Competitive Strategy of Global Firms andIndustrial Clusters 1
Case Study on the Hard Disk Drive (HDD) Industry

Tomofumi Amano*

1. Introduction
This report discusses the location strategies of multinational firms andthe industrial policies of the countries that are the recipients of their investment.
For firms engaged in international business, the timing of foreign investment,
selection of locations, and maintenance and expansion of their local operations
are all important strategic matters.
Then what foreign investment strategies have been used by firms thathave succeeded in strengthening their competitive advantage? What are theunique aspects of the policies taken by recipient countries? This report will
focus upon the strategic nature of investment for global firms and the strategic
nature of investment-attracting policy for the recipient countries.
Because the determinant factors of foreign investment have been acore theme for studies on multinational firms, there is already a large literature
upon the topic. However, much of it consists of studies that identify and classify the location factors based on economic theories and empirical studies using
cross-section or pooled data. While these studies indicate the general framework of multinational firms’ location selection, it is difficult to derive fromthem the strategic implications related to individual firms’ foreign investment.
* An Associate Professor at the Faculty of Business Administration, Hosei University and a
researcher of the Manufacturing Management Research Center, University of Tokyo.
1
This report is an expansion and revision of the content of Chapter 5 of the following book for the
purpose of presentation at the GRIPS/MMRC Joint Symposium: Amano Tomofumi, Higashi Ajia
No Kokusai Bungy To Nihon Kigy : Aratana Kigy Seich He No Tenb (East Asian Linkage
and Japanese Firms: A New Perspective of Corporate Growth), Yuhikaku.

27

Tomofumi Amano

Foreign investment in a growth region is an important strategic matterfor firms. Industry-specific conditions must be taken into account to appropriately examine its strategic nature. However, to this end, the focus should beplaced on how firms recognized the industrial environment and what approaches they took; in other words, we must focus on firm-specific recognition of theenvironment, decision-making, and implementation, rather than on the generaldeterminant factors of investment.
This report takes the hard disk drive (HDD) industry and looks at how
major Japanese and U.S. firms have made investments in Asia. Over the past 20
years, the HDD industry experienced dramatic changes in technology and market conditions. For HDD manufacturers, investment in Asia during this period
was a critical issue for their survival. How did they perceive this challenge andwhat strategies did they take? This point is closely related to the first focus:
strategic nature of investment.
The second focus, strategic nature of investment-attracting policy,
will rather become clear by looking at the investment history of surviving firms.
These firms have concentrated their large-scale investment in specific areas. In
these areas where a large number of firms have gathered, collaborative relationships can be observed between local governments, local universities, local
firms, and global suppliers. Such agglomerations have served to attract investment to these areas in a sustainable manner.
These areas are called industrial clusters. In a global industry like the
HDD industry, the greatest concern for the recipient country is the risk of theclient firms leaving the country to invest in another country due to subsequent
wage increase or rivalry against newly developed countries. The challenge forthe recipient country is to consolidate investment, and one means to achieve
this could be to increase the attractiveness of the area as an industrial cluster.
In the process of East Asia’s economic development, investment fromother countries gathered in a number of areas and industrial clusters wereformed in these major areas. This enabled the recipient countries to provide
abundant and diverse resources to the multinational firms located inside theseareas. There was also intense competition among the recipient countries for
attracting investment. The point is how these countries strategically differentiated their policies from the others in forming attractive industrial clusters.

28

Competitive Strategy of Global Firms and Industrial Clusters

2. Competitive Strategy of Global Firms and Industrial
Clusters
This section explains the three basic viewpoints applied to the casestudy. They are (1) global location strategy and clustering; (2) integration of
global production networks; and (3) consolidation of foreign investment inrecipient countries.
Global Location Strategy and Clustering
During the past several decades, in which economic globalization has
made remarkable progress, firms have actively expanded the geographical baseof their operations through direct investment or strategic partnerships. Competition in Global Industries (Porter, 1986) is a representative study and an earlyattempt at systematizing international business expansion.
Porter analyzes firms’ global strategies by focusing on two concepts:
allocation and coordination. Allocation refers to the internationally distributed
allocation of the value chain, while coordination means the coordination among
the distributed bases. He defines a global strategy as “a strategy to achieve a
global competitive advantage through concentrated allocation or coordinationof distributed activities, or both” (Porter, 1986, p.35) and states that “in order tounderstand the competitive advantage of a global strategy or the cause of globalization of a firm, one must know the conditions for achieving cost reduction
or differentiation through globally concentrating the activities and/or coordinating the distributed activities” (ibid., p.36). He indicates that such conditions are:(1) proximity to markets; (2) economies of scale and experience effect; (3)effective consolidation and coordination of activities; and (4) comparativeadvantage of each country.
This framework presents the basic idea of a global strategy. In order
for a firm to achieve a global competitive advantage, both two factors are essential: the expansion of activities and building of operational foundations at theoverseas locations by seizing the internationally spread opportunities forachieving advantages and growth; and the integration of networks of the internationally spread activities under a unified philosophy and business strategy.

29

Tomofumi Amano

In addition to this, the approach of committing to local industrial clusters is vital for the foreign subsidiaries. In an industrial cluster, many firms andinstitutions are located together, forming multi-dimensional networks to create
the characteristics of the area. Inside clusters, markets of diverse humanresources and intermediate goods are also formed. Thus firms can secure thediversity, quality and quantity of their managerial resources. Moreover, as technical domains are specialized through division of labor, knowledge accumulates
more effectively and operation costs are reduced through the economy of scale.
These benefits are collectively called agglomeration economies.
David McKendrick, Richard Doner and Stephan Haggard (McKendrick, Doner, & Haggard, 2000) analyzed the agglomeration economies inthe HDD industry. They refer to areas such as Silicon Valley and the Japanesearchipelago as technology clusters; they refer to areas like the Southeast Asian
region, mainly Singapore, Thailand and Malaysia, as operation clusters.
The agglomeration economies that firms can enjoy in a technology
cluster include (1) early recognition of new technology and market opportunities; (2) creation of new technology, products and services through many startups and technology spillovers; (3) prompt problem-solving and product development; (4) access to venture capital; (5) human resource pools that are specialized and differentiated for each technical field; and (6) prompt imitation of
product innovations.
In an operation cluster firms can enjoy (1) low transportation costs;(2) shorter transportation times between the respective stages of the value
chain; (3) economies of scale in production; (4) quick production launch; (5)skillful human resource pools that are specialized for each process or function;(6) prompt imitation of innovation related to assembly, production and physicaldistribution; (7) monitoring of the quality of suppliers; and (8) low inventory
costs.
One of the purposes of a global strategy is to establish the firm’s ownbase within the local industrial cluster, in other words, to take part in creatingsuch agglomeration economies and fully enjoying the benefits they produce. In
studies on international business, the need for localization is often discussed. A
firm that expands overseas but does not localize its overseas base cannot fully
enjoy the benefits of globalization. The same applies in the context of an indus-

30

Competitive Strategy of Global Firms and Industrial Clusters

trial cluster. Spreading the value chain itself is insufficient for achieving essential advantage. The key is how deeply a firm can get involved in the industrial
cluster, and how well it can find and develop resources there. The advantages tobe gained in a cluster are sometimes highly firm-specific and relation-specific,
unlike the initially available advantages like low wage level and land resources;
these specific advantages become the firm’s core competitive advantage.
Integration of Global Production Networks
As business opportunities spread worldwide and a firm’s scope ofoperations broadens, the firm’s business management becomes more complicated. One of the important conditions for a multinational firm to smoothly carryout its global operations is to know how to integrate its decentralized and complicated management into a single direction. The purpose of integration of global production networks is to ensure that the activities that have achieved a global spread through foreign investment are not conducted in a disorganized way,
but are implemented in an integrated manner under a common vision and business strategy.
A firm that has effectively integrated its specialized functions with aneye on the changes in environmental conditions could turn the benefits into acompetitive advantage in the market through the division of labor. Furthermore,
it could enjoy large integration benefits by creating synergy between its bases.
On the other hand, a firm that is lacking integral ability could lose its operation
efficiency through international division of labor. In globalization, the logic ofintegration is in fact more important than the logic of division and spread.
In order for a firm to integrate its operations beyond national borders,
the strategic abilities, leadership, and coordinating ability of the firm’s headquarters are essential. It is the duty of the headquarters, or the top management,
to instill its business philosophy and business strategy in overseas growth markets and to make the firm’s resources complement each other. The management
requirements for integrating global production networks are (1) presentation ofvision and strategy; (2) leadership of top management and the management
team; (3) integration of organizational structure; and (4) sharing of organizational culture.

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Tomofumi Amano

The first requirement is presentation of the vision and strategy
because in order to integrate businesses beyond national borders, vision andstrategies need to be clearly indicated as the purpose of integration. It is ideal tohave overseas employees and partners understand and share basic principles
and strategy, including the firm’s purpose of doing business and the desired
future direction, beyond cultural barriers.
However, merely indicating the vision and strategy is not enough; theleadership of the top management and the management team and integration of
the organizational structure are also important. The top management and the
management team at the headquarters should launch concrete initiatives to put
the vision and strategy into practice within the local operation bases. Also, theyshould indicate the vision’s importance to the local management team andemployees.
Furthermore, the firm needs to identify the way of sharing the responsibilities and communication between the headquarters and the local bases toimplement its vision and strategy in an organized manner. At the first stage, theheadquarters needs to take the initiative in overall matters. However, as the subsidiaries become localized, their responsibilities increase and the communication becomes two-way and multi-tiered. Finally these division and communication systems will be optimized so that the firm can fully enjoy the merits ofintegration.
The last requirement is sharing of the organizational culture. Internationalization of business can be regarded as an act of sharing the firm-specificorganizational culture among group companies while respecting the differencesin culture in each country. A firm’s organizational culture is expected to gradually permeate the overseas operation bases through its operation. This culture
becomes the code of conduct for the members of the organization. In otherwords, it becomes the corporate identity. A firm having a reasonable code of
conduct is likely to be capable of integrating its international business activities
smoothly.
Industrial Clusters and Consolidation of Foreign Investment
The country on the receiving end of investment is interested in effectively attracting multinational firms with the above-mentioned behavioral prin-32

Competitive Strategy of Global Firms and Industrial Clusters

ciples. In this case, the point of concern is the issue of mobility of investment,
namely that a firm that has been attracted under initial conditions such as low
wage levels and ideal land conditions could move to another country in light ofwage differences and investment opportunities in newly developing countries.
In order to have a multinational firm continuously invest in the initially chosen area, the recipient country needs to take the lead in developing competitive advantages that do not rely only on wage level and land resources. The
key to achieving this is forming industrial clusters.
As discussed earlier, industrial clusters involve various agglomeration economies. The recipient country must promote regional development withthese agglomeration economies in mind. For example, development of expressway systems and port improvements are indispensable for achieving low transportation costs and shorter transportation times. It is also necessary to simplify
customs procedure. In regards to forming pools of intellectual human resources
and promoting innovations, it is important to develop human resources throughcollaboration between industry, academia, and government. Another possible
measure would be to implement special taxation that meets the industrial needs.
The regional development of an industrial cluster involves bothplanned factors and emergent factors. Establishment of development zones,
development of public infrastructure, and revision of the tax system are planned
factors. These are important, but may easily be copied by others. More important factors are emergent ones such as industry-specific networks and a pool of
qualified human resources, which are accumulated through the industrial development of the recipient country. Both planned and emergent factors are criticalto provide located firms incentives to secure their investments, which contributes to the consolidation of investments for the economic growth of recipient countries.

3. Structural Changes in the HDD Industry
The above-mentioned three concepts provide the analysis frameworkfor studying the HDD industry case. From this section onward, the report will
look at this industry. This section focuses on the structural changes in the industry since the 1980s, with particular emphasis on the competition between Japan-

33

Tomofumi Amanoese and U.S. firms over investment in Asia.
Changes in the Product Architecture and Industrial Structure
Product architecture in the HDD industry was led for a long time byIBM. The firm has a long history in the data storage business, starting withtapes, moving on to floppy disks in 1970, and establishing the standard for the“Winchester” HDD in 1973. In 1989, it developed the magnetic head technology that applied the principle of magneto-resistance (MR) to the recording head,allowing recording of 1 gigabyte per square inch. Furthermore, in 1996, it succeeded in developing the giant magneto-resistive (GMR) head. In this way,
IBM has constantly led the development of cutting-edge technology in thisfield.
Dramatic changes occurred to the industrial structure from the second
half of the 1970s through the 1980s. After the HDD industry took off with theestablishment of the standard for the Winchester HDD, U.S. computer manufacturers outsourced HDD production to external firms, and U.S. and Japanesefirms with a high level of technology entered and formed the industry. As thecomputer platform changed from mainframes to minicomputers, office computers, workstations and personal computers, the HDD interfaces evolved to enable
the use of HDDs as modules. The demand structure shifted from large generalpurpose machines to small computers, and there was a transition from centralized processing using mainframes to distributed processing using small computers.
In the mainframe era of the 1970s, a computer and an HDD were connected via IBM-IF, and the physical address of the HDD was controlled by thehost computer. Later, with the rise of minicomputers, office computers, andworkstations, the interface between the computer and the HDD evolved into thestorage module drive (SMD) and subsequently into the Shugart Associates System Interface (SASI) in the second half of the 1970s.2 With the introduction of
the SASI, the host computer came to control the HDD not through physicaladdressing, but through logical block addressing. Until this point, development

2

Shugart Technology was a leading HDD manufacturer and was the predecessor of the present
Seagate Technology.

34

Competitive Strategy of Global Firms and Industrial Clustersof HDDs required close coordination with the computers due to the need forsuch addressing.
However, when the personal computer (PC) market began to take off
at the end of the 1970s, things began to change. Apple Computer, the pioneer of
the PC market, had not revealed its basic input/output system (BIOS) for its
Apple-1. However, after IBM revealed the BIOS source code for its IBM-PC
XT, the design of controllers and HDDs became more open.
In the middle of the 1980s, the small computer system interface(SCSI) was introduced as the interface connecting the computer to the HDD in
the PC field. As a result, the HDD came to be connected to an external expansion bus via a controller board, and it became possible to support various HDDs
using the BIOS parameter table. With this, the modularization of the HDD
made rapid progress. After that, in the PC field, standardization of externalinterfaces made headway with the introduction of intelligent drive electronics(IDE), achieving the complete modularization of the HDD by moving the harddisk controller that had been mounted on the PC motherboard to within thedrive. The IDE specification was later certified by the American National Standards Institute (ANSI), and is being standardized as the AT attachment (ATA).3
Because the external interfaces became standardized and it became
sufficient to comply with the rules of a specified interface, drive manufacturers
no longer had to adjust their HDD specifications according to the computer inthe design phase. They could now make the internal design of their HDDs as
they liked, which expanded the possibilities for technological innovations andcost reductions. These changes were so dramatic that they completely changed
the competition rules of the industry; they served as the background to the subsequent entry of many firms into the industry and their fierce competition indevelopment and cost.

3

BIOS is the basic program that controls a computer’s input and output. SCSI is an interface connecting the computer with peripheral equipment. It was developed based on the SASI to make it
more versatile. IDE is the interface standard jointly developed by Compaq Computers
Corporation and Western Digital Corporation. It has achieved wide distribution as the standard
interface due to its mechanical simplicity.

35

20,000
15,00010,0005,000
0140,000
120,000
100,000
80,0006.5〜145.25
3.5
2.5
1.8 or smaller

60,00040,00020,000
0
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97

25,0006.5〜145.25
3.5
2.5
1.8 or smaller

Figure 1. (B) Changes in HDD Shipment
Volume by Inch
Product shipment volume (thousand units)

Figure 1. (A) Changes in HDD Shipment
Value by Inch
30,000

19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97

Product shipment volume (million U.S.dollars)

Tomofumi Amano

Source: Created based on McKendrick, Donner and Haggard [2000], p. 27.

Miniaturization of HDDs and Changes in Competitive Conditions
During this course, HDDs also became more compact. Figure 1
shows the changes in the world’s total HDD shipment value and shipment volume by inch. The type of HDD that contributed to the growth of the industry inthe second half of the 1970s when the industry had just started was the 6.5- to
14-inch drive for mainframes. The HDD industry had originally been monopolized by IBM. However, because new computer manufacturers emerged in thefirst half of the 1970s and procured their HDDs from external suppliers, theoriginal equipment manufacturer (OEM) market for HDDs grew.
HDDs were first miniaturized from the 14-inch drive for mainframes
to the 8-inch and 6.5-inch drives targeting minicomputers and office computers.
By the first half of the 1980s, the 5.25-inch drive for desktop PCs was gaining
popularity (Figure 1 (A)). This market was cultivated by such emerging firms
as Seagate Technology, MiniScribe, and Computer Memories.
After that, the small HDD for PCs was further miniaturized from 5.25
inches to 3.5 inches, and the 3.5-inch drive achieved full-fledged diffusion in
the 1990s. In this process, the emerging manufacturers of the 5.25-inch drive
took bold growth strategies in entering the competition arena of the 3.5-inch

36

Competitive Strategy of Global Firms and Industrial Clusters

drive. Conner Peripherals was hived off from the leading 5.25-inch HDD manufacturer, Seagate. Within a few years, Seagate, Quantum, Maxtor, and Western
Digital entered the market.
The important turning point was when HDD size shifted from 5.25
inches to 3.5 inches. Comparison between the shipment value and the shipment
volume of HDDs in Figure 1 shows this fact. The changes in the HDD shipment
value by inch in Figure 1 (A) suggest that the industry followed the miniaturization trend in a sequence from 14 inches to 6.5 inches, 5.25 inches, 3.5 inches,and 2.5 inches.
The changes in HDD shipment volume by inch in Figure 1 (B) indicate an essential difference between the miniaturization up to 5.25 inches andthat from 3.5 inches onward. The miniaturization of the HDD up to 5.25 inches,though it brought changes to the market segment structure, did not change thebasic structure of the industry; the shipment volume remainined at a low level.
In the process of miniaturization from 3.5 inches onward, the HDD
manufacturers faced demand for product volume exceeding that for the 5.25inch drive. The modularization trend created an incentive for increasing the production volume and accelerating innovation, and firms could secure profits only
if they could manufacture HDDs of higher performance at lower costs. Insteadof adopting a flexible development framework to adapt to market changes,
firms had to take bold growth strategies by focusing on growing market segments such as that of the 3.5-inch drive.
Figure 2 shows the changes in the number of firms in the HDD industry. The figure clearly indicates the changes in the industrial structure caused by
the expansion of the 3.5-inch drive market. The number of firms peaked in1985 with 105 players in the industry. This was the time when the 3.5-inch
drive market was launched in the United States. A large number of firms
attempted to enter this market segment at the time, seeking potential business
opportunities.
After the peak, however, many firms withdrew from the HDD industry, and the number of firms remaining in the industry rapidly declined. Only 15
firms remained in the industry in 2000, which means 90 firms, or about 86% in
proportion to the number of firms in the industry in 1985, withdrew from theindustry over 15 years. This rapid decline indicates that unusually fierce compe-

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Tomofumi Amano

Figure 2. Changes in the Number of Companies in the HDD Industry(No. of companies)

90
Elsewhere in the world
Japan

80
70
60
50
40
30
20
10
0
1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: Created based on data from the International Disk Drive Equipment and Materials
Association (IDEM), Trend FOCUS, and an interview survey of firms.

tition characterized the small HDD market segment.
Market Performance as of 2000
To look more closely at the intensification of competition in the small
HDD market throughout the 1990s, the performance of the market is identified
based on the shipment volumes of HDD manufacturers and major component
manufacturers as of 2000 (FY1999) as well as the changes in the sales andoperating margins of major firms (see Table 1).
The small HDD market is divided into 3.5-inch ATA (drives for PCs;
sold at around 10,000 yen), 3.5-inch SCSI (drives for servers; sold at around
30,000 yen), and 2.5-inch or smaller HDD (drives for mobile computers). The
3.5-inch ATA accounts for the largest volume, commanding a 73.6% share of
the 184 million-unit HDD market. Meanwhile, the 3.5-inch SCSI commands ashare of 11.0% and the 2.5-inch HDD a share of 15.4%.
As mentioned earlier, the SCSI and the ATA are only different interms of the interface; they share the same magnetic heads and media for the
3.5-inch drives. As for price, the SCSI for servers is about three times more
expensive than the ATA for PCs. With regard to the media used, the 3.5-inch

38

Competitive Strategy of Global Firms and Industrial Clusters

Table 1. Volume of HDD Shipped Worldwide (2000)(thousand units)2.5-inchor smaller
Seagate (U.S.A.)
Quantum (U.S.A.)
Maxtor (U.S.A.)
IBM (U.S.A.)
Fujitsu (Japan)
Western Digital (U.S.A.)
Samsung (South Korea)
Toshiba (Japan)
Hitachi (Japan)
OthersTotal

11,1005,300

3.5-inch
ATA
30,10026,80025,4008,300
14,50018,20010,1007,200
4,700
28,3003.5-inch
SCSI
8,900
2,500

Total

5,100
3,200

600
2,000
135,400

20,30039,00029,30025,40024,50023,00018,20010,100
7,200
5,300
2,000
184,000

Notes:

1. The “2.5-inch or smaller drives” are all ATA. The “ATA” is for PCs and the“SCSI” is for servers.
2. Maxtor acquired Quantum’s HDD business in April 2001.
3. Hitachi acquired IBM’s HDD business in December 2002.
Source: “‘01 HDD Market Survey: Current Status and Prospects of HDD-based Digital
Home Electric Appliances” (June 2001) Japan Economic Center.

drives use aluminum and the 2.5-inch drives use glass.
By type of drive, U.S. HDD manufacturers achieve overwhelming
production volumes in the 3.5-inch ATA segment. In particular, the top HDD
manufacturer, Seagate, which boasts a tremendous production volume in thissegment, also secures a 44% share in the high-priced 3.5-inch SCSI for servers.
The firm’s strategy is to secure its share of the high-end market while pursuinga high production volume in the ATA segment in order to attain a high production scale of its in-house manufacturing components.
The firms that made both HDDs for PCs and those for servers, similar
to Seagate, included Quantum, IBM, and Fujitsu in 2000. They competed indeveloping cutting-edge component-level technology. They tended to self-manufacture some of the core components, including the head and media.
Other firms, such as Maxtor, Western Digital, and South Korea’s
Samsung, do not have the capacity for in-house development of core components, partly owing to their later entry into the industry compared to Seagate
and IBM. Therefore, they specialize in the 3.5-inch ATA for PCs.
IBM and Japanese firms including Fujitsu, Hitachi, and Toshiba havealso placed emphasis on 2.5-inch and smaller HDDs for mobile computers. This
market segment is expected to grow in the future. Hitachi’s 2002 announcement

39

Tomofumi Amano

that it would acquire IBM’s HDD business was a strategy to gain dominance inthe market of HDDs for mobile computers. Hitachi and Toshiba specialize in
HDDs for mobile computers.
In addition to the drives, the market conditions of the key HDD components at the time should be studied. Table 2 shows the major manufacturers
and the shipment volumes of the key components mounted on HDDs.
The supply markets of the major HDD components are dominated by
Japanese firms. Such HDD manufacturers as Seagate, IBM, Fujitsu, and Hitachi
Table 2. Shipment Volume of the Key HDD Components (2000)(A) Media (hard disk [HD])Komag (U.S.A.)
Fuji Electric (Japan)
Showa Denko (Japan)
IBM (U.S.A.)
Mitsubishi Chemical (Japan)
Seagate (U.S.A.)
Fujitsu (Japan)
Nippon Sheet Glass (Japan)
Hoya (Japan)
Others
Total(B) Magnetic heads
IBM (U.S.A.)
Alps Electric (Japan)
Seagate (U.S.A.)TDK (Japan)
Hitachi (Japan)
Fujitsu (Japan)
Read-Rite (U.S.A.)
OthersTotal(C) Spindle motors
Nidec (Japan)
Matsushita-Kotobuki Electronics
Industries (Japan)
Minebea (Japan)
Victor Firm of Japan (Japan)
Sankyo Seiki Manufacturing
OthersTotal(thousand units)
Aluminum
46,50039,40034,80053,90034,20034,90012,800

Glass
1,800
8,900
700

11,10025,60012,700269,200

48,100(thousand units)
102,800
101,600
118,200
154,300
19,00050,20066,100612,200(thousand units)
113,100
31,50031,10011,9008,100
2,400
198,100

Note: Samsung withdrew from the spindle motor market in 1999.
Source: “01 HDD Market Survey: Current Status and Prospects of HDD-based Digital
Home Electric Appliances” (June 2001) Japan Economic Center.

40

Competitive Strategy of Global Firms and Industrial Clusters

manufacture magnetic heads and media (hard disks [HD]) in house, but eventhese firms procure any volume that cannot be covered by their own production
capacity from these outside suppliers. In addition, because self-manufacturingof components requires development of cutting-edge technology and global
production capacities, many HDD manufacturers do not self-manufacture thecomponents. Therefore, the market for supply of the key components is enormous.
By type of component, the supply of magnetic heads is dominated by
Alps Electric and TDK. As for media, there was intense competition among
Japanese firms in the aluminum media market for 3.5-inch HDDs as of 2000.
However, because the absolute number of media required for HDDs for PCs
decreased with the improvements in the recording density, the media became
oversupplied from around 2000. After that, the industry’s structure changed
with the withdrawal of Komag and the acquisition of Showa Denko by Mitsubishi Chemical, leading to a state of oligopoly. The supply of glass media for
HDDs is dominated by Hoya and Nippon Sheet Glass. In the spindle motor
market, Nidec boasts an overwhelming share.
It could be said that U.S. HDD manufacturers are more competitive insmall HDDs, centering on 3.5-inch drives, and Japanese firms differentiatethemselves by focusing on the 2.5-inch and smaller HDD market for mobile
computers. On the other hand, Japanese firms are found to be more competitivein the key component markets. Why is there such an inconsistency in focus
between the U.S. and Japanese firms when they are both part of the HDD industry?

4. Shift Towards Asia
Competition Strategies in Growth Markets
How did the structure of U.S. HDD manufacturers taking the offensive in the 3.5-inch HDD market and Japanese firms gaining an advantage inthe key component market come about amidst the rapid expansion of the HDD
industry? To answer this question, we must look at the growth strategies ofmajor firms during this period.

41

Tomofumi Amano

Figure 3. (A) Sales of U.S. Manufacturers

9,000
8,000
7,000

MaxtorSeagateQuantum
Western Dig

6,000
5,000
4,000
3,000
2,000

40

MaxtorSeagateQuantum
Western Dig
IBM

30

Operating margin (%)

Sales (million U.S.dollars)

10,000Figure 3. (B) Operating Margins of
U.S. Manufacturers

1,000
19
1981
1983
1985
1987
1989
1991
1993
1995
1997
99

0

20
10
0

81 83 85 87 89 91 93 95 97 99
-10
-20
-30
-40

Notes: 1. Financial data is on a consolidated basis.
2. Operating margins are EBIT margins.
Source: Created based on financial data from the Development Bank of Japan.

Figure 3 shows the changes in the sales and operating margins of U.S.
HDD-specialized manufacturers. Due to the limitation in acquiring long-term
data, earnings before interest and taxes (EBIT) were used for the operating margins instead of sales profits. The EBIT are the values close to operating profits,
which are obtained by adding the interests paid to the ordinary income and subtracting the interest income from that total.
As Figure 3 (A) shows, U.S. HDD manufacturers dramaticallyincreased their sales during this period, growing robustly with focus on the
OEM market in 3.5-inch HDDs for PCs. In particular, Seagate continuously
kept its top position in the industry. Its sales doubled in 1996 due to its acquisition of Conner Peripherals. Seagate has been followed by the second largest
manufacturer, Quantum.
Compared to these two firms, Maxtor and Western Digital, which arelatecomers that only deal in drive assembly, began to show a decline or a slowdown in growth in the second half of the 1990s. The reasons are said to be thatthey failed to integrate their global operations and that they were late in placing
their new products on the market because they found quality problems at themass production stage due to not manufacturing the key components by them-42Competitive Strategy of Global Firms and Industrial Clusters

selves.
In this industry, the scale of operation has a large influence on profitability. Figure 3 (B) suggests that the industry leaders, Seagate and Quantum,
have maintained a certain level of profitability over a long term. The firm
secured high profitability by growing. Meanwhile, the operating margins of
Maxtor and Western Digital fell into the red in the second half of the 1990s andhave stayed in the red since then. Because they could not expand their scale ofoperation smoothly and because they were not market leaders, they had nochoice but to give in to PC manufacturers’ pressure to lower the prices and thus
failed to make profits.
The situation was not promising for Japanese HDD manufacturers
either during this period. In the case of general electric appliance manufacturers, the profits and losses for individual divisions cannot be identified from thepublished financial reports. However, according to some interviews, it seems tohave been difficult for them to make notable achievements in terms of profit,
because the scale of commercial production was small for 3.5-inch HDDs, andthe market for 2.5-inch or smaller HDDs was limited to laptop PCs with theproportion of domestic production also being high.

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2

HitachiShowa Denko
Hoya
Alps Electric
Nidec

80 83 86 89 92 95 98
19 19 19 19 19 19 19

Figure 4. (B) Operating Margins of Major
Component Manufacturers
HitachiShowa Denko
Hoya
Alps Electric
Nidec

25
20
Operating margin (%)

Sales as compared to those in 1990 (%)[1990=1]

Figure 4. (A) Sales of Major Component
Manufacturers

15
10
5
0
-5

80 983 986 989 992 995 998
1 1 1 1
1 1

19

Notes: 1. Financial data are on a non-consolidated basis.
2. Data for Hitachi is shown for reference.
Source: Created based on financial data of the Development Bank of Japan.

43

Tomofumi Amano

In the meantime, how did the business performance of component
manufacturers change? Looking at the financial data of major firms in Figure 4,
in the media market, Showa Denko has seen stagnation in both sales growth andoperating margins, but Hoya has achieved an outstanding growth rate and profitability. The fact that Hoya has established a monopolistic position in the glass
media for the 2.5-inch HDD has also contributed to its high profitability.
Among the manufacturers of magnetic heads and motors, Nidec
boasts a monopolistic share in spindle motors, achieving notable sales growth.
Its operating margin has remained within the region of 7% as well. In the caseof Alps Electric, the firm had conventionally focused on magnetic heads andelectronic components for home electric appliances. Nevertheless, it formulated
a business restructuring plan in 1993 and shifted the production of electronic
components for consumer products to China; it also restructured its domestic
operations with focus on heads for HDDs. These efforts began to show resultsin 1996, and the firm’s sales and operating margin have been recovering.
As a matter of course, these data are based not on individual operations, but on the overall operations of firms, so various factors are involved intheir changes. As each firm defines its divisions differently, it is impossible toextract and compare information on the HDD-related segments alone. However,at least for the firms mentioned here, manufacturing of HDD components is avery large-scale operation and a business that contributes greatly to the firms’
sales and operating margins.
Be they manufacturers of HDDs or HDD components, firms thatassumed the market would expand, took active measures in anticipation of suchgrowth, and built an operational framework that could withstand rapid businessexpansion succeeded in increasing their market control and profitability; eventaking into account the restriction of data, this can be said about firms’ strategies amid the rapid expansion of the 3.5-inch HDD market. Many of the Japanese component manufacturers that succeeded to grow and increased their competitiveness during this period established close relationships with leading U.S.
HDD manufacturers. Firms that fell behind in achieving growth faced a decline
in profits, both in the areas of HDD and their components.

44

Competitive Strategy of Global Firms and Industrial Clusters

U.S. HDD Manufacturers’ Shift to Asia
Foreign investment in Asia played an important role in expanding operations in the growth phase that started in the 1980s. This is an aspect in whichnotable differences are observed between firms that achieved remarkable growth
and those that became stagnant. The first point is the timing of the investment.
Table 3 shows the timing of HDD manufacturers’ investment in Asia.
The industrial leader, Seagate, was also the first firm to invest in Asia. Seagate
was a venture firm founded in 1979 by an IBM engineer, Alan Shugart. Since
Shugart himself was the person who promoted the standardization of the interfaceof 3.5-inch HHD, he thought it was only a matter of time until the HDD would

Table 3. Timing of HDD Manufacturers’ Investment in East Asia
Year
Company
Place of investment
1983 Seagate Technology Singapore
Ampex
Hong Kong
Computer Memories
Singapore
TandonSingapore
TandonIndia
1984 Seagate Technology Thailand
IBM
Japan
MaxtorSingapore
Miniscribe
Singapore
Quantum (OEM to MKEI* 2) Japan
1985 Microscience International Singapore
1986 Micropolis
Singapore
TandonSouth Korea
1987 Connor Peripherals
SingaporeControl Data
Singapore
Cybernex
Singapore
Microscience International Taiwan
Priam
TaiwanSeagate Technology Thailand
1988 Unisys
Singapore
Western Digital
Singapore
1989 IBM (Saha-Union)
ThailandSeagate Technology Malaysia
Kalok
Philippines
SyQuestSingapore
NEC
Philippines

Year
Company
Place of investment
1990 Connor Peripherals
Malaysia
Microscience International China
1991 Fujitsu*1
Thailand
PrairieTek
Singapore
Xebec
Philippines
1992 Integral Peripherals
Singapore
Ministor
Singapore
1993 Connor Peripherals
China1994 DEC
Malaysia
Hewlett-Packard
Malaysia
Quantum
Malaysia
Western Digital
Malaysia
MKEI (Quantum OEM) Singapore
1995 IBM
Singapore
HitachiPhilippines
Toshiba
Philippines
Fujitsu
Philippines
1996 IIBM
ThailandSeagate Technology Thailand
Fujitsu
Vietnam1998 MKEI (Quantum OEM) Indonesia
2002 Western DigitalThailandThailand
Hitachi*3

Notes: *1.Fujitsu launched Fujitsu (Thailand) Co., Ltd. (FTC) in 1988, but shifted its HDD production to FTC in 1991.
*2. MEKI: Matsushita-Kotobuki Electronics Industries.
*3. Hitachi acquired IBM’s HDD division.
Source: Created based on McKendrick, Donner and Haggard (2000) at p. 99 and data from interviews.

45

Tomofumi Amano

become adaptable to a wide variety of applications. Therefore, he established a
production base in Singapore in 1983 and in Thailand the following year, driving
forward the mass production of the HDD, already with a full understanding of
how the modularization would affect the industry.
Seagate frequently conducted M&A in its growth process. It acquired
Grenex (a thin-film media manufacturer) in 1985 and Aeon (an aluminum substrate manufacturer) in 1986. Furthermore, it purchased HDD software manufacturers in the 1990s and acquired Conner Peripherals, which had originally hived
off from Seagate, in 1996. By procuring funds from the stock market and acquiring external resources through M&As, Seagate came to posses the largest HDD
production capacity in the industry. Much of the production capacity it established through this process is located in Southeast Asia.
The next firms to invest in East Asia were Tandon and Maxtor. Tandon
advanced into countries such as Singapore, India, and South Korea in the first halfof the 1980s. However, this expansion ended in failure and the firm was acquiredby Western Digital in 1988. Conversely, Western Digital managed to invest in
Singapore through the acquisition of Tandon. Firms including Maxtor, Conner
Peripherals, and Miniscribe also invested in Asia in and around the mid-1980s.
In the beginning, the race for foreign investment was started by U.S.
venture firms. At that time, many of them chose Singapore as the place for investment. Since the OEM market (non-captive market) for the 3.5-inch HDD for
desktop PCs was developing, backed by the rapid expansion of the PC market,
U.S. venture firms daringly attempted to invest in Asia in order to establish acompetitive advantage in the OEM market.
From the end of the 1980s, the place for investment by U.S. firms
spread from Singapore to Thailand and Malaysia. Seagate invested in Thailand in
1987, in Malaysia in 1989, and once again in Thailand in 1996. Western Digital
expanded into Malaysia in 1994, and Quantum also invested in Malaysia in thesame year.
IBM’s case is interesting. The firm had engaged in developing andmanufacturing all types of HDD, from drives for servers to 2.5-inch or smaller
drives for mobile computers. It had also conducted in-house development of key
components, including magnetic heads and media. IBM America outsourced thedevelopment and manufacturing of 3.5-inch and 2.5-inch HDDs for PCs to IBM

46

Competitive Strategy of Global Firms and Industrial Clusters

Japan in 1984. IBM Japan initially developed and manufactured HDDs in Fujisawa, Japan. However, due to the competitors’ shift to Southeast Asia and theimpact of yen appreciation, they started to outsource the manufacturing of HDDs
to Saha-Union Public Firm in Thailand in 1989. Moreover, IBM America shifted
its operations related to HDDs for servers from San Jose in the United States to
Singapore in 1995, and established a wholly owned manufacturing base in the
Prachinburi Province, Thailand, in 1996.
Quantum also expanded its operations by using contract manufacturing.
The firm was founded in 1980 and had expanded its business mainly through the
5.25-inch HDD. Quantum listed its stock in 1982 and came to command a 25%
share in the HDD market. However, in order to further expand its production
capacity, it entered into a partnership with Matsushita-Kotobuki Electronics
Industries in 1984, regarding contract production of the 3.5-inch HDD. Matsushita-Kotobuki was first manufacturing the HDD at its base in Ipponmatsu, Ehime
Prefecture, Japan but in order to evade the impact of yen appreciation, the firm
launched overseas production of HDD in Singapore in 1994.
Concentrated Investment and Geographic Advantage
U.S. manufacturers invested in Southeast Asia, centering on Singapore and gradually spreading to Malaysia and Thailand. Eventually, a mass production framework in Asia became a requisite condition for securing large-scaletransactions in the 3.5-inch HDD market. As indicated in Figure 2, the numberof firms entering the industry declined and the number of firms withdrawing
from the industry increased rapidly after this period. The overseas mass production capacity began to function as an entry barrier for surviving in the industry.
HDD manufacturers that achieved foreign investment consistently
began to increase their overseas production ratios at this time. According to a
study by McKendrick, Donner and Haggard (2000), which examined thechanges in the overseas production ratio with regard to the HDD industry, theoverseas production ratio of U.S. firms, which had only been 4% in 1983,
increased to 67% by 1990. These firms had conducted a major shift to overseas
production in the second half of the 1980s.
In contrast, the overseas production ratio of Japanese HDD manufacturers was only 2% in 1990 and 54% in 1995; they only began to make full-47

Tomofumi Amano

fledged expansion into Asia from the mid-1990s. The main reason for the foreign investment was to deal with the second yen appreciation in the mid-1990s.
Despite having a competing operational domain, Japanese HDD manufacturers
were more than a decade late in engaging in foreign investment. It is doubtfulthat Japanese firms that made foreign investments with an eye on the exchange
rate fluctuations were able to act based on a consistent global strategy.
As an example of concentrated foreign investment in Southeast Asia,
the investment process of Seagate will be studied below in detail. Seagate’s
expansion into Asia began in Singapore in 1983, later spreading to Thailand
and Malaysia. Seagate had 12,000 workers in Singapore and 16,700 workers in
Thailand and Malaysia compared with 11,000 workers in the United States in
1990, and the number of workers in Asia increased to 15,000 in Singapore and57,000 in Thailand and Malaysia against 9,000 workers in the United States in
1999. The firm now has 4,000 workers in China.
Seagate’s employee makeup in Asia by region points to some interesting facts. One is that the firm has regarded Singapore as the central base in
Asia for a long time. In terms of labor cost, it would have been wiser for thefirm to downsize its base in Singapore and expand its bases in Thailand,
Malaysia, and China. However, it did not do that. Seagate positioned Singapore
as a base for supplying engineers and supervisors, which complements the U.S.
headquarters, and as the core base for the industrial cluster in Southeast Asia.
Therefore, the number of Seagate employees in Singapore never decreased
throughout the 1990s.
Among the Southeast Asian countries, Singapore has substantial preferential measures for foreign firms, including tax incentives. For example, inThailand, the Board of Investment (BOI) gives approvals for inward investment
by foreign firms, and by dividing the land area into three zones from Zone 1 toZone 3, it provides a tax allowance of 40% to 50% for firms investing in Zone 2
and Zone 3, which are far from Bangkok. Malaysia provides a tax allowance forre-investment and a tax allowance of a little over 10% for collaboration with
universities and public research institutions. The Thai government usually takes
about three to six months to approve an investment project.
Compared to neighboring countries such as Thailand and Malaysia,
the support policy of Singapore had distinctive characteristics. First of all, its

48

Competitive Strategy of Global Firms and Industrial Clusters

taxation system was highly preferable for foreign firms conducting sophisticated operations, including an R&D allowance (23.1%), an equipment purchaseallowance (61.5%), an allowance for collaboration with universities or publicresearch institutions (61.5%), a depreciation allowance (53.8%), a humanresources development allowance (46.2%), and an allowance for technicalassistance to small and medium-sized enterprises (SMEs) (69.2%). At the sametime, the time required for gaining an approval for an investment project was
three months in 80% of all cases, which was extremely short compared to othercountries. This point was very important for making large-scale investment
with a short payback period in the IT industry, which has short lifecycles. The
Singaporean government was thoroughly aware of the needs of the U.S. IT
industry.
A more important point was that Singapore provided, in addition to
the above-mentioned general incentives applicable to all industries, industryspecific incentives for the HDD industry. Singapore provided substantial preferred measures in association with a wide range of activities in the HDD industry, including (1) development of engineers and operators, (2) diffusion anddevelopment of technology, and (3) development of local vendors.
The organization that played the central role was the Magnetic Technology Centre (MTC; renamed as the Data Storage Institute [DSI] in 1996).
The MTC was established within the National University of Singapore at the
government’s initiative in 1984. Since then, it has promoted basic research
related to data storage and joint projects between industry and academia, andhas produced a large number of engineers for the HDD-related industry. It also
provided support measures for SMEs, provided them with basic knowledge andtechniques for quality control and production management, and engaged inoperator training.4
U.S. HDD manufacturers sought assistance from the Singaporean
government and the government made active efforts to support Singapore’s
HDD industry. As a result, many firms related to the HDD industry established“advanced mass production bases” equipped with a technology development
capacity and a mass production capacity in Singapore. Under a favorable envi4

According to an interview by the author with the Data Storage Institute (DSI) (2004, February).

49

Tomofumi Amanoronment, Seagate developed engineers, supervisors, and operators in Singapore,appointed them as core personnel, and spread a low-cost operation framework
throughout Southeast Asia. When launching production bases in Malaysia andThailand, the operational experience in Singapore and the human resources it
had developed there played a key role. The concentrated human resources
development at the core base and prompt transfer of knowledge to the neighboring mass production bases enabled Seagate to conduct what can be called a vertical launch of HDD mass production.
Furthermore, the firm developed local suppliers and encouraged global suppliers to establish their bases close to Seagate’s bases. The firm provided
technical guidance to local suppliers to raise their technical level. Seagate also
appointed local workers as personnel in charge of procurement and repeatedly
applied unique ideas in product design in order to be able to manufacture HDDs
using local components. For global suppliers, the firm increased the incentive
for establishing their bases nearby by increasing the production ratio in Southeast Asia and securing production volume. Since component cost accounts for alarge share of the HDD production cost, such local supplier networks are likely
to have contributed greatly to increasing the firm’s cost competitiveness.
Seagate’s efforts have been copied by other U.S. HDD manufacturers,
and have sparked successive waves of investment. Underlying the rapid
increase in the overseas production ratio in the second half of the 1980s weresuch efforts by the aforementioned pioneering firm, with subsequent firms
immediately following its example.
Hesitant Japanese General Electric Appliance Manufacturers5
The U.S. HDD manufacturers’ investment in Asia can be understoodas part of the competition to acquire production resources on a global scaleamidst the rapid expansion of the 3.5-inch HDD market. However, Japaneseelectric appliance manufacturers were not quick to respond to this trend. The
reason was closely related to their conventional business circumstances.
The HDD sections of Japanese electric appliance manufacturers wereusually established within the in-house computer divisions as sections provid5

For the efforts made by Japanese general electric appliance manufacturers, see Amano (1999).

50

Competitive Strategy of Global Firms and Industrial Clusters

ing storage devices. From the end of the 1970s through the first half of the
1980s, they supplied storage devices to U.S. office computer manufacturers as
OEM suppliers and expanded their operations. Since the HDDs for office computers had close technical relevance to computers, Japanese electric appliancemanufacturers provided technical support and engaged in joint developmentwith U.S. computer manufacturers; they gained tremendous trust from leadingclient firms, including IBM. The HDD business earned the biggest profits forcomputer manufacturers at the time, and some firms gained nearly 70% of theiroverall profits from the HDD business.
One example of this success is Fujitsu. The firm jointly developed an
8-inch HDD with Memorex Products in 1979, and independently developed a
48-MB HDD in 1981. It also succeeded in developing a 10.5-inch drive andsupplied the product to the United States. Until the mid-1980s, the OEM business of HDDs for U.S. office computer manufacturers was one of the core businesses of the firm. Although the HDD business required cutting-edge technology, the unit prices for products were extremely high. Fujitsu exerted efforts todevelop HDD-related technology in-house and in affiliated firms, and wonorders from U.S. clients.
However, such success produced the opposite result in the world ofsmall HDDs. In the second half of the 1980s when U.S. HDD manufacturers
achieved rapid growth, Japanese electric appliance manufacturers faced a very
severe situation. The market for medium and large-size HDDs was eroded bythat for small HDDs, and shipment values for the HDD operations of Japaneseelectric appliance manufacturers, which had relied on medium and large-size
HDDs, dropped sharply. Moreover, yen appreciation spurred a decline in profits. In order to break through this situation, Japanese electric appliance manufacturers finally began to review their operational structure in the early 1990s,
but the process did not progress smoothly.
In the case of Fujitsu, which fared relatively well among the Japanesefirms, the firm launched Fujitsu (Thailand) Co., Ltd. (FTC) in 1988 and attempted to shift its 3.5-inch HDD operation to FTC in 1991. However, the operation
did not succeed, and Fujitsu withdrew from global production. It invested in
Thailand once again in 1994, but full-fledged mass production only started in thesecond half of the 1990s, nearly ten years later than that of U.S. firms.

51

Tomofumi Amano

NEC Corporation was more passive. The firm had produced HDDs
mainly for its PC98 series computers and computers for its internal systems
divisions, as well as for the captive market in which products were sold throughits distributors and exclusive dealers. NEC expanded into the Philippines in
1989, but all products were sold to Japan and the components were supplied
from Japan; only the labor-intensive processes were outsourced to the local
Japanese subcontracting firms, and the finished products were imported into
Japan.
Overseas production was adjusted in line with exchange rate fluctuations, so the overseas production ratio changed wildly. The firm lacked the attitude to commit itself to establishing a mass production framework in Asia. As aresult, costs became high and the firm had no choice but to withdraw from thein-house manufacturing of HDDs in 1998, and from the entire HDD production
business in 2001.
Toshiba and Hitachi, at first, intentionally avoided full-scale entry
into the 3.5-inch HDD market and specialized in the 2.5-inch HDD for laptop
PCs. The two firms invested in the Philippines in 1995 and gradually increased
their overseas production ratios. However, the market of the 2.5-inch and smaller HDDs for mobile computers was smaller in absolute scale compared to thatfor the 3.5-inch HDD, and had little growth potential.6 Because they could notallocate a substantial amount of management resources to their HDD operations, the firms purposefully avoided entering into full-fledged competition with
U.S. firms.
Compared to U.S. HDD manufacturers, Japanese firms were later toexpand overseas, and their commitment to overseas production was irresolute.
Their main investment location was the Philippines, which was far from Singapore and Thailand. By looking at their mode of investment, it is doubtful thatthey promoted foreign investment with a view to forming local industrial clus-

6

In 1994, the world’s total demand for HDDs was 62.58 million units, of which 900,000 units werefor 2.5-inch and smaller HDDs, accounting for 14% of the total. In 2000, the world’s total
demand was 184.02 million units, of which 28.3 million units were for 2.5-inch and smaller
HDDs, accounting for 15% of the total. The proportion increased little, but the production volumeof the 2.5-inch HDD nearly tripled during these six years. The market is expected to grow further
in the future.

52

Competitive Strategy of Global Firms and Industrial Clusters

ters and strategically expanding the scale of operations as the U.S. firms did.
They seem to have regarded the shift of production to overseas bases a temporary measure to deal with the relative personnel costs that soared in Japan due
to yen appreciation. Such differences between Japanese and U.S. firms manifested as differences in their competitive advantages in the HDD market in the
1990s when the 3.5-inch drive became the standard.
Rapidly Growing Japanese Component Manufacturers
In contrast to the struggling general electric appliance manufacturers,
Japanese component manufacturers gradually gained strength in the 1990s.
These firms paid attention to the growth of U.S. firms from an early stage andestablished business connections with them. Since U.S. firms started increasing
their production in Asia the Japanese component manufacturers have attempted
to establish their production bases near the U.S. firms’ bases.
Japanese component manufacturers started investing overseas relatively earlier than Japanese general electric appliance manufacturers. They promoted overseas production in pace with the trend of U.S. HDD manufacturers
rather than that of the Japanese HDD manufacturers.
The first Japanese firm to begin the trend of investment in Southeast
Asia was the top spindle motor manufacturer, Nidec. It is a venture firm, founded by Shigenobu Nagamori, which was hived off from TEAC Corporation in
1973. At the time, Japanese general electric appliance manufacturers tended to
produce motors in-house or at their affiliated firms, so it was relatively difficult
to expand the motor business within Japan. Therefore, the firm conductedactive sales and marketing activities in the United States.
At that time, U.S. HDD manufacturers were switching from self-manufacturing the spindle motors to procuring the motors from outside. Thus,
Nidec was able to start a deal with Seagate in 1983. HDD manufactures including Seagate concentrated their development resources in the development of thedrives and magnetic heads in order to catch up with the rapid market expansionof the 3.5-inch HDD. Nidec acquired orders for motors from most HDD manufacturers, weaving its way through this niche.

53

Tomofumi Amano

Table 4. Major Component Manufacturers’ Operational Expansion Into
East Asia And Its Timing(A) Media manufacturers
Overseas bases
Domestic bases (operation)(operation; year of foundation)
Showa Denko Malaysia (aluminum substrates; 1997)

Ichihara Plant (aluminum/
glass media)

Remarks
Showa Denko and Showa Aluminum merged in March 2001.
It acquired the HD operation of
Mitsubishi Chemical in 2002.

Singapore (aluminum/glass Mizushima / Naoetsu Plants
media; 1996)(aluminum/glass media)
Malaysia (aluminum
Asahi Komag, founded in 1987,
San Jose in California
media; 1993, 1996)
was dissolved in March 2001.
(only development)
Komag closed all plants in the
United States and shifted theoperation to Malaysia.
Fuji Electric Malaysia (aluminum/glass Matsumoto / Yamanashi Plants
media; 1996)(aluminum / glass media)
Mitsubishi
Chemical
Komag(U.S.A.)

NipponPhilippines (glass blank
Yokkaichi Plant (blank
Sheet Glass sheets, substrates, media; sheets, substrates, media)
1997), Malaysia (same asabove; 1999)
Hoya

Thailand (substrates;
1990), Singapore (media;
1995)

Akishima Plant (blank
sheets)The base in Malaysia is ADP(joint venture between Kobe
Steel and Nippon Sheet Glass).
It transferred its Philippine baseto Hoya in 2004.
Hoya received Nippon Sheet
Glass’substrate base in thePhilippines by transfer in 2004.

Notes: 1. Blank sheets are aluminum sheets punched out in a doughnut shape or glass sheets
processed into a doughnut shape.
2. Substrates are blank sheets polished on the surface and cleaned. Media are substrates towhich a magnetic film has been sputtered.

(B) Magnetic head manufacturers
Overseas bases(operation; year of foundation) Domestic bases (operation)
TDK

Dongguan Plant in China Chikumagawa Plant(back-end process; 1994), (development, front-end
Philippines (back-end
process)
process; 1996)

Remarks
TDK is the top supplier of magnetic heads for HDD.

Alps Electric Wuxi Plant in China (back- Nagaoka Plant (development,
end process; 1995)
front-end process), Furukawa
Plant (back-end process)Read-Rite

54

Thailand (back-end
process; 1991, 1995)

Milpitas Plant in California(development, front-end
process)

Read-Rite established ReadRite SMI with the capital participation of Sumitomo Metal
Industries in 1991, but it wasdissolved in 2001. The firm has
continued its magnetic headoperation in Thailand andundertakes processing workfrom HGA.

Competitive Strategy of Global Firms and Industrial Clusters(C) Spindle motor manufacturers
Overseas bases(operation; year of foundation) Domestic bases (operation)
Nidec

Thailand (motor component processing andassembly; 1990)

Kyoto / Nagano Plants
Nidec invested in Thailand in(development, processing, 1990, and has established andassembly)
expanded its plants in nearby
locations including Bangkadi
and Rojana.

Matsushita- Indonesia (motor component processing andKotobukiElectronics assembly; 1998)
Industries

Ipponmatsu Plant (development, processing,assembly)

Thailand (motor component processing andassembly; 1990)

Karuizawa Plant (development, processing, assembly)

Minebea

Remarks

Source: Created based on data from interviews with firms, “Market Survey on HDD” for the relevant
years, Japan Economic Center and “Electronic Manufacturers’ Investment in East Asia,”
Electronic Economic Research Center, 1995.

In the case of Nidec, U.S. HDD manufacturers had been major clientsfrom the beginning, so the firm had seen the need to establish its production
framework in Southeast Asia from the mid-1980s. Nidec established a branch
office in Singapore in 1984 to gather information while engaging in sales andmarketing activities, and achieved investment in Thailand in 1990. The directcause for the investment was a request from Seagate, which had already started
manufacturing in Thailand, and from IBM-affiliated Saha-Union.
Later, while U.S. HDD manufacturers expanded their mass production at their overseas operation bases, Nidec established and expanded its plantsin Thailand. After Nidec advanced into Thailand, Fujitsu, IBM (Prachinburi),and Western Digital also advanced into Thailand and nearby Malaysia, so it
became even more advantageous to establish operation bases in this area. Nidec
mentioned the following points as the reasons for choosing Thailand: (1) clientsare concentrated in the area; (2) supply chains are developed, and about 70% of
the components can be procured within Thailand; (3) there is access to the
BOI’s tax exemption measures and the preferential treatment for the HDD
industry; and (4) they believe that people in Thailand are diligent and friendly.
Currently, Nidec controls the Ayutthaya, Bangkadi, Rojana, andNidec Hi-tech Motor (NHMT) (acquired from Seagate) plants in Thailand, with
about 9,000 workers. The firm has a separate production line for each client.

55

Tomofumi Amano

Nidec deals with most of the HDD manufacturers, including GSM, Maxtor,
Western Digital, Hitachi Global Storage Technologies, and Fujitsu.
While Nidec conducted one of the most daring foreign investment
campaigns of Japanese HDD-related component manufacturers, manufacturersof other types of components also shifted their operations overseas one after theother in the mid-1990s. In the area of hard disk media processing, U.S.-based
Komag (1993 and 1996: Malaysia), Mitsubishi Chemical (1996: Singapore),
Fuji Electric (1996: Malaysia), and Hoya (1995: Singapore) established theirplants close to HDD manufacturers’ bases. Their overseas expansion was also
influenced by the local production activities of U.S. HDD manufacturers thatwere their major clients. Therefore, investment locations came to be concentrated in Singapore and Malaysia.7

5. Establishing Bases within Industrial Clusters and Creating Competitive Advantages
Growing Competitive Pressure and Establishment of Bases within Industrial Clusters
The HDD industry’s shift to Asia cannot be discussed only from theviewpoint of the timing of the establishment of overseas production bases. In
this industry, the significance of establishing production bases within industrial
clusters in Asia gradually increased through the 1990s. This is closely related tothe changes in competitive pressure within the industry. From the 1980s to the1990s, the competitive pressure in the industry changed and HDD manufacturers’ establishment of production bases in Southeast Asia came to take on a different meaning in terms of competition.
In the first half of the 1980s when U.S. HDD manufacturers began toconsider the establishment of bases in the Southeast Asian region, particularly
Singapore, the only roles of Southeast Asia were to accept matured products
and manufacture low added value at a low cost by providing low-cost labor andinvestment incentives.

7

Based on “Market Survey on HDD” for the relevant years (Japan Economic Center) and “Electronic
Manufacturers’ Investment in East Asia,” (Electronic Economic Research Center, 1995).

56

Competitive Strategy of Global Firms and Industrial Clusters

Table 5. Changes in the Competitive Pressure in the HDD Industry andComparative Advantages of Each Country
Comparative advantages of each country
Role of Southeast
ThailandAsia in the HDD
Singapore
Malaysia
industry
Labor cost,
1980-1985 Cost
New products were Labor cost,—produced in thegeneral incentives, generalincentives,
United States andinfrastructure,proximity to
the matured
supervisors andSingaporeengineers
products were
shifted to Southeast
Asia.
Supervisors Supervisors
1986-1992 Cost, Time to Development of new Weak industrial
andcluster effects
Marketproducts wasand(human resources, engineers, engineers,
launched in theindustrial linkage), labor cost,
United States, andlabor cost,proximity to proximity towhen the processes industry-specificincentives, general Singapore
became stable,
Singaporemass production
incentives
was conducted in
Singapore. When the
products matured,
they were shiftedfrom Singapore to
Thailand or Malaysia.
GeneralStrong industrial
1993-2000 Cost, Time to The pilot run isGeneralincentives, incentives,
cluster effects
Market, Time conducted in the
weak
United States, and(specialized
to Volume,
weak
the production ishuman resources, industrial
Yield
industrial
Improvement directly launched in industrial linkage, cluster
cluster
effects,
technology
Southeast Asia.
effects,
proximity to proximity tospillover), strong
Singaporeindustry-specificSingapore
incentives, general andand
Malaysia,
incentives,
Thailand,labor costproximity tolabor cost
Thailand andMalaysia
Competitive
pressure

Note:

General incentives are general preferential measures for foreign investment and industry-specificincentives are preferential measures for investment which are specific to the HDD industry.
Source: McKendrick, Donner & Haggard (2000), p. 60.

The situation began to change in the second half of the 1980s. U.S.
firms launched new products in the United States, commencing mass production in Singapore when the processes became stable, and shifting the production
to Thailand or Malaysia when the products matured. Meanwhile, the productlife cycles became shorter in the market, generating the need to shorten the timerequired for placing a new product on the market (Time to Market). Singapore
played the key role in shortening the Time to Market.

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Tomofumi Amano

After the mid-1990s, firms faced the need to expeditiously place newstable-quality products at low prices from the start. Therefore, while conducting
a pilot run in the home country, the firms came to directly launch mass production in Southeast Asia. Today, they even conduct pilot runs in Southeast Asia.
By 1996, firms no longer simply sought low-cost labor from theinvestment locations. They were now required to shorten the development period in the United States, and to solve the quality problems involved in theprocess, from the pilot run to the launch at their local bases in Southeast Asia,
so as to smoothly place the products on the market. In order to withstand suchcompetitive pressure, the firms needed to promote localization in Southeast
Asia and effectively exploit the various effects of industrial clusters.
The firms that responded actively to this issue were the U.S. HDD
manufacturers and the Japanese component manufacturers. U.S. HDD manufacturers made concentrated investments in Southeast Asia from an early stage andactively involved themselves in the formation of local industrial clusters. They
invited key component suppliers to these locations in order to enjoy stronger
cluster effects. As their local production increased in scale, it became more beneficial for component manufacturers to move into these locations, so Japanesecomponent manufacturers advanced into these areas.
Nidec in the earlier example was also quick at shifting its operations
to Southeast Asia. Currently, the firm not only conducts the daily operations
related to mass production, but also conducts product launches and pilot runs at
its production bases in Thailand. They say they will transfer more of their backend product development operations to Thailand in the future. It can be said thatthe firm has steadily reinforced its ties with industrial clusters under the increasing competitive pressure.
In contrast to these successful strategies, many Japanese general electric appliance manufacturers that were late in expanding overseas invested in
the Philippines, far from the major industrial cluster areas. This can either beconstrued as having prioritized low wages to industrial cluster effects or having
intentionally avoided the industrial cluster areas where U.S. manufacturers had
a firm foothold.

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Competitive Strategy of Global Firms and Industrial Clusters

Significance of Establishing Bases in Industrial Clusters in Terms of Operations
What, then, is the significance of establishing production bases insuch mass production clusters in regards to the HDD industry? First of all, there
are two significant points in regards to operations.
The first point is the ability to deal with daily production fluctuations
and quality problems. Since most HDDs are currently destined for the PC OEM
market, there are considerable production fluctuations on a daily basis. Information regarding market trends is relayed through the chain of production, to thecomponent manufacturers by way of information systems. Thus, HDD manufacturers and component manufacturers must change their production volumes
every day. Such daily adjustments of production volumes and response to quality troubles need to be conducted locally.
The second, more important point is the ability to improve yield uponlaunching a new model. Even if the key HDD components are of good quality
when shipped from the component manufacturers, this does not guarantee ahigh quality final product. The quality of the finished product can only be confirmed after combining the components in the HDD manufacturer’s final
assembly process. In particular, when launching a new model, how quickly the
manufacturer can correct the compatibility problems between the components
and improve yield greatly affect the profits of the HDD manufacturer and thecomponent manufacturers.
A case of a media manufacturer is highlighted below as a textbook
example of this point.8 This media manufacturer conducts business with its
client firms in the following manner. When an HDD manufacturer commences
initial development, the firm always has the homeland development team participate in the client firm’s development to acquire information on the product’s
specifications and process attributes. Then the firm conducts the initial processdevelopment in the homeland, gradually shifting the operations to Singapore.
The homeland staff and local staff carry out the pilot run at the overseas loca-

8

Based on an interview with Hoya’s subsidiary in Singapore (2004, February).

59

Tomofumi Amanotion in cooperation with each other. During the same period, the client firm also
shifts its pilot run and process development operations to Southeast Asia andworks on launching the production. The two firms actively exchange information during this course.
The reason for conducting the pilot run at the overseas location isthat, even if the trial products created in the product and process development
phases comply perfectly with the intended design, when they are moved to themass production phase, the percentage of good-quality products can be low dueto the peculiarities of the actual facilities and the process characteristics. Also,
even if a component manufacturer delivers good-quality components that meetthe specified specifications, defects could occur when they are assembled into a
product in the HDD manufacturer’s final stage of production, due to a bad combination or incompatibility of components. In particular, problems frequently
occur with respect to the interface between the head and the media.
The parameter adjustment in the media manufacturer’s production
process is important in solving this yield problem. Therefore, the media manufacturer in this case example has a separate production line for each client, conducts lot control, carries out 100 percent inspection in the pilot run phase, andinforms the HDD manufacturer of the results. If the HDD manufacturer
requests correction of a product’s attributes, the firm makes adjustments bychanging the parameters in the production process.
Due to the need for frequent adjustments in the mass production
phase and early achievement of economies of scale, it is highly beneficial forcomponent manufactures to locate their operations close to the HDD manufacturers’ bases.
Access to Human Resources and Technology Spillovers
It is also possible to discuss the significance of establishing production bases within industrial clusters from the viewpoint of access to humanresources and technology spillovers. This refers to the direct or indirect use of
the labor market formed within a cluster.
In the case of mass production-type products such as the HDD, themanufacturers often face the need to establish a new plant or suddenly expand
its production capacity. In such a case, it would be too late to start training

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Competitive Strategy of Global Firms and Industrial Clusters

human resources with the know-how to launch such operations. The key todetermining the production location would be the ability to promptly hire people who already have the necessary skills at that location. This point is evident
in IBM’s case.
Since its contract production to Saha-Union in Thailand in 1991, IBM
has expanded its production in Southeast Asia. It established a wholly owned
production subsidiary in Prachinburi in 1997. As of 2003, Saha-Union produced
over 12 million units of product and the Prachinburi Plant produced over 28
million units. About 7,000 employees are working in the two locations combined.
When IBM established its Prachinburi Plant, it conducted personnel
exchanges with Saha-Union, which had a long production experience. The firm
had the staff hired at the Prachinburi Plant receive training in Saha-Union, andhad engineers from Saha-Union dispatched to the Prachinburi Plant. In this caseas well, the yield upon the initial production launch was very low at about 50%,
and the firm was required to promptly solve the quality problems and smoothly
inaugurate the production. Thus, the above-mentioned personnel exchanges
were indispensable for launching production in the new plant.
Later, in the second half of the 1990s, IBM expanded the Prachinburi
Plant and hired people at the mid-career level. It is notable that two-thirds of theengineers hired at this time had been working for nearby competitors, such as
Seagate or Fujitsu, and the remaining one-third were people who had moved
from semiconductor-related firms. Sometimes, such people coming from otherfirms brought their subordinates with them.
A similar situation occurred in Singapore. IBM established a production base for HDDs for servers in Singapore in 1994. The person who supervised the launch of this production base was an engineer who had over 20 yearsof experience with IBM’s competitors, including Seagate. He took his subordinates with him when he joined IBM. A person who was assisting him stated asfollows.

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Tomofumi Amano

When he started business in 1994, many senior staff members gathered underhim. All of us had worked with him for ten years or more. I had the experience of working
with him for another firm for ten years. We had accumulated work experience, sometimes
in the same firm, and sometimes in different firms. However, when he was going to establish IBM Singapore, we all came back to him. So we already knew each other and had
experiences at the time of establishment. This is why we could launch the business soquickly.9

This statement expresses the essence of the white-collar labor market
in Southeast Asia very well. U.S. HDD manufacturers and Japanese component
manufacturers that expanded their operations to Asia in a decisive mannerlaunched production quickly by actively hiring people who had accumulated
experience with other firms.
In recent years, many firms have also acquired such human resources
through M&A. Western Digital acquired Fujitsu’s plant in 2002 to expand production of the 3.5-inch HDD. The main reason for the acquisition was toacquire a large amount of experienced human resources along with the manufacturing equipment.
In an industrial cluster, information moves around through movementof labor, close business relationships between firms, and frequently held seminars. Best practices concerning production or distribution operations often cometo be shared within an industrial cluster through various routes. By establishinga production base in a cluster and taking root there, a firm is able to increase its
sensitivity to such information and effectively incorporate it into the firm’s
operations.
Many of the Japanese general electric appliance manufacturers thatinvested in areas far away from ASEAN’s major industrial clusters could not
enjoy such benefits at the initial phase of their production launch. The slow
speed of the mass production launch of Japanese electric appliance manufacturers is attributable in part to limited access to experienced human resources atthe locale. Due to this lack, the firms had to dispatch many engineers fromJapan, so they took a long time to develop a local framework for solving problems independently and are likely to have failed to reduce the overhead costs in
9

Based on an interview with IBM Singapore (1998, December).

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Competitive Strategy of Global Firms and Industrial Clusters

proportion to the increase in the production scale.

6. Closing Remarks
The competition between firms in the HDD industry from the 1980s
through the 1990s indicates how Japanese and U.S. firms competed fiercely
based on the premise of accelerated innovations in line with the modularizationof HDDs and a trend toward global competition. With additional involvement
Asia, investment competition took place to gain dominance in this region,
which is rich with management resources.
U.S. HDD manufacturers and Japanese component manufacturers thatmanaged to achieve high business growth through investing in East Asia
formed full-fledged industrial clusters in ASEAN countries including Thailand
and Malaysia, centered around Singapore. Their expansion into Asia and theiruse of industrial clusters were backed by long-term principles, and they gradually involved the entire region. In that sense, these firms were strategic.
Japanese HDD manufacturers, in contrast, expanded into Asia passively to deal with yen appreciation and competitive pressures from U.S. firms.
Applying no long-term principles, they did not maintain a consistent strategy.
Their investment in Asia in the initial stage was not so different from their conventional outsourcing and reduction of processing costs within Japan, highlighting the difference with the competitors that pursued full production scale andspeed. However, by the end of 1990, they also began to expand the scale ofoperation though M&A and are making efforts to form full-fledged industrial
clusters in the Philippines and China, following the example of U.S. HDD manufacturers.
In the HDD industry, the expected functions of industrial clusters
became more advanced with the increase in competitive pressures, so firms havemade efforts to enhance the functions of industrial clusters and develop humanresources. The countries on the receiving end of investment also developed industrial policies for making the industrial clusters more sophisticated. The efforts of
the Singaporean government are notable in this respect. Since the mid-1980s,
Singapore has rolled out investment-attracting policies that reflected the intentions of the investors, targeting specific industries, including the HDD industry.

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Tomofumi Amano

The shorter time for approving investment projects and tax incentives
focusing on capital investment and R&D, which the government presented, sufficiently met the needs of the HDD industry for short payout periods and intensive development of production technology at the locale. The initiatives targeting the HDD industry, including development of engineers and operators, technical/management support for local vendors, and support for R&D and commercialization of magnetic recording technology at the National University ofSingapore, formed strong incentives for the investors in the industry to sophisticate the functions of the local area. U.S. firms and some Japanese component
manufacturers used these support measures to actively localize part of theirtechnology development and operational management function, so as to pursue
scale and speed as well as improve the quality of local management. Additionally, the engineers and supervisors that had been trained at the local bases
became indispensable when the firms expanded their business into other
ASEAN countries or China.
The case study of the HDD industry reveals that U.S. firms and someJapanese component manufacturers were able to achieve competitive advantages in this industry because they quickly selected their business practices inline with technology and market changes, and committed themselves to pursuing potential in Asia in order to achieve an advantage in that business area.
They did not merely aim to establish buffer locations to take advantage of low
wage levels, but aimed to enhance their global competitive advantage throughbuilding global production networks with bases in Asia among their core bases.
The local governments approved of such large schemes, and industrial clusters
were formed to serve both parties’ interests.
Finally, if multinational firms aim to strategically advance the functions of investment locations, and local governments develop support measuresthat match the needs of the industry, their strategies will bring extremely significant benefits to the country on the receiving end of the investment. While theestablishment of large-scale bases will naturally have the effect of creating
employment, particularly important factors are advancing the functions of thelocal bases and improving the quality of local human resources through the creation of diverse educational opportunities within the industrial cluster.

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Competitive Strategy of Global Firms and Industrial Clusters

To maintain competitive advantages, firms need to clearly indicate
their goals for advancing the functions and developing human resources at thebases of their global production network, and they need to take advantage of theexternal effects of industrial clusters. The countries on the receiving end ofinvestment also need to cooperate with firms to produce employment opportunities for the workers and to foster the development of potential leaders within
their ranks. When the firms’ global strategies and the countries’ industrial andhuman resources development policies intersect in this strategic way, businessprovides fruitful opportunities for developing high-quality human resources in
the recipient countries.

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