US Thin-Film Supplier Shifts Production Plants

Posted on November 1, 1999 
Filed Under Julian, Nikkei Electronics Asia

One of the world’s largest independent supplier of thin-film media for computer hard disk drives, Komag Inc, is shifting its large-scale production in the US to Malaysia in the last quarter of this year.

The move is in line with efforts to bring down costs and stimulate new applications in the troubled data storage industry.

“This shift of production volume into Malaysia will result in lower unit production costs and generate substantial cash savings in future,” said Komag’s Malaysian-born president and chief executive Tan Thian Hoo.

Under the accelerated phase down plan, Komag is expected to close down two plants in San Jose, and a third plant in Santa Clara acquired from Western Digital Corp in April.

It will also transfer research and development on substrates to Santa Rosa, California. Headcount in its US operations will be slashed from a high of 1,950 in its second quarter to about 570 staff, with realized cash savings of approximately US$20 million per quarter in payroll costs.

“In our second quarter our Malaysian plants produced approximately 60% of our worldwide unit volume. As a result of these transitions, Malaysia should account for virtually all of our finished disk output by the end of this year,” said Tan.

Tan said its US plants will now focus on design and development of new processes and products, while its large installed capacity base in Malaysia puts it in a position to have the lowest cost structure in the industry. Komag has three plants in Malaysia – two end-product plants in Penang and a substrate production plant in Sarawak with about 2,750 staff.

Cost a Constant Factor

The company made its debut in Malaysia in 1993 citing better cost structures and proximity to major customers such as Maxtor Corp and Seagate Technology Inc.

It has since developed a local supplier base of 10 small and medium-sized companies and aided in technology transfer and improving manufacturing processes.

Local content of its products currently stands at 40% while it was priming local engineering talent to give more technical depth to overcome a lack of research and development efforts in Malaysia.

The Sarawak plant located at the Sama Jaya Free Industrial Zone is currently working on producing more durable and better performing glass substrates in addition to its present aluminum substrates.

The plant manufactures up to 3 million plated, polished substrates units a month. The bulk of this is sent to its plants in Penang while 20% is sent its US plant for processing.

Sarawak operations managing director Kevin Tompkins said it was targeting direct sales to Singapore, Japan and the US for its products and was currently in negotiations with several substrate users in those markets.

“Between 30 to 35% of our substrates can be sold externally, but these depend on Komag’s requirements,” he said. Tompkins said Komag had put on hold plans to build a second plant in Sarawak because of the downturn in the disk drive market.

Komag also recently announced it was shipping volume production of 9.1-Gbyte disks and already had prototypes of a 35-Gbyte disk. Disks capable of storing 6.8-Gbytes per platter already comprise 30% of the company’s shipments and are currently used by the company’s three major customers for desktop PCs and servers.

“We are extremely pleased that our 9.1-Gbyte products have been qualified and are shipping to two customers directly from our factories in Malaysia. This is a validation of our announced strategy to develop products in the US and then quickly ramp into volume production offshore,” said Tan.

The disk drive industry, once dominated by US companies, has been besieged by intense pricing pressures forcing major players such as Seagate and Western Digital to restructure and announce lay-offs.

Although International Data Corp projects shipments of 166 million units this year and 15.5% growth from 11% in 1998, the industry is still in a glut. Tan took over the leadership of Komag in August following retirement of co-founders Stephen Johnson and Dr Tu Chen, who were the president and chairman respectively.

Founded in 1983, Komag has produced over 400 million thin-film disks.

Published in Nikkei Electronics Asia, Nov 01, 1999
by Julian Matthews, Malaysian correspondent

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