Conner's Drive Is Getting A Bit Gummed Up

Ever since it got rolling in 1986, Conner Peripherals has been the darling of the hard-disk-drive industry. In 1987, its first full year, it set a sales record for a manufacturing startup by rocketing to $113 million--beating the record set by its biggest customer, Compaq Computer Corp. And by exhorting his engineers to outpace rivals in designing the smallest and speediest drives, Chairman Finis F. Conner has kept sales climbing in every single quarter since. No more. On Apr. 17, the San Jose (Calif.) company announced that sales for its first quarter, which ended on Mar. 31, fell 10% from the fourth quarter, to $382 million (chart). The main culprits: increased competition and parts shortages. Both problems lead some analysts to question Conner's vaunted product-design and manufacturing strategies. Says Dataquest Inc. analyst J. Philip Devin: "Conner's glory days are over."

By no means is the drivemaker in danger of crashing. For one thing, the quarter was no surprise--and compared with a year ago, sales were up 62%, and profits rose 127%. Plus, Conner Peripherals Inc. has focused on two of the fastest-growing computer markets: portable PCs that need drives of 3 1/2 inches wide or less, and high-performance desktop machines that are gluttons for speed. "We're doing much better than most people gave us credit for," says the chairman.

PRICE WAR. Right now, Conner resembles the Cincinnati Reds. It's probably a better team this year, but so are two or three division rivals. Quantum Corp. in nearby Milpitas has come on strong with 3 1/2-inch drives. Even more important, No. 1 drivemaker Seagate Technology Inc. has finally digested its 1989 acquisition of Control Data Corp.'s $1 billion drive operation and is ready to motor again. Last summer, it started cutting prices to gain market share. Today, its 40-megabyte 3 1/2-inch drives go for half of the $280 they commanded a year ago.In response, Conner has sped up production of its new, high-end, 2 1/2-inch drives. Already, customers such as Compaq have bought nearly 1 million of them for use in laptops and notebook PCs. But Conner is most vulnerable to component shortages at the beginning of a product cycle, and right now, a scarcity of recording heads and aluminum disks is preventing the company from meeting customer demand. And the problems could persist until summer.

Conner's tight spot highlights a worrisome weakness in its strategy. The company lets outside vendors manufacture the components and subassemblies it designs--unlike Seagate, which builds most of its own parts from scratch. Finis Conner's theory: In an industry where a product's life is sometimes measured in months, avoid investing in factories that become obsolete when technology changes.

Smart idea, but it leaves Conner exposed to shortages. So in all likelihood, the company will have to do at least some of its own manufacturing. Conner started down that road last year, when it bought the disk-coating operation of Domain Technology Inc.

Still, Conner's bias toward subcontracting should be as effective as ever over the long term. "Product cycles are as short as they've ever been," says Quantum Marketing Vice-President Michael A. Brown.

And the competition is rougher. Seagate, once slow with new drives, unveiled 14 products last fall and has already upgraded about half of them.

Finis Conner won't let that go unchallenged. He started Seagate with its current chairman, Alan F. Shugart. Conner left in 1984 and set up his own shop, vowing to overtake Seagate before long. Now that he's getting close, he's not about to let a slowdown sidetrack him.

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