Quantum Has One Tough Hurdle To Leap

When Stephen M. Berkley took over as chairman of computer hard disk-drive maker Quantum Corp. in 1987, he knew he was in for a tough slog. For three years, sales had been mired at about $120 million. And because it was late with its new generation of drives--ones with 3 1/2-inch platters instead of 5 1/4-inch--Quantum had lost all but two of its customers. When the drives finally came out in 1988, the market was glutted and prices were crashing. "We had to do something pretty dramatic," Berkley recalls.

He did, and it worked. Thanks to unique development and manufacturing strategies--and the coattails of its biggest customer, Apple Computer Inc.--the Milpitas (Calif.) company is now the fastest-growing drive maker. In fiscal 1991, ended Mar. 31, sales hit $878 million, making it No. 3 behind Seagate Technology Inc. and Conner Inc. Says Dataquest Inc. analyst J. Philip Devin: "Quantum is the company to watch."

Actually, that's not hard, since most of its competitors are faltering. Because of slow personal-computer sales, the market for hard-disk drives is growing by just 8%, to $18.5 billion--one-third of the 1990 rate. Maxtor Corp. lost $50 million in its most recent quarter, as prices for some drives plunged 50%. Conner Inc., a superstar startup, last quarter saw sales drop 10% from the preceding one, to $382 million. PrairieTek, based in Longmont, Colo., just laid off 210 of 325 employees.

STOCK DROP. So far, Quantum has fared better. But Berkley says revenues will decline quarter-to-quarter into the fall. And Apple, which accounts for 41% of Quantum's sales, recently signed IBM to supply some drives. Meanwhile, Quantum plans to launch five new products this year, twice the usual number. All this has pushed Quantum's stock down to 11, from nearly 18 in April.

This difficult season should show whether Quantum's success resulted from Berkley's strategies or simply from being on Apple's team when it was on a tear. Since Berkley and David A. Brown, Quantum's president, took charge, Quantum has plotted an unusual course. In manufacturing, for instance, it follows neither Seagate nor Conner. Conner buys rather than builds most of its components, thereby avoiding high fixed costs. But when demand jumps, as recently happened in its 2 1/2-inch line, it can run short of parts. Seagate, by contrast, makes many components so it can gear up production quickly to earn high profits when demand is strong. But when demand slows, its large fixed costs hurt.

Quantum used to be like Seagate. But in 1983, Berkley and Brown launched a new subsidiary to build the Hardcard, a 3 1/2-inch disk drive on a circuit card that snaps into an IBM PC. To build it quickly, they enlisted Japan's Matsushita Kotobuki Electronics Industries Ltd. MKE had never made a disk drive, but as the world's largest maker of videocassette recorders, it had proven skills in making electromechanical gear. It was a risky move because it could produce a strong Japanese competitor in hard disks. But so far, the gamble has paid off. By 1987, Hardcards were contributing 54% of Quantum's sales and all of its profits.

With development of Quantum's other products bogged down, Berkley and Brown took the reins of the whole company. They hired MKE to speed Quantum's push into 3 1/2-inch drives. MKE made Quantum revamp the way it develops drives, insisting they be designed with robotic assembly in mind. Some drives had to be redesigned 30 times. "After four months, our engineers were ready to quit," Berkley recalls.

But Quantum got the benefits of building in-house--without the cost. MKE plowed about $150 million into automated plants. So, 97% of the drives leaving MKE's assembly lines need no reworking, compared with 90% or less for most competitors. That gives Quantum among the highest gross margins in the industry, even after MKE's cut.

NEW TEAMS. Lately, Berkley and Brown have focused on development. Disk-drive product generations had shrunk to less than two years, but development was still taking up to three. They set up teams for each product line, which were free to draft needed talent from engineering, sales, marketing, finance, and other departments. For Quantum's 2 1/2-inch drives, due out this summer, designers came up with final specifications in just 30 days, rather than months. Prototypes arrived in two months, not four. The result: The new drives will be ready just 15 months after conception.

Still, Berkley concedes that he needs to do better. Despite the new teams, Quantum's 2 1/2-inch drives are three months behind the original plan, partly because MKE had trouble making a new component. That, says Conner Vice-Chairman William J. Schroeder, underscores the weakness of relying on MKE. Indeed, one major Quantum customer worries that if sales continue to slow, MKE may not invest in new diskmaking technology, perhaps leaving Quantum drives less competitive.

But Berkley isn't placing all his bets on his Japanese partner. Quantum has just opened a new plant in Milpitas with some of MKE's technology. Back in the 1970s, Berkley learned the hard way how quickly Japanese suppliers can become rivals. As an executive at printer maker Qume Corp., he "watched a business disappear in two or three years" to Japan. So far, he has managed a neat trick in disk drives: using Japanese knowhow to help keep the U. S. on top.

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