Seagate Technology, Inc.

920 Disc Drive
Scotts Valley, California 95066
U.S.A.
(408) 438-6550
Fax: (408) 438-4127

Public Company
Incorporated: 1979
Employees: 43,000
Sales: $2.86 billion
Stock Exchanges: NASDAQ
SICs: 3572 Computer Storage Devices; 3674 Semiconductors & Related Devices

Seagate Technology, Inc., is the world’s leading independent manufacturer of rigid magnetic disks and disk drives for computers. The company pioneered the downsizing of mainframe hard disk drives, making them affordable for personal computers. Seagate commands about 30 percent of the market in 2.5, 3.5, and 5.25-inch drives, with foreign sales making up about 35 percent of its revenues.

Seagate was established in 1979 in Scotts Valley, California, by a group of businesspeople, including Alan Shugart who had been an engineer with Memorex for four years, following eighteen years at IBM. Seagate was his second start-up after having founded Shugart Associates, the company that made floppy disk drives a standard feature on personal computers. When Shugart Associates was sold to Xerox a year later, Shugart was forced out. Of Seagate’s group of four cofounders, another significant member was Tom Mitchell. He had come from Commodore, where he had served as general manager of Commodore business machines, and had previously worked at Bendix, Fairchild Camera, and Honeywell. Shugart became president and CEO of the new company, while Mitchell started out as senior vice president of operations.

Hard disks are made of one or more magnetic-coated aluminum platters. Data is stored on, retrieved from, and erased off the rapidly rotating disk by a mechanical arm, which moves across the disk. The whole mechanism is called the disk drive, or hard drive, and the technology for the sealed unit, which is also known generically as a Winchester disk, is Seagate’s basic product. Hard disk technology allows the storage of more data than a floppy disk, and does it at a faster rate.

Unlike larger mainframe computers, personal computers were originally built with only a floppy disk drive and without hard drives. Therefore, the market was open for an independent company like Seagate to manufacture hard drives and sell them directly to the computer manufacturers. They in turn would incorporate the drives into their personal computers as add-on features. Seagate’s first client was IBM in 1980, just as the latter was about to introduce its personal computers, which would set the standard for the industry. Seagate’s first product, a 5.25-inch hard drive, was very successful. By 1982, with sales of $40 million, Seagate had captured half of the market for small disk drives. The company went public in September of 1981, with an initial stock offering of three million common shares.

Seagate made a name for itself by producing the least expensive disk drives in the industry, largely due to Mitchell’s successful efforts to procure component parts from vendors at the lowest possible prices. In 1983 Mitchell replaced Shugart as president, though the latter remained chairman and CEO. Mitchell also took on the new position of chief operating officer to direct day to day operations, while Shugart oversaw planning.

By 1984 sales had shot up to $344 million as Seagate became the world’s largest producer of 5.25-inch disk drives, with three-quarter’s of the company’s shipments going to IBM. Then in mid-1984 the computer industry entered a slump, and the average price for a wholesale 10-megabyte disk drive fell from $430 to $320 in a matter of days. A number of factors contributed to the situation, including a slowing in the growth of personal computer sales, industry-wide falling prices, a glut of disk drive competitors, and rising costs of producing the new generation of drives. Diminished growth of personal computer sales came just as the disk-drive companies were squeezing the last profits from their older product lines. These difficulties were intensified for Seagate, with its reliance on IBM’s business, when that company reduced orders and began demanding lower prices. Thus, Seagate’s sales for the first quarter of fiscal 1985, at $50.6 million, were half of what they had been for the last quarter of fiscal 1984. Annual sales for fiscal 1985 declined 38 percent to $215 million.

Mitchell immediately began looking into ways of manufacturing the drives even more cheaply. Realizing that disk drives, as a commodity product, would become subject to price pressures, he had already decided to begin relocating Seagate’s manufacturing operations overseas where labor costs were lower, and the pressures resulting from cutbacks forced quick implementation of the move. In July of 1984, 900 of the 1,600 employees in Scotts Valley were laid off, as component production shifted to Singapore. By December most of its drives were being produced there, and plans were underway to open another plant in Thailand. In so doing, Seagate successfully followed the Japanese strategy of using less expensive Southeast Asian labor in manufacturing, which had allowed Japanese companies to dominate the floppy disk drive market. Now, however, with the high value of the Japanese yen, Seagate was able to undercut the prices of Fujitsu, Hitachi, NEC, Toshiba, and others, and dominate the hard disk market.

At the same time, Mitchell made one outlet of sales more secure by extending credit to a small but important client, CMS. The latter was buying stripped-down IBM personal computers, furnishing them with Seagate drives and selling them to retailers at bargain prices. Thus, while Seagate’s revenues fell temporarily in 1984-85, the company managed to stay profitable.

Seagate was faced with another problem in the fall of 1984—the replacement of its 10-megabyte drives, which were becoming obsolete as higher capacity drives appeared on the market. Mitchell saw an opportunity to outmaneuver a rival, Computer Memories, which was already providing disks with greater memory, but less reliability, to IBM. He promised IBM a shipment of 20 prototype high-capacity, high-reliability drives by December, before Seagate had even finished designing them. Working long hours, Seagate engineers pulled it off. Although mass quantities could not be delivered by March as originally promised, IBM was satisfied and placed orders for tens of thousands of the disk drives.

Seagate also sought to diversify its clientele in order to be less vulnerable to fluctuations in demand. Seagate began marketing more to value-added resellers (VARs), dealers that package stripped-down computer components and software and resell them as specialized systems. By 1987 such dealers came to represent 47 percent of Seagate’s clients, up from zero in 1983, while sales to IBM fell to 24 percent. In that year a deal was also signed to supply drives to Hewlett-Packard, among other new personal computer makers. To expand sales internationally, Seagate set up a European headquarters in Versailles, France, in 1987.

Beginning in 1985 Seagate experienced a phenomenal rise in sales, hitting $1 billion in revenue by 1987, with a record $115.3 million in profits. This reflected the rapid growth of the market for hard drives in desk-top computers. In 1984 only 15-20 percent of personal computers had hard drives, while this figure had reached 70 percent by 1987, according to analyst Ronald Elijah at Robertson, Colman & Stephans. As the market grew, Seagate was able to maintain its dominant share by keeping its prices down. It had reduced the costs of storing data by 95 percent since it first went into business.

However, Seagate’s concentration on efficient production, while allowing technological innovation to take a back seat, made it vulnerable to the boom and bust cycles of the rapidly changing high technology industry. In 1987 computer manufacturers started demanding the smaller 3.5-inch drives earlier than anticipated. IBM, which was purchasing 30 percent of Seagate’s 5.25-inch drives, was now planning to manufacture some of its own 3.5-inch drives. As a consequence, Seagate’s profits declined by 39 percent during this product transition period in the second half of 1987, and profits remained low into 1988.

Seagate introduced six models of its first 3.5-inch drives that spring, although 5.25-inch drives continued to dominate its sales. The company had added 32,000 square feet to its Singapore plant, where the 3.5-inch disk drives were made. Meanwhile, it expanded operations in Thailand beyond the manufacture of components and sub-assembling to include the complete assembly process and testing of disk drives. More significantly, Seagate began investing greater amounts on research and development in 1987, double the amount of the previous year, by issuing $250 million in debentures. The company established a new research and development facility in Boulder, Colorado, in addition to the one at its headquarters in Scotts Valley.

The market’s growth was less than anticipated, however, and revenue for fiscal 1988 declined 50 percent from the previous year, while inventories of 5.25-inch disks piled up. Seagate blamed the problem on industry-wide overproduction, while Shugart moved quickly to lay off nearly 2,200 employees in Singapore and the United States. The company barely stayed in the black for fiscal 1989.

Although Seagate remained the undisputed leader in market share, ups and downs in the demand for the personal computer market were a serious concern. Thus, Seagate’s next move was to gain entry into the market for the high capacity drives used in mainframes, by purchasing Control Data’s disk-drive subsidiary, Imprimis, in June of 1989. In addition, the $450 million acquisition nearly doubled Seagate’s sales, to $2.4 billion for fiscal 1990, larger than all its U.S. competitors—Conner Peripherals, Maxtor, Micropolis, and Quantum—combined.

Seagate also had an edge on its competitors in its ability to provide consistently lower priced products, because the company manufactured its own disk drive components. In plants throughout the United States and in Asia, Seagate turned out motors, precision recording heads, and other parts. While the company built many of these factories itself, key component suppliers were also acquired by Seagate. In 1987 the company purchased Integrated Power Semiconductors, Ltd. of Scotland—a long-time Seagate supplier—and Aeon, a Brea, California-based producer of substrates to make thin film magnetic recording media.

On the other hand, Seagate continued to lag behind the competition when it came to introducing new technology. “Seagate has never been that interested in getting products out of the lab first. We wait until we’ve squeezed every penny of cost out of a product before we bring it to market,” Shugart explained in Forbes in 1991. “But the product cycles are getting shorter and shorter. Now we can’t afford to wait.” The latest product on the market was a 2.5-inch disk drive for laptop and notebook computers. Seagate introduced the drive in November of 1990, only five months behind competitor Conner Peripherals, as compared with a delay of a year for the 3.5-inch drives.

Mitchell’s emphasis on high volume manufacturing over product innovation was one of the points of contention that led him to resign under pressure from the board in September of 1991. Shugart then reasserted his role in running the company by giving up his position as chairman and assuming the posts of president and chief operating officer vacated by Mitchell. Gary Filler, former vice chairman, replaced Shugart as chairman. This change in management came on the heels of a disappointing fiscal year with revenues down 42 percent, and the layoff of another 1,650 workers.

Firmly in charge again, Shugart pursued a strategy of turning out new products as soon as they were designed. He also began focusing on higher profit margins and specific markets, contrary to Mitchell’s goal of general large-volume sales. One of Shugart’s first products in this regard was the 1480 disk drive introduced at the end of 1991. This 425-megabyte, 3.5-inch drive was successfully targeted at the high-end workstation and minicomputer markets, where profit margins were greater. Seagate beat the competition by introducing the product first, then continuing to outsell its rivals.

Seagate’s profits rebounded beyond expectations in early 1992 as sales of lower priced, high-end personal computers took off amid vendor price wars. At the same time, Seagate also benefited from the current PC owner trend toward buying new higher capacity drives to run more powerful programs. The company’s large market share ensured that such upswings in personal computer demand would have a definite effect on its sales.

Shugart in turn pumped those profits into more research and development and strategic investments. In early 1993 Seagate invested $65 million in a factory in Londonderry, Northern Ireland, which doubled its capacity to produce a key part used its hard drives. In addition, Seagate acquired a 25 percent stake in the Sundisk Corp.—another manufacturer of computer data storage products—and together the two companies produced data storage systems for portable computers and other handheld electronic devices. In April of that year Seagate signed an agreement with Corning, the glass manufacturer, to provide a new glass-ceramic compound for use in disks. The new material allowed Seagate to reduce the distance between a disk and its magnetic read-write head, which enabled a higher capacity for data.

While Seagate’s business continued to be successful through the early 1990s, new developments in data storage technology presented a potential challenge. Magnetic disks were apparently destined to become obsolete, as high-capacity, erasable optical disks became less expensive and faster. In addition, optical technologies without moving parts began to show promise.

However, if the past is any example, when Seagate lacks the latest technology, it will buy the company that has it.

Principal Subsidiaries

Seagate, Inc. (Korea); Seagate Technology (Singapore) Pte., Ltd.

Further Reading

Brandt, Richard, “Seagate Goes East—And Comes Back a Winner,” Business Week, March 16, 1987, p. 94.

“Driven Down,” Forbes, January 9, 1989, p. 115.

Dubashi, Jaganath, “Seagate Technology: Too Soon to Bet?” Finance World, July 10, 1990, pp. 19–20.

Fisher, Lawrence M., “Seagate Trips, Industry Cringes,” New York Times, August 23, 1988, p. Dl +.

Larson, Erik, “Decline in Disk-Drive Demand Puts Squeeze on Many Makers,” Wall Street Journal, December 3, 1984, p. 4.

O’Reilly, Brian, “How Tom Mitchell Lays Out the Competition,” Forbes, March 30, 1987, pp. 90–96.

Marks, Don, “Seagate Technology,” Datamation, June 15, 1992, pp. 49–52.

Pitta, Julie, “The Survivor,” Forbes, July 8, 1991, pp. 94–95.

Richter, Paul, “700 Workers Dismissed at Seagate Plant,” Los Angeles Times, July 20, 1984, sec. IV, p. 1.

Schmitt, Richard B., “Seagate Technology’s Mitchell Resigns as Board Decides to Shift Management,” Wall Street Journal, September 23, 1991, pp. B4 (W), B8 (E).

“Seagate Technology,” Datamation, June 15, 1988, p. 106.

“Seagate Technology Names New President,” New York Times, August 9, 1983, p. D2 (L).

“Seagate Technology Posts 40% Drop in Net for Fiscal First Period, Wall Street Journal, October 14, 1987, p. 49 (E).

Yamada, Ken, “Once-Battered Seagate Gains in Computer Price War,” Wall Street Journal, June 1, 1992, p. B2 (E).

—Heather Behn Hedden