Introduction by Jim Koch -
We will continue with the story, if you will, of this remarkable Industry.  this afternoon we’re going to shift the focus a bit to take a look at the Global and Business Context of the Storage Technology Industry.  We are pleased to have with us today Larry Sanders who is President and C.E.O.  of Fujitsu Computer Product of America.  Let me just make a few brief comments on Larry’s background, he became the President and C.E.O. of Fujitsu Computer Products in 1995, he has today responsibility for strategic direction and management of the Company’s sales, marketing, research and development and manufacturing operations.  I guess that’s the whole enchilada in many respects.  His 25 years of experience in high tech marketing, like many of our speakers today, began his career with IBM.  He also worked at Lockheed Corporation and Conner Peripherals before his current job.  at Conner he was Vice-President of Far East sales then Vice President of International Sales, so he has indeed a Global perspective.  Larry, I want to thank you and Fujitsu Corporation for your generous support for today’s program.

Sanders' Biography

LARRY SANDERS
 

Jim thanks very much for that kind introduction.  It seems like all the introductions today start with when I was a young person at IBM.  Someone once told me that the worst time to speak is after lunch.  I’m reminded today that even worst than that is to speak after lunch and after Al Shugart.  That is not a good combination.  But at least I am not standing between you and the cocktail hour so I do have that working for me.      During the course of the day I think all of us have had a wonderful opportunity to hear a kind of retrospective of the Storage Industry.  And certainly we are fortunate to belong to an Industry that I think really populated by exceptional people as well as one with a very rich and colorful past.  It was a lot fun for all of you, myself included, to hear some of the stories today and also to hear some wonderful presentations on Technology, not only where we are today, but some of the challenges that we face in the future.      My remarks today are going to take a little bit of tact.  I’m certainly not qualified to stand here and talk to you about the technology side of our business, particularly given the company of these speakers we have today.  but I did want to spend some time sharing with you today some ideas about the challenges that our Industry faces on the business side of the equation.  Particularly as our Industry, like all others in information technology, begins to take on more of a global look going forward.  This emerging global market place that we see today of course basically has been fueled by a tremendous evolution in communications technology.

I was having a discussion at lunch today with some people at our table and we were talking about the fact that there are a very few barriers to entry today in business.  So this has been driving a revolution whereby more and more we see globalization becoming an important part of the challenges that we face everyday.      I chose just a couple of facts to show this point. Consider the tremendous amount of capital that has gone to overseas markets.  42 billion dollars is the example shown here, in development money that went to China during 1996.  Another element, you’ve seen a lot of it in the news papers recently, is an emphasis on Corporate realignment and alliances that really began to add more of a global flavor to the type of  competition that we see on a world wide basis.

So recently you see combinations, Bankers Trust and Deutsche Bank, Chrysler with Daimler Benz, MCI Cable and Wireless, and variety of others around the world.  Now within these global alliances we not only see some of our competitors in the business but we also see a lot of our customers, and we’ll talk more about that later.

What’s driving these consolidations?  The Wall Street Journal said it’s really the high cost of operating duplicated finance, manufacturing and distribution facilities in different countries and that many companies are restructuring their business today to eliminate   that kind of duplicate cost.  It’s particular prevalent in our customer set.  Although you hear a lot today about the consolidation of the Disk Drive Industry among the suppliers, I want you to think for a moment about what’s happening with the customer base that we all serve on a daily basis.

Today 8 companies control nearly 50% of this market on a global basis. The one example I’d like to give you is one of our largest customers, and a customer for many of the   companies in the disk drive business is Compaq.  With Compaq's recent acquisition of Digital Equipment Corporation  they have a capacity for 20 million disk drive per year, which equates to 4 ½ billion dollars in revenue.  In other words Compaq consumes almost the total output of one of the top 3 drive companies in the Industry. Pretty significant!

Of course the somewhat scary thing about that is what’s causing all of this?  Well certainly increased competition is part of it, shrinking margins in our business on a world wide basis, but its also driving a new kind of thinking among these customers as to what types of suppliers they want and need. In many cases today they’re   looking for truly strategic partners.  It used to be that you were invited into show your product roadmap.  Nobody wants to see that now, they want to see your technology roadmap.  They want to be assured that you have the types of resources, the funding and commitment to be a long term player, if they’re going to invest in you as a supplier.  The second thing they are looking for, of course, is the economy of scale and the lower cost of your business model.  With some of the recent consolidations in the disk drive industry there are a number of suppliers that have that critical mass.  And last but not least, and probably the most important, they‘re looking for companies that, though they may be global, need to know how to act and think locally to support that customer’s business all around the world.

So if you think about what kind of profile this global supplier will take on, typically, as we mentioned, they’re probably going to be large with a world wide infrastructure and resources available to support the customer.  Probably most important, they will offer complete and customer focused products lines.  Today more then ever customer’s are finding out that qualifying a large numbers of suppliers and a large number of products, is very expensive proposition.      I was talking with a EMC a few months ago.  On one of the most recent drive qualification they did, they spent a million and a half dollars doing the drive qualification.  They need to find a way to reduce these costs.  And this is beginning to become a common theme among all our customers today.  The old idea of having the drive manufacturer bring the product and have the customer qualify it is probably disappearing.  Today we do it on a joint basis and I think very soon the disk drive companies well be doing the drive qualification with the customers looking over our shoulder and auditing the process.  And were very close to that now and I think we’ll probably complete that for all products shortly.      There has been a lot of discussion, a lot argument and debate about the merits of being vertically integrated as a company in this Industry.  Unfortunately a lot of the conversation that I heard tend to focus on vertical integration as a way of saving money.  If you are vertically integrated you should be the lower cost supplier.  Of course in doing that you may give up some benefits in terms of time-to-market.  We don’t believe that’s the case and I’m gonna talk more about that in a moment.      Last but not least you’ve probably got to be well financed.  In this day and age of dealing with very large customers on a global basis, customers that more and more want you to take control of the inventory, they want you to offer terms and they want you to maintain buffer stocks close to their customers and that requires significant financial strength to do that.  Unfortunately it means many cases you will have to be large to compete in this arena of going forward.

In summary, I guess if you really set down and talk to these customers today, and which we all have to do regularly, here’s what you’ll hear.  First of all, in the near term they want to focus on supply chain management, and I will talk about that more in detail in a moment.  They want you to be able to offer leading edge technology but they also want you to be able to control it.  They want you to achieve operational excellence and they want you to be well funded.

Now all of a sudden why this focus on supply change management? A very interesting thing is happening in the computer business today.  One large customer of ours was telling me recently that about 15% of all the drives that they buy today are aimed at the consumer market place.  They believe in three years that number will go up to 70%.  These are clearly people who believe there’s a tremendous opportunity for information appliances in the Industry.  But the result of that is going to be tremendous impact on the way drive companies handle these types of customers.  First of all shorter product cycles, that we enjoy or suffer that depending on your point view these day.  I would tell you they seem to be reaching the point where they are about every 6 months, particularly on the desktop.  As we enter the consumer market the margins have gotten a little slimmer.  Clearly, we’ve got to be able to offer a lower cost business model to these customers and that is why we need to improve our supply chain management.  If we are gonna control the inventory we have to be able to manage our cash to remain competitive.  Most importantly our customers are demanding it.  And again let me give you an example of  one of the leading companies in the industry, Compaq.

Compaq, simply stated, says that they want an industry leading position in customer satisfaction, they expect to do that, by enhancing and improving quality tracking efforts, insuring the fastest time to market, focusing on improving delivery predictability, but most importantly improving the reliability, flexibility; scalability and predictability of the supply chain from source to customer.      I just got back from Japan this week, (this year I’ve only managed to make two trips, two all expense paid vacations there this year) and was having a discussion with the gentleman who’s president of our storage product group back in Japan.  We concluded there’s no such thing as forecasting any more, and there really isn’t.  Most customers today, particularly large sophisticated global types of customers, they’ll give you an indication of what their going to take from you on a quarterly basis, but there is no strong forecast.  There is no purchase order any more.  Were moving to a system of replenishment.  What it says is that we as the suppliers have to maintain the responsibility for determining the customer need and keeping the product close to the customer at all times.  Now this used to be a lot easier when the customers had inventory.  for instance, if you were Compaq and you had a months worth of inventory in the channel, if you had a sudden up turn in demand, what happens? Well it wasn’t to difficult you could simply go to that inventory that you had in the channel deplete that somewhat re-order it and you had sufficiently lead time to rebuild your inventory position.  Today what happens in the new model? when there’s a sudden up-tick in demand, the suppliers have to respond immediately with product.  It becomes a much more difficult task going forward.

With regards to vertical integration, at least at Fujitsu, we believe that this investment in long term research and development allows us to use this in a lot of different ways.  One is our ability to leverage technologies across a variety of disciplines.  For instance, photolithography advances that we’ve been able to develop at Fujitsu, we can apply towards our electronic components business, to the PCB business, and magnetic heads all at the same time.  So we have that ability to share technology across organizations.  in addition we believe in removing the lead time associated with technologies, that are developed externally, is extremely important going forward.  The hard disk drive development can proceed ahead of the technology’s general availability, which we feel is a real strength.  Maybe the most important though and the most critical of these elements is the ability to discover potential manufacturing impacts during the research and to implement those into your manufacturing process prior ramping the volume.  Let me give you the best example I can.  It’s only been a short time ago that one of the competitors in the desktop Industry had difficulty making the transition from thin film head to MR head.  Well we too have launched a full compliment of giant MR products over the course of the last few months and I know when I was in Japan I was speaking with our engineers and they were telling me that if you look at the ESD challenge associated with MR heads, particularity in the transition from thin film to MR, it was a pretty daunting challenge.  But to put in perspective the challenge of moving from MR to giant MR head is that the ESD sensitivity of a MR head is something like 200 volts.  You can generate 200 volts of ESD simply by moving your hand through the air .  ESD sensitivity of giant MR is 5 volts.  Now if you are one of the Industry leaders in developing this technology and you understand some of the aspects and sensitivity of that technology, you do have a head start in beginning to develop your manufacturing capabilities to achieve higher yields.  Higher yields mean shorter time-to-volume, higher profits in the front end of the program, and a defendable competitive advantage.  Last but no least you can remove some the cost and uncertainty due to competitive pressures in the merchant market but that probably doesn’t rank as high in terms as the prior items that we’ve mentioned.

Finally in summary I want to talk about couple of things, one is there’s been a lot of discussion about the number of disk drive companies in the Industry today and the consolidation that you’ve seen.  It is interesting that from 1995 through 1998 we do have a somewhat more level playing field then we have in the past.  Today there are a variety of companies, some United States, some Asian, that all find themselves in a position of having somewhat in excess of 10% market share. Well this sort of competition has caused some difficulty in the Industry.  It has been wonderful   for the customers. They have a choice of companies where by they can receive the kind technology they want at a price that they are willing to pay.

So in summary what is it the customers want?  Well they want leading edge technology.  They certainly want time to volume leadership.  This has become an extremely critical matter in our Industry.  They want complete comprehensive product lines.  They want unquestioned product quality and operational flexibility.  But on top of that, they want you to be the low cost supplier.

Now I have a slightly different way of summing up what that all means.   Basically what they’re saying is they want it free, they want it now, and they want it perfect.  But it does help put it in perspective the challenge discussed in the beginning of my remarks today.  Certainly just like we face technology challenges as an industry we need to manage through another strategic transition in our business, and it’s gonna be difficult.      As John Naisbitt said in the Global Paradox, “you know if we had made similar progress in the automotive technology that we have in the information technology, today you could by a Lexus for about 2 dollars, it would travel at the speed of sound, and go about 600 miles on a thimble of gas.” In the Disk Drive Industry we do all that, but then the guy next door would sell it to you for $1.90.  In closing I’d like to say again Dr.  Hoagland, thanks for having us today it was a pleasure to participate and hope you all have a great afternoon.