Steven Jobs and Apple Computer, but the Western Digital saga is reasonably serene. While Western Digital miscalculated the evolutionary direction of the computer industry on several occasions, it has always managed to recover and to maintain a significant presence.

In 1970, Western Digital began producing special semiconductors in its incarnation as Emerson Electric Company of St. Louis. Based in Santa Ana, California, the company was financially backed by the Emerson Electric Company of St. Louis and various other independent investors. A year later, the Western Digital appellation was born and headquarters were shifted to Newport Beach, California. Alvin B. Phillips was the founder and president of Western Digital from its inception until 1976. His technical experience in semiconductors was a critical element of the early formation of the company. The most important company event of the 1970s was the manufacture of a 4K RAM chip. Technological breakthroughs multiplied exponentially in this period.

The 1980s proved to be the least predictable period of growth in the electronics/computer industry. The company underestimated the importance of IBM’s PC/XT and its related floppy drives and interfaces. But in 1983, Western Digital engineers produced a wire-wrapped prototype of a hard-drive controller for IBM’s PC/AT in only 14 days. Western Digital then elected to concentrate its attention on supplying components for the newly developed PC market.

Of the innovations that President and Chief of Operations Roger W. Johnson brought to Western Digital in the early-1980s, nurturing a stable of engineering innovators was one of the most important. Within four years of Johnson’s start, sales doubled and earnings grew to $21 million. Among the achievements at Western Digital in the early 1980s was the first Winchester disk drive controller in 1982. Almost 90 percent of Western Digital’s income was coming from storage controller products by 1985. The company was one of the first to choose to provide controllers to the pre-eminent PC manufacturers, such as IBM, Compaq, Hewlett-Packard, and Tandy, thus positioning it for later successes and perhaps foreshadowing Western Digital’s later partnership with IBM.

Expansion in the 1980s

By the mid-1980s, Western Digital was in the position to acquire new business and start off in new directions. MIT worked in concert with Western Digital to develop the “Nu machine,” an artificial intelligence computer later sold to Texas Instruments. Another result of this hybrid team was the “Nu bus”, designed to open Macintosh buses to peripherals. Macintosh had developed several of their own versions of this product, but the Nu bus was chosen over all of them.

The late 1980s brought Kathryn Braun into the administrative spotlight in the Personal Storage Division, and the decisions she made would effect the future success of the company profoundly. In a time of fiscal strength for Western Digital, Braun recommended that the company focus on supplying hard disk storage to Original Equipment Manufacturers, or OEMs— like IBM and its compatibles. By acquiring Tandon drive manufacturers at this time, Western Digital gained a foothold in this growing sector. In Singapore, the Western Digital team labored to convert Tandon’s production line into a smoother and more profitably run facility. Braun succeeded in increasing her division’s annual income from $15 million to more than $2 billion.

Western Digital went on to buy several other smaller peripheral manufacturers, such as Adaptive Data Systems, Paradise, and Verticom. These companies provided Western Digital with key components to diversify and expand. In 1988, Western Digital became a Fortune 500 company. Two years later, the silicon wafer fabrication facility was opened in Irvine, California, and corporate headquarters, Irvine Spectrum, also transferred to Irvine.

Challenges in the 1990s

The early 1990s saw many changes for the worse at Western Digital, reflecting the woes of the computer industry at large. The company reported that large-scale layoffs, financial writeoffs, and debt restructure were necessary to keep Western Digital afloat. A recession similarly affected many other U.S. markets. Charles A. Haggarty was hired at Western Digital in 1992, having come from IBM. At Western Digital, he filled a variety of executive management needs. In 1993, he was first elected director, then chairman, and then chief executive officer of the company. At IBM, his Rochester, Minnesota, storage products team had won the Malcolm Baldrige National Quality Award in 1990. His years of OEM storage expertise were put to good use at Western Digital.

Under Haggarty’s leadership, Western Digital was weaned from stand-alone memory storage to integrated disk drive storage. Western Digital fabricated the first two-platter, 3.5-inch, 340-megabyte drive in 1993. A year later, the first 3.5-inch, 1-gigabyte, 3-platter Enhanced IDE drive was produced. IDE stands for Integrated Drive Electronic, otherwise known as a hard drive interface. An Enhanced IDE was faster, had more expansion options, and handled more material. By 1995, Western Digital’s IDE storage capacity was increased by another half gigabyte. These products were members of the well-received Caviar family of hard drives, which were found in Apples, BullZeniths, Compaqs, Gateway 2000s, NECs, IBMs, and many other PCs.

In 1994, Western Digital was proud to announce that it had become the first U.S.-headquartered, multinational company to be awarded ISO 9001 status by the International Standards Organization. The ISO 9001 status linked all of Western Digital’s operations with a global standard for high-quality processes.

While Western Digital’s revenues increased steadily in the late 1990s, it was still experiencing an industry-wide slump based on increased competition, overproduction of drives that molder in warehouses while inventory values decline, and a struggle to keep up with rapidly advancing technology.

One of Western Digital’s sources of technological weakness was the lack of GMR research advancement. The GMR technology was based on a recently discovered property of certain magnetic materials that increase electrical resistance when exposed to a magnetic field. The resulting sensors are extraordinarily sensitive, making it possible to store enormous amounts of data in the disk. It was speculated that this technology could eventually make chip memory storage obsolete. IBM’s research scientists announced that they had fit “more than 11.6 billion bits of data in one square inch on the surface of a rotating magnetic disk,” according to a February 1998 issue of the New York Times.

Company Perspectives:

Western Digital’s mission is to satisfy our customers’ requirements by providing world-class computing products and services. We will accomplish this mission through investments in people and technologies that generate sustained profitability.

The Turn of the Century and Beyond

The disastrous declines in Asian markets near the end of the 1990s hurt U.S. technology revenues in general, and compounded Western Digital’s woes. Not only did Western Digital manufacture drives in the East, but it sold ten to fifteen percent of those drives there, before selling the remainder in the United States. The declining values of Asian currency had at least one benefit—however temporary—for Western Digital: “Sales in Asia have fallen, but profits are rising,” the New York Times reported in late 1997. “The disk drives are sold in dollars, while the manufacturing costs are incurred in the weakening Asian currencies.” It was predicted that inflation would eventually correct this phenomenon, but Western Digital enjoyed it while it lasted.

Western Digital’s struggle to keep up, technology-wise, led industry experts to speculate that the company was perfect for purchase in 1998. The Orange County Business Journal quoted David Takata, an analyst with Gruntal & Co., in February 1998: “One of the reasons people are speculating about IBM buying a desktop drive company like Western Digital [is that] IBM would gain manufacturing expertise and Western Digital would gain R&D talent.” Takata speculated that Haggarty’s previous relationship with IBM might smooth the way for a takeover. As the situation developed, however, market researcher Jim Porter of Disk/Trend Inc., had a different outlook: “My take on the management out there is they would rather do it themselves. I can’t imagine Chuck [Haggarty] going back to work for IBM.”

Instead of a takeover, IBM and Western Digital entered into an agreement to work together for the very reasons Porter cited. Haggarty told his board of directors that the move was a “major step in changing the game,” according to a Western Digital press release. “Last fall we rolled up our sleeves, did a lot of soul searching and seriously examined our business model. We concluded that pursuing a significantly expanded relationship with IBM … was in the best interests of our company, our employees and shareholders.” Haggarty went on to detail the advantages of the agreement, and to emphasize the enthusiasm of company officers in both companies.

Concern had been raised in late 1997 among Western Digital shareholders that the company had misrepresented its assets, and that losses were not taken in a timely fashion. A class action suit was announced against Western Digital on February 2, 1998, alleging that some key insiders had manipulated financial numbers to their benefit, while the average stockholder took a loss. The New York law firm of Stull, Stull & Brody represented what one source called a “handful” of plaintiffs, while Western Digital denied all charges against it.

Western Digital had indeed sustained hard financial blows late in 1997; the company went from debt-free to $513.1 million in debt between December 27, 1997, and March 28, 1998. While Western Digital stock went as high as 54¾ and split at 44 in 1997, it had yet to regain its original value a year later, going as low as 14½. Funding was tight, and Western Digital raised money the old-fashioned way: they sold $400 million of zero coupon convertible subordinated debentures. The Dow Jones Newswires reported on February 12, 1998, that Western Digital “intends to use the net proceeds of the offering for general corporate purposes.” A month before, the company had broken ground on a new manufacturing facility in San Jose, California. Meanwhile in Rochester, Minnesota, the new Enterprise Storage Group’s headquarters were in the process of being built. The new research and development facility was planned to include a clean room, administrative and engineering offices, and design laboratories.

Western Digital took special measures to recover its financial equilibrium. In mid-1998, the company entered into a special partnership agreement whereby IBM would share its areal-density giant magnetoresistive (GMR) heads with Western Digital, and IBM in turn would have a foothold in the PC peripherals market. It was hoped that this partnership would ensure that Western Digital would be a force to reckon with well into the next century.