21COE, University of Tokyo

MMRC Discussion Paper No. 99

MMRC-F-99

Competitive Strategy of Global Firms andIndustrial Clusters- Case Study on the Hard Disk Drive (HDD) Industry Associate Professor, Faculty of Business Administration, Hosei
University
Researcher, Manufacturing Management Research Center(MMRC), University of TokyoAMANO Tomofumi
September 2006

21COE, University of Tokyo

MMRC Discussion Paper No. 99

Competitive Strategy of Global Firms andIndustrial Clusters1– Case Study on the Hard Disk Drive (HDD) Industry –Associate Professor, Faculty of Business Administration, Hosei
University
Researcher, Manufacturing Management Research Center (MMRC),
University of TokyoAMANO Tomofumi 2

September 2006

1

This report has expanded and revised the content of Chapter 5 of the following book for the purpose ofpresentation at the GRIPS/MMRC Joint Symposium: Amano Tomofumi, Higashi Ajia No Kokusai Bungyō To
Nihon Kigyō: Aratana Kigyō Seichō He No Tenbō (East Asian Linkage and Japanese Firmss: A New
Perspective of Corporate Growth), Yuhikaku.
2
Contact:AMANO Tomofumi,Faculty of Business Administration, Hosei University, Address: 2-17-1 Fujimi,
Chiyoda-ku, Tokyo 102-8160, Japan, Tel: +81-3-3264-4486, E-mail: amanot@i.hosei.ac.jp
1

Tomofumi Amano

Introduction
This report discusses the location strategies of multinational firms based and the industrial
policies of the investment recipient countries. For firms engaged in international business, the timingof foreign investment, selection of the locations, and maintenance and expansion of their local
operations are all important strategic matters.
Then what can be the strategic nature of foreign investment by firms that have succeeded instrengthening their competitive advantage? What are the unique aspects of the policies taken byrecipient 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.
Since the determinant factors of foreign investment have been a core theme for studies on
multinational firms, there is already a large literature upon the topic. However, much of it consists ofstudies that identify and classify the location factors based on economic theories or empirical studies
using cross-section or pooled data. While these studies indicate the general framework ofmultinational firms’ location selection, it is rather difficult to derive from them the strategic
implications related to individual firms’ foreign investment.
Foreign investment in a growth region is obviously one of the important strategic mattersfor firms. Thus it is necessary to appropriately examine its strategic nature by also taking into
account industry-specific conditions. To this end, the focus should be placed on how firms
recognized the industrial environment and what approaches they took, in other words, firm-specificrecognition of the environment, 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 andU.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 had been a critical issue for their survival. In this phase how did they perceive thischallenge and what strategies did they take? This point is closely related to the first focus: strategic
nature of investment.
The second point, strategic nature of investment-attracting policy, will become clear bylooking 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 lure investment to these areas in asustainable manner.
These areas are called industrial clusters. In a global industry like the HDD industry, the2Competitive Strategy of Global Firms and Industrial Clusters

greatest concern for the recipient country is the risk of the client firms leaving the country to invest inanother country due to subsequent wage increase or rivalry against the newly-developed countries.
The challenge for the recipient country is how it can consolidate investment, and one means toachieve this could be to increase the attractiveness of the area as an industrial cluster.
In the process of East Asia’s economic development, investment from other countries
gathered in a number of areas, and industrial clusters were formed in these major areas. This enabled
the recipient countries to provide abundant and diverse management resources to the multinationalfirms located inside these areas. There was also intensive competition among the recipient countries
for attracting investment. The point is how they strategically differentiated their policies from theothers in forming attractive industrial clusters.

Section 1 Competitive Strategy of Global Firms and Industrial Clusters
Section 1 explains the three basic viewpoints applied to the case study. They are, (1) global
location strategy and clustering; (2) integration of global production networks; and (3) consolidationof foreign investment in recipient countries.
Global Location Strategy and Clustering
During the past several decades in which economic globalization made remarkable progress,
firms have actively expanded their geographical base of their operations through direct investment or
strategic partnerships. Competition in Global Industries, written and edited by Michael Porter (Porter[1986]), is a representative study and an early attempt at systematizing international businessexpansion.
In this book, he analyzes firms’ global strategies by focusing on two concepts: allocationand coordination. Allocation here refers to 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
coordination of 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, onemust know the conditions for achieving cost reduction or differentiation through globallyconcentrating the activities or coordinating the distributed activities” (ibid., p. 36). He indicates thatsuch conditions are: (1) proximity to markets; (2) economies of scale and experience effect; (3)effective consolidation and coordination of activities; and (4) comparative advantage of each country.
This framework presents the basic idea of a global strategy. In order for a firm to achieve a
3

Tomofumi Amano

global competitive advantage, the following two factors are essential: expansion of activities andbuilding of operational foundations at the overseas locations by seizing the internationally spread
opportunities for achieving advantages and growth; and integration of the networks of theinternationally spread activities under a unified philosophy and business strategy.
In addition to this, the approach of committing to local industrial clusters is vital for theforeign subsidiaries. In an industrial cluster, many firms and institutions are located together, forming
multi-dimensional networks to create the characteristics of the area. Inside clusters, markets ofdiverse human resources and intermediate goods are also formed. Thus firms can secure the diversity,
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 and
Haggard [2000]) analyzed the agglomeration economies in the HDD industry. They refer to areas
such as the Silicon Valley and the Japanese archipelago as technology clusters, while areas like theSoutheast Asian region, mainly Singapore, Thailand and Malaysia as operation clusters.
The agglomeration economies that firms can enjoy in a technology cluster include: (1) earlyrecognition of new technology and market opportunities; (2) creation of new technology, products
and services through many start-ups and technology spillovers; (3) prompt problem-solving andproduct development; (4) access to venture capital; (5) human resource pools that are specialized anddifferentiated for each technical field; and prompt imitation of product innovations.
In an operation cluster firms can enjoy: (1) low transportation costs; (2) shortertransportation times between the respective stages of the value chain; (3) economies of scale inproduction; (4) quick production launch; (5) skillful human resource pools that are specialized foreach process or function; (6) prompt imitation of innovation related to assembly, production andphysical distribution; (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 own base within the local
industrial cluster, in other words, to take part in creating such agglomeration economies and fully
enjoying the benefits they produce. In studies on international business, the need for localization isoften discussed. A firm that expands overseas but does not localize its overseas base cannot fully
enjoy the benefits of globalization. The same applies in this context. Spreading the value chain itself
is insufficient for achieving essential advantage. The key is how deeply a firm can get involved in theindustrial cluster, and how well it can find and develop resources there. The advantages to be gainedin a cluster sometimes are highly firm-specific and relation-specific, unlike the initially available
advantages like low wage level and land resources, and would become the firm’s core competitive
advantage.
4

Competitive Strategy of Global Firms and Industrial Clusters

Integration of Global Production Networks
As business opportunities spread worldwide and a firm’s scope of operations broadens, thefirm’s business management becomes more complicated. One of the important conditions for a
multinational firm to smoothly carry out 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 throughforeign 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 eye on the changes inenvironmental conditions could turn the benefits through the division of labor into a competitive
advantage in the market. 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 of integration 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 theheadquarters, or the top management, to instill its business philosophy and business strategy inoverseas growth markets and to make the firm’s resources complement each other. The management
requirements for integrating global production networks will be as following: (1) presentation ofvision and strategy; (2) leadership within top management and the management team; (3) integrationof organizational structure; and (4) sharing of organizational culture.
The first point is presentation of the vision and strategy. In order to integrate businesses
beyond national borders, vision and strategies need to be clearly indicated as the purpose of
integration. It is ideal to have 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, mere indication is not enough. Here, the leadership of the top management andthe management team and integration of the organizational structure become 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, they should indicate theimportance of the vision to the local management team and employees.
Furthermore, the firm needs to identify the way of sharing the responsibilities andcommunication between the headquarters and the local bases to implement its vision and strategy inan organized manner. At the first stage, the headquarters needs to take the initiative in overall matters.
5

Tomofumi Amano

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 of integration.
The last point is sharing of the organizational culture. Internationalization of business canbe regarded as an act of sharing the firm-specific organizational culture among group companies
while respecting the differences in culture in each country. A firm’s organizational culture is expected
to gradually permeate the overseas operation bases through its operation. This culture becomes thecode of conduct for the members of the organization. In other words, it becomes the corporate
identity. A firm having a reasonable code of conduct is likely to be more capable of integrating its
international business activities smoothly.
Industrial Clusters and Consolidation of Foreign Investment
The country on the receiving end of investment, on the other hand, is interested in how
effectively it can attract multinational firms with above-mentioned behavioral principles. In this case,the point of concern is the issue of mobility of investment, namely that a firm that has been lured
under initial conditions such as low wage levels and ideal land conditions, could move to anothercountry in light of wage increase or newly developed countries to invest.
In order to have a multinational firm continuously invest in the initially chosen area, therecipient country needs to take the lead in developing competitive advantages that do not rely only on
wage level and land resources. Here the key to this is forming industrial clusters.
As discussed earlier, industrial clusters involve various agglomeration economies. The
recipient country must promote regional development with these agglomeration economies in mind.
For example, development of expressway systems and port improvements are indispensable forachieving 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 through collaboration between industry,
academia, and government. Another possible measure would be to implement special taxation thatmeets the industrial needs.
The regional development of an industrial cluster involves both planned factors andemergent factors. Establishment of development zones, development of public infrastructure, andrevision of the tax system are planned factors. These are important, but sometimes are easily 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 therecipient country. Both planned and emergent factors are critical to provide located firms incentives
to secure their investments, which significantly contributes to the consolidation of investments for the6Competitive Strategy of Global Firms and Industrial Clusters

economic growth of recipient countries.

Section 2

Structural Changes in the HDD Industry

The above mentioned three concepts provide the analysis framework for studying the HDD
industry case. From this section onward, the report will look at the contents of this industry. Thissection focuses on the structural changes in the industry since the 1980s, with particular emphasis on
the competition between Japanese and U.S. firms over investment into Asia.
Changes in the Product Architecture and Industrial Structure
For a long time, the HDD industry had been led by IBM. The firm has a long history in thedata storage business, starting with tapes, moving on to floppy disks in 1970, and establishing thestandard for the “Winchester” HDD in 1973. In 1989, it developed the magnetic head technology thatapplied the principle of magneto-resistance (MR) to the recording head, allowing recording of 1
gigabyte-per-square-inch.

Furthermore,

in

1996,

it

succeededindeveloping

the

giant

magneto-resistive (GMR) head. In this way, IBM has constantly led the development of cutting-edge
technology in this field.
The HDD industry took off with the establishment of the standard for the Winchester HDD
by IBM in 1973. Later, while U.S. computer manufacturers outsourced HDD production to externalfirms, U.S. and Japanese firms with a high level of technology entered and formed the industry.
However, dramatic changes occurred to the industrial structure from the second half of the
1970s through the 1980s. As the computer platform changed from mainframes to minicomputers,
office computers, workstations and personal computers, the HDD interfaces evolved to enable theuse of HDDs as modules. The demand structure shifted from large general-purpose 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 the host computer. Later, with the rise ofminicomputers, office computers, and workstations, the interface between the computer and the HDD
evolved into the Storage Module Drive (SMD) and subsequently into the Shugart Associates System
Interface (SASI) in the second half of the 1970s. 3 With the introduction of the SASI, the host3

SMD is the abbreviation for the Storage Module Drive, and SASI is the abbreviation for the Shugart
Associates System Interface. The SASI is the standard interface between the computer and the HDD, which
was developed by a leading HDD manufacturer, Shugart Technology, the predecessor of the present Seagate
Technology.
7

Tomofumi Amano

computer came to control the HDD not through physical addressing, but through logical block
addressing. Until this point, development of HDDs required close coordination with the computers
due to the need for such 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 sourcecode 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 beconnected 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 rapidly
made progress. After that, in the PC field, standardization of external interfaces made headway with
the introduction of Intelligent Drive Electronics (IDE), achieving the complete modularization of the
HDD by moving the hard disk controller that had been mounted on the PC motherboard to within thedrive. The IDE specification was later officially certified by the American National Standards
Institute (ANSI), and is being standardized as the AT Attachment (ATA). 4
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 in the design phase. They could now make the internal
design of their HDDs as they liked, which expanded the possibilities for technological innovations
and cost reductions. These changes were so dramatic that they completely changed the competition
rules of the industry, and served as the background to the subsequent entry of many firms into thisindustry and their fierce competition in development and cost.
Miniaturization of HDDs and Changes in Competitive Conditions
During this course, the size of HDDs also became more compact. Figure 1 shows thechanges 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 in the 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 beenmonopolized by IBM. However, because new computer manufacturers emerged in the first half of the
1970s and procured their HDDs from external suppliers, the original equipment manufacturer (OEM)
4BIOS is the abbreviation for the Basic Input/Output System, which is the basic program that controls acomputer’s input and output. SCSI is the abbreviation for the Small Computer System Interface, which is aninterface connecting the computer with peripheral equipment. It was developed based on the SASI to make it
more versatile. IDE is the abbreviation for the Intelligent Drive Electronics, which 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.
8Competitive Strategy of Global Firms and Industrial Clusters

market for HDDs grew.
Figure 1 (B) Changes in HDD Shipment Volume by Inch

Figure 1 (A) Changes in HDD Shipment Value by Inch

140,000
6.5～1425,0005.25
3.5

20,0002.5
1.8 or smaller

15,00010,0005,000

Product shipment volume (thousand units)

Product shipment value (million U.S. dollars)

30,000120,000
100,000
80,0006.5～145.25
3.5
2.5
1.8 or smaller

60,00040,00020,000
0

0
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97

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

Source: Created based on McKendrick, Donner and Haggard [2000], p. 27.
According to Figure 1, HDDs were first miniaturized from the 14-inch drive for
mainframes to the 8-inch and 6-inch drives targeting minicomputers and office computers. By the
first half of the 1980s, the 5.25-inch drive for desktop PCs became popular. This market also wascultivated 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 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 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 HDD in Figure 1 clearly shows
this fact. The changes in the HDD shipment value by inch in Figure 1 (A) suggest that the industry
followed the miniaturization trend from 14 inches to 6.5 inches, 5.25 inches, 3.5 inches, and 2.5
inches in an orderly manner.
However, the changes in HDD shipment volume by inch in Figure 1 (B) indicate that there
is an essential difference between the miniaturization up to 5.25 inches and that 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 have such a large impact as to change the basic structure of the industry,9

Tomofumi Amano

with the shipment volume remaining at a low level.
On the other hand, in the process of miniaturization from 3.5 inches onward, the HDD
manufacturers faced demands for product volumes that were beyond those for the 5.25-inch drive.
The modularization trend created an incentive for increasing the production volume and accelerating
innovation, and only the firms that could manufacture HDD of higher performance at lower costs
became able to secure profits. Instead of adopting a flexible development framework to adapt tomarket changes, it became necessary for firms to take bold growth strategies by focusing on growing
market segments such as that of the 3.5-inch drive.
Figure 2 Changes in the Number of Companies in the HDD Industry(No. of companies)

90
80
70

Elsewhere in the world
Japan

60
50
40
30
20
10
0
1960 1965 1970 19751980 1985 1990 1995 2000

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

Figure 2 shows the changes in the number of firms in the HDD industry. The figure clearly
indicates the change in the industrial structure caused by the expansion of the 3.5-inch drive market.
The number of firms peaked in 1985 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 offirms 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 the industry over a time span of 15 years. This fact indicates that unusually fierce
competition characterized the small HDD market segment.
10Competitive Strategy of Global Firms and Industrial Clusters

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 thechanges in the sales and operating margins of major firms (see Table 1).
The small HDD market is divided into 3.5-inch ATA (drives for PCs; sold at around 10,000yen), 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 entire HDD market (180,000,000 units). Meanwhile, the 3.5-inch SCSI
commands a share 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 in terms of the interface, andthey share the same magnetic heads and media for the 3.5-inch drives. As for price, the SCSI forservers is about three times more expensive than the ATA for PCs. With regard to the media used forthe 3.5-inch and the 2.5-inch drives, the former uses aluminum media, while the latter uses glass
media.
Table 1

Volume of HDD Shipped Worldwide (2000)(thousand units)2.5-inch or smaller

3.5-inch ATA
30,10026,80025,4008,300
14,50018,20010,1003.5-inch SCSI
8,900
2,500

Total
Seagate (U.S.A.)
39,000Quantum (U.S.A.)
29,300
Maxtor (U.S.A.)
25,400IBM (U.S.A.)
11,1005,100
24,500Fujitsu (Japan)
5,300
3,200
23,000Western Digital (U.S.A.)
18,200Samsung (South Korea)
10,100Toshiba (Japan)
7,200
7,200
Hitachi (Japan)
4,700
600
5,300
Others
2,000
2,000
Total
28,300135,400
20,300184,000
Notes: 1. The “2.5-inch or smaller drives” are all ATA. The “ATA” is for PCs and the “SCSI” is forservers.
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 ElectricAppliances” (June 2001) Japan Economic Center.

By type of drive, U.S. HDD manufacturers including Seagate achieve overwhelming
11

Tomofumi Amano

production volumes in the 3.5-inch ATA segment. In particular, the top HDD manufacturer, Seagate,
which boasts a tremendous production volume in this segment, also secures a 44% share in thehigh-priced, 3.5-inch SCSI for servers. The firm’s strategy is to secure its share of the high-end
market while pursuing a high production volume in the ATA in order to attain a high production scaleof its in-house manufacturing components.
The firms that made both HDDs for PCs and those for servers, similar to Seagate, at thetime included Quantum, IBM, and Fujitsu. They competed in developing cutting-edge component
level technology. They tended to self-manufacture some of the core components, including the headand media.
On the other hand, Maxtor, Western Digital, and South Korea’s Samsung do not have thecapacity for in-house development of core components, partly owing to their later entry into theindustry 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 have also placed emphasison 2.5-inch and smaller HDD for mobile computers. This market segment is an area that is expected
to see growth in the future. Hitachi’s 2002 announcement that it would acquire IBM’s HDD business
was a strategy to gain dominance in the market of HDD for mobile computers. Hitachi and Toshibaspecialize in HDD for mobile computers.
In addition to the drives, the market conditions of the key HDD components at the timeshould be studied. Table 2 shows the major manufacturers and the shipment volumes of the key
components mounted on HDD.
It is immediately obvious from the table that the supply markets of the major HDD
components are dominated by Japanese firms.
Such HDD manufacturers as Seagate, IBM, Fujitsu, and Hitachi manufacture magnetic
heads and media (hard disks [HD]) in house, but even these firms procure any volume that cannot becovered by their own production capacity from these outside suppliers. In addition, because
self-manufacturing of components requires development of very cutting-edge technology and global
production capacities, many HDD manufacturers do not self-manufacture the components. Therefore,
there is an enormous market for supply of the key components.

12Competitive Strategy of Global Firms and Industrial Clusters

Table 2

Shipment Volume of the Key HDD Components (2000)(thousand units)(A) Media (hard disk [HD])Aluminum
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)
OthersTotal

Glass
46,50039,40034,80053,90034,20034,90012,800

1,800
8,900
700

11,10025,60012,700269,200(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(thousand units)
102,800
101,600
118,200
154,300
19,00050,20066,100(C) Spindle motors
Nidec (Japan)
Matsushita-Kotobuki
Electronics Industries (Japan)
Minebea (Japan)
Victor Firm of Japan (Japan)
Sankyo Seiki Manufacturing
OthersTotal(thousand units)
113,100
31,50048,100612,200

31,10011,9008,100
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 ElectricAppliances” (June 2001) Japan Economic Center.

13

Tomofumi Amano

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 HDD as of 2000. However, the absolute number of media required for the HDD
for PCs decreased with the improvements in the recording density, and media became oversupplied
from around 2000. After that, the industry became restructured with the withdrawal of Komag andacquisition of Showa Denko by Mitsubishi Chemical, leading to a oligopoly state. 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 in small HDDs,
centering on 3.5-inch drives, and Japanese firms differentiate themselves 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 competitive in the key component markets. Why is there such an inconsistency when they areboth part of the HDD industry?

Section 3

Shift Towards Asia

Competition Strategies in Growth Markets

How did the structure of “U.S. HDD manufacturers taking an offensive in the 3.5-inch
HDD market and Japanese firms gaining an advantage in the key component market” come about
amidst the rapid expansion of the HDD industry? In order to inquire into this question, it is necessary
to look at the growth strategies of major firms during this period.

14

Competitive Strategy of Global Firms and Industrial Clusters
Figure 3 (A) Sales of U.S. Manufacturers

Sales (million U.S. dollars)

9,000
8,000
7,000

40

MaxtorSeagate Tech
Quantum
Western Dig

6,000
5,000
4,000
3,000
2,000
1,000

MAXTORSEAGATEQUANTUM
WESTERN DIG
IBM

30
Operating margin (%)

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

20
10
0

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

0

-30

81 83 85 87 89 91 93 95 97 99
19 19 19 19 19 19 19 19 19 19-40

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 tooperating profits, which are obtained by adding the interests paid to the ordinary income andsubtracting the interest income from it.
According to Figure 3(A), U.S. HDD manufacturers dramatically increased 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 toits acquisition of Conner Peripherals. Seagate has been followed by the second largest manufacturer,
Quantum.
Compared to these two firms, Maxtor and Western Digital, which are latecomers 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 that they failed to integrate their global operations and that they
were late at placing their new products on the market because they found quality problems at themass production stage due to not manufacturing the key components by themselves.
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 ofprofitability over a long term. The firm secured high profitability by way of growing. On the other
hand, the operating margins of Maxtor and Western Digital fell into the red in the second half of the
1990s and have stayed in the red since then. Because they could not expand their scale of operation
15

Tomofumi Amanosmoothly and because they were not the market leader, they had no choice but to give in to PC
manufacturers’ pressure to lower the prices and 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 the published financial reports. However, according to some interviews, it
seems to have been difficult for them to make notable achievements in terms of profit, because thescale of commercial production was small for 3.5-inch HDDs, and the market for 2.5-inch or smaller
HDDs was limited to laptop PCs with the proportion of domestic production also being high.
Figure 4 (A) Sales of Major Component Manufacturers

1.8
1.6
1.4
1.2

HitachiShowa Denko
Hoya
Alps Electric
Nidec

1
0.8
0.6
0.4
0.2
0

20
Operating margin (%)

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

2

Figure 4 (B) Operating Margins of Major Component Manufacturers
25

15

HitachiShowa Denko
Hoya
Alps Electric
Nidec

10
5
0
80 83 86 89 92 95 98
19 19 19 19 19 19 19-580 83 86 89 92 95 98
19 19 19 19 19 19 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.
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 and operating margins, but Hoya has achieved an outstanding growthrate 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 sharein spindle motors, achieving notable sales growth. Its operating margin has remained within theregion of 7% as well. In the case of Alps Electric, the firm had conventionally focused on magnetic
heads and electronic components for home electric appliances. Nevertheless, it formulated a businessrestructuring plan in 1993, and shifted the production of electronic components for consumer
products to China, as well as restructuring its domestic operations with focus on heads for HDD.
These efforts began to show results in 1996, and the firm’s sales and operating margin have been
16Competitive Strategy of Global Firms and Industrial Clusters

recovering.
As a matter of course, this data are not based on individual operations, but based on theoverall operations of firms, so various factors are involved in their changes. As each firm defines its
divisions differently, it is impossible to extract and compare information on the HDD-related
segments alone. However, at least for the firms mentioned here, manufacturing of HDD components
is a very large-scale operation and a business that contributes greatly to the firms’ sales and operating
margins.
Even by taking into account the restriction of data, the following can be said: be it HDD
manufacturers or HDD component manufacturers, firms that assumed market expansion, took active
measures in anticipation of such growth, and built an operational framework that could withstandrapid business expansion succeeded in increasing their market control and profitability as a result,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. On the other hand, firms thatfell behind in achieving growth faced a decline in profits, both in the areas of HDD and theircomponents.
U.S. HDD Manufacturers’ Shift to Asia

Foreign investment in Asia played an important role in expanding operations in the growthphase that started in the 1980s. This is an aspect in which notable differences are observed between
firms that achieved remarkable growth and those that became stagnant. The first point is the timingof investment.
Table 3 shows the HDD manufacturers’ timing of 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 standardizationof the interface of 3.5-inch HHD, he thought it was only a matter of time until the HDD would
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 hadoriginally hived off from Seagate, in 1996. By procuring funds from the stock market and acquiringexternal resources through M&As, Seagate came to posses the largest HDD production capacity inthe industry. Much of the production capacity it established through this process is located in17

Tomofumi Amano

Southeast Asia.
Table 3 Timing of HDD Manufacturers’ Investment in East Asia
Year
Company
1983 Seagate Technology
Ampex
Computer Memories
TandonTandon1984 Seagate Technology
IBM
Maxtor
Miniscribe
Quantum （OEM to MKEI*2）
1985 Microscience International
1986 Micropolis
Tandon1987 Connor Peripherals
Control Data
Cybernex
Microscience International
Priam
Seagate Technology
1988 Unisys
Western Digital
1989 IBM(SAHA Union)
Seagate Technology
Kalok
SyQuestNEC

Place of investment
Singapore
Hong Kong
Singapore
Singapore
India
ThailandJapan
Singapore
SingaporeJapan
Singapore
Singapore
South Korea
Singapore
Singapore
Singapore
TaiwanTaiwanThailandSingapore
Singapore
Thailand
Malaysia
Philippines
Singapore
Philippines

Year
Company
1990 Connor Peripherals
Microscience International
1991 Fujitsu*1
PrairieTek
Xebec
1992 Integral Peripherals
Ministor
1993 Connor Peripherals
1994 DEC
Hewlett-Packard
Quantum
Western Digital
MKEI （Quantum OEM ）1995 IBM
HitachiToshiba
Fujitsu
1996 IBM
Seagate Technology
Fujitsu
1998 MKEI （Quantum OEM ）2002 Western Digital
Hitachi*3

Place of investment
Malaysia
China
ThailandSingapore
Philippines
Singapore
Singapore
China
Malaysia
Malaysia
Malaysia
Malaysia
Singapore
Singapore
Philippines
Philippines
Philippines
ThailandThailand
VietnamIndonesia
ThailandThailand

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.

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 half of the 1980s. However, thisexpansion ended in failure, and the firm was acquired by 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 around the mid-1980s.
In the beginning, the race for foreign investment was started by U.S. venture firms. At thattime, many of them chose Singapore as the place for investment. Since the OEM market (non-captive
market) for the 3.5-inch HHD for desktop PCs was developing, backed by the rapid expansion of thePC market, U.S. venture firms daringly attempted to invest in Asia in order to establish a competitive
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 in18Competitive Strategy of Global Firms and Industrial Clusters

Thailand in 1996. Western Digital expanded into Malaysia in 1994, and Quantum also invested in
Malaysia in the same year.
IBM’s case is interesting. The firm had engaged in development and manufacturing of 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 the development and manufacturing of 3.5-inch and 2.5-inch HDD for PCs to
IBM Japan in 1984. IBM Japan initially developed and manufactured HDDs in Fujisawa, Japan.
However, due to the competitors’ shift to Southeast Asia and the impact 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 wasfounded 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 tofurther expand its production capacity, it entered into a partnership with Matsushita-Kotobuki
Electronics

Industries

in

1984,

regardingcontract

production

of

the

3.5-inch

HHD.

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, 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 arequisite condition for securing large-scale transactions in the 3.5-inch HDD market. As indicated in
Figure 2, the number of 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 tofunction as a entry barrier for surviving in the industry.
HDD manufacturers that achieved foreign investment consistently began to increase theiroverseas production ratio at this time. According to a study by McKendrick, Donner and Haggard[2000], which studied the changes in the overseas production ratio with regard to the HDD industry,the overseas 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% in1990 and 54% in 1995. They only began to make full-fledged expansion into Asia from the19

Tomofumi Amano

mid-1990s. The main reason for the foreign investment was to deal with the second yen appreciationin 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 doubtful whether Japanese firmsthat made foreign investments with eye on the exchange rate fluctuations were able to act based on aconsistent 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. While 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, the number of workers in Asia increased to 15,000 in Singapore and 57,000 in Thailand andMalaysia 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 thatthe 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 the firm to downsize its base in Singapore and expand its bases inThailand, Malaysia, and China. However, it did not do that. They positioned Singapore as a base forsupplying engineers and supervisors, which complements the U.S. headquarters, and as the core basefor 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 particularly substantial preferential
measures for foreign firms, including tax incentives. For example, in Thailand, the Board of
Investment (BOI) gives approvals for inward investment by foreign firms, and by dividing the landarea into three zones from Zone 1 to Zone 3, 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 publicresearch 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 ofSingapore had distinctive characteristics. First of all, its taxation system was highly preferable forforeign firms conducting sophisticated operations, including an R&D allowance (23.1%), an
equipment purchase allowance (61.5%), an allowance for collaboration with universities or publicresearch institutions (61.5%), a depreciation allowance (53.8%), a human resources development
allowance (46.2%), and an allowance for technical assistance to small and medium-sized enterprises(SMEs) (69.2%). At the same time, 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 other countries.
20

Competitive Strategy of Global Firms and Industrial Clusters

This point was very important for making large-scale investment with a short payback period in the
IT industry that has short lifecycles. The Singaporean government was thoroughly aware of the needsof 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, industry-specific incentives specializing in the HDD
industry. Singapore provided substantial preferred measures in association with a wide range ofactivities in the HDD industry, including (1) development of engineers and operators, (2) diffusionand development 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, and has produced alarge number of engineers for the HDD-related industry. It also provided support measures for SMEs,
provided them with basic knowledge and techniques for quality control and production management,
and engaged in operator training. 5
U.S. HDD manufacturers sought assistance from the Singaporean government and thegovernment 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 environment,
Seagate developed engineers, supervisors, and operators in Singapore, appointed them as corepersonnel, and spread a low-cost operation framework throughout Southeast Asia. When launchingproduction bases in Malaysia and Thailand, the operational experience in Singapore and the humanresources 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 toestablish their bases close to Seagate’s bases. It provided technical guidance to local suppliers to raise
their technical level. Seagate also appointed local workers as personnel in charge of procurement andrepeatedly applied unique ideas in product design in order to be able to manufacture HDD using local
components. For global suppliers, it increased the incentive for establishing their bases nearby
through increasing the production ratio in Southeast Asia and securing production volume. Sincecomponent cost accounts for a large share of the HDD production cost, such local supplier networks
are likely to have contributed greatly to increasing the firm’s cost competitiveness.
These efforts of Seagate have been copied by other U.S. HDD manufacturers, and have5

According to an interview with the Data Storage Institute (DSI) (February 2004).
21

Tomofumi Amano

sparked successive waves of investment. Underlying the rapid increase in the overseas production
ratio in the second half of the 1980s were such efforts by the aforementioned pioneering firm, withsubsequent firms immediately following its example.
Hesitant Japanese General Electric Appliance Manufacturers6

The U.S. HDD manufacturers’ investment in Asia can be understood as part of thecompetition to acquire production resources on a global scale amidst the rapid expansion of the
3.5-inch HDD market. However, Japanese electric appliance manufacturers were not necessarily
quick to respond to this trend. The reason was closely related to their conventional businesscircumstances.
The HDD sections of Japanese electric appliance manufacturers were usually establishedwithin the in-house computer division as a section providing storage devices. From the end of the
1970s to 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 officecomputers had close technical relevance to computers, Japanese electric appliance manufacturers
provided technical supportand engaged in joint development with U.S. computer manufacturers,

and gained a tremendous trust of leading client firms including IBM. The HDD business earned thebiggest profits for computer manufacturers at the time, and some firms gained nearly 70% of theiroverall profits from the HDD business.
One example 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 and supplied the product to the United States. Until the mid-1980s, the OEM businessof 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 to develop HDD-related technology in-house and in affiliatedfirms, and won orders from U.S. clients.
However, such success produced the opposite result in the world of small HDDs. In thesecond 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 HDD
was eroded by that for small HDDs, and shipment values for the HDD operations of Japanese electric
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 theearly 1990s, but the process did not progress smoothly.
6

For the efforts made by Japanese general electric appliance manufacturers, see Amano [1999].
22

Competitive Strategy of Global Firms and Industrial Clusters

In the case of Fujitsu, which fared relatively well among the Japanese firms, the firm
launched Fujitsu Thailand (FTC) in 1988 and attempted to shift its 3.5-inch HDD operation to the
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.
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 inwhich products were sold through its distributors and exclusive dealers. NEC expanded into thePhilippines in 1989, but all products were sold to Japan and the components were supplied fromJapan; 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 a result, costs became high and the firm had no choice but towithdraw from the in-house manufacturing of HDD 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 both invested in thePhilippines in 1995 and gradually increased their overseas production ratios. However, the market ofthe 2.5-inch and smaller HDDs for mobile computers is smaller in absolute scale compared to that forthe 3.5-inch HDD, and had little growth potential. 7 Since they could not allocate a substantial
amount of management resources to their HDD operations, they purposefully avoided entering intofull-fledged competition with U.S. firms.
Compared to U.S. HDD manufacturers, Japanese firms were later to expand overseas, andtheir commitment to overseas production was irresolute. Their main investment location was thePhilippines, which was far from Singapore and Thailand. By looking at their mode of investment, it
is doubtful whether they promoted foreign investment with a view to forming local industrial clusters
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 the7

In 1994, the world’s total demand for HDD was 62.58 million units, of which 900,000 units were for 2.5-inch
and smaller HDD, 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 HDD, accounting for 15% of the total. The
proportion has not increased very much, but the production volume of the 2.5-inch HDD nearly tripled during
these six years. The market is expected to grow further in the future.
23

Tomofumi Amano

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 and established business connections with them. Since U.S. firms started
increasing their production in Asia, the Japanese component manufacturers have attempted toestablish their production bases near the U.S. firms’ bases.
Japanese component manufacturers started investing overseas relatively earlier thanJapanese general electric appliance manufacturers. They promoted overseas production in pace withthe 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 appliancemanufacturers tended to produce motors in-house or at their affiliated firms, so it was difficult to
expand the motor business within Japan. Therefore, the firm conducted active 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 close a deal with Seagate in1983. HDD manufactures including Seagate concentrated their development resources in thedevelopment of the drives 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.

24Competitive Strategy of Global Firms and Industrial Clusters

Table 4

Major Component Manufacturers’ Operational Expansion Into East Asia And Its Timing(A) Media manufacturers
Overseas bases
Domestic bases(operation; year of
Remarks(operation)foundation)
Showa Denko
Malaysia(aluminum Ichihara
Plant Showa Denko and Showa
substrates; 1997)(aluminum/ glass media) Aluminum merged in
March 2001. It acquired
the HD operation of
Mitsubishi Chemical in
2002.
Mitsubishi
Singapore
Mizushima/Naoetsu
Chemical(aluminum/glass media; Plants (aluminum/glass
1996)
media)
Komag
Malaysia(aluminum San Jose in California Asahi Komag, founded in(U.S.A.)
media; 1993, 1996)(only development)
1987, was dissolved in
March 2001. Komag
closed all plants in the
United States and shiftedtheoperation
to
Malaysia
Matsumoto/Yamanashi
Malaysia.
Fuji Electric(aluminum/glass media; Plant(aluminum/glass
1996)
media)
Yokkaichi Plant (blank
Nippon Sheet Philippines (glass blank sheets, substrates, media) The base in Malaysia is
Glasssheets, substrates, media;
ADP(jointventure1997), Malaysia (same as
between Kobe Steel andabove; 1999)
Nippon Sheet Glass). It
transferred its Philippine
Akishima Plant (blank base to HOYA in 2004.
HOYA
Thailand(substrates; sheets)
HOYA received Nippon
1990), Singapore (media;
Sheet Glass’ substrate1995)
base in the Philippines bytransfer 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.

25

Tomofumi Amano(B) Magnetic head manufacturers
Overseas bases
Domestic bases(operation; year of
Remarks(operation)foundation)
TDK
Plant TDK is the top supplier
Dongguan Plant in Chikumagawa(development, front-end of magnetic heads for
China(back-end process)
HDD.
Alps Electric

Read-Rite

process;

1994),

NagaokaPlant(back-end (development, front-end
process),
Furukawa
process; 1996)
Plant (back-end process)Wuxi Plant in China Milpitas
Plantin(back-end process; 1995) California (development, Read-Rite
establishedfront-end process)Read-Rite SMI with thecapital participation ofThailand(back-end
Sumitomo
Metalprocess; 1991, 1995)
Industries in 1991, but it
was dissolved in 2001.
The firm has continued its
magnetic head operation
inThailand
and
undertakes
processing
work from HGA.

Philippines(C) Spindle motor manufacturers
Overseas bases
Domestic bases(operation; year of
Remarks(operation)foundation)
Nidec
Thailand(motor Kyoto/Nagano Plants Nidec
investedincomponent processing (development,
Thailand in 1990, andand assembly; 1990)
processing, assembly)
has established andexpanded its plants innearbylocations
including Bangkadi andMatsushita-Kotobuki Indonesia(motor Ipponmatsu
Plant Rojana.
Electronics
component processing (development,
Industries
and assembly; 1998)
processing, assembly)
MinebeaThailand(motor Karuizawa
Plant
component processing (development,
and assembly; 1990)
processing, assembly)
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.

26

Competitive Strategy of Global Firms and Industrial Clusters

In the case of Nidec, U.S. HDD manufacturers had been major clients from the beginning,
so the firm had seen the need to establish its production framework in Southeast Asia by mid-1980s.
Nidec established a branch office in Singapore in 1984 to gather information while engaging in sales
and marketing activities, and achieved investment in Thailand in 1990. The direct cause for theinvestment was a request from Seagate, which had already started manufacturing in Thailand, andfrom IBM-affiliated Saha Union.
Later, while U.S. HDD manufacturers expanded their mass production at their overseas
operation bases, Nidec established and expanded its plants in Thailand in succession. 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) clients areconcentrated in the area; (2) supply chains are developed, and about 70% of the components can beprocured within Thailand; (3) there is access to the BOI’s tax exemption measures and thepreferential treatment for the HDD industry; and (4) people in Thailand are diligent and friendly.
Currently, Nidec controls the Ayutthaya, Bangkadi, Rojana, and NHMT (acquired from
Seagate) plants in Thailand, with about 9,000 workers. The firm has a separate production line foreach client. 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, manufacturers of other types of components also shifted
their operations overseas one after the other in the mid-1990s. In the area of hard disk (HD) media
processing, U.S.-based Komag (1993 and 1996: Malaysia), Mitsubishi Chemical (1996: Singapore),
Fuji Electric (1996: Malaysia) and HOYA (1995: Singapore) established their plants close to HDD
manufacturers’ bases. Their overseas expansion was also influenced by the local production activities
of U.S. HDD manufacturers that were their major clients. Therefore, investment locations came to beconcentrated in Singapore and Malaysia. 8

8Based on “Market Survey on HDD” for the relevant years, Japan Economic Center and “Electronic
Manufacturers’ Investment in East Asia,” Electronic Economic Research Center, 1995.
27

Tomofumi Amano

Section 4 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 only be discussed from the viewpoint of the timingof the establishment of overseas production bases. In this industry, the significance of establishingproduction bases within industrial clusters in Asia gradually increased through the 1990s. This is
closely related to the 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 to consider theestablishment of bases in the Southeast Asian region, particularly Singapore, the only roles ofSoutheast Asia were to accept matured products and manufacture low added value at a low cost byproviding low-cost labor and investment incentives.

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Competitive Strategy of Global Firms and Industrial Clusters

Table 5

Changes in the Competitive Pressure in the HDD Industry and Comparative

Advantages of Each Country
Comparative advantages of each country
Competitive
pressure
1980-1985

Cost

1986-1992

Cost, Time toMarket1993
onwardCost, Time toMarket, Time
to Volume,
Yield
Improvement

Role of Southeast
Asia in the HDD
industry
New products were
produced in the
United States and thematured products
were shifted toSoutheast Asia.
Development of new
products waslaunched in the
United States, andwhen the processes
became stable, mass
production was
conducted in
Singapore. When the
products matured,
they were shiftedfrom Singapore to
Thailand or Malaysia.
The pilot run isconducted in the
United States, and the
production is directly
launched in Southeast
Asia.

Singapore

Thailand

Malaysia

Labor cost,
generalincentives,
infrastructure,
supervisors andengineers
Weak industrial
cluster effects(humanresources,industrial
linkage),industry-specificincentives,
general incentives

Labor cost,
generalincentives,
proximity to
Singapore—

Supervisorsand engineers,labor cost,proximity to
Singapore

Supervisors andengineers, laborcost, proximity
to Singapore

Strong industrial
cluster effects(specialized
human resources,industrial linkage,technology
spillover), strong
industry-specificincentives,
generalincentives,
proximity toThailand andMalaysia

Generalincentives, weakindustrial cluster
effects,
proximity to
Singapore andMalaysia, labor
cost

Generalincentives, weakindustrial cluster
effects,
proximity to
Singapore andThailand, labor
cost

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 and Haggard [2000], p. 60.

However, the situation began to change in the second half of the 1980s. U.S. firms at thetime 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 product life cycles became shorter in the market, generating the need toshorten the time required for placing a new product on the market (Time to Market). Singapore
played the key role in shortening the Time to Market.
After the mid-1990s, firms faced the need to expeditiously place new stable-quality
29

Tomofumi Amano

products at low prices from the start, in order to survive. Therefore, while conducting a pilot run in
the home country, the firms came to directly launch mass production in Southeast Asia. Today, theyeven conduct pilot runs in Southeast Asia.
Firms no longer simply sought low-cost labor from the investment locations. They were
now required to shorten the development period in the United States, and to solve the quality
problems involved in the process, 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 such competitive
pressure, the firms needed to promote localization in Southeast Asia and effectively exploit thevarious effects of industrial clusters.
The firms that responded actively to this issue were the U.S. HDD manufacturers and theJapanese component manufacturers. U.S. HDD manufacturers made concentrated investments inSoutheast Asia from an early stage and actively 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 Japanese component manufacturers advanced into
these areas in succession.
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 willtransfer more of their back-end product development operations to Thailand in the future. It can besaid that the firm has steadily reinforced its ties with industrial clusters under the increasing
competitive pressure.
On the other hand, many Japanese general electric appliance manufacturers that were late inexpanding overseas invested in the Philippines, far from the major industrial cluster areas. This caneither be construed 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.
Significance of Establishing Bases in Industrial Clusters in Terms of Operations

What, then, is the significance of establishing production bases in such mass production
clusters in regards to the HDD industry? First of all, there are two significant points in regards tooperations.
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 the component manufacturers by way of information systems. Thus, HDD
30

Competitive Strategy of Global Firms and Industrial Clusters

manufacturers and component manufacturers must change their production volumes every day. Suchdaily adjustments of production volumes and response to quality troubles naturally need to be
conducted locally.
The second, more important point is the ability to improve yield upon launching a newmodel. Even if the key HDD components were of good quality when shipped from the component
manufacturers, this does not guarantee a high quality final product. The quality of the finishedproduct 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 cancorrect the compatibility problems between the components and improve yield greatly affect the
profits of the HDD manufacturer and the component manufacturers.
A case of a media manufacturer is highlighted below as a textbook example of this point. 9This 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 process development in thehomeland, gradually shifting the operations to Singapore. The homeland staff and local staff carry out
the pilot run at the overseas location in cooperation with each other. During the same period, theclient firm also shifts its pilot run and process development operations to Southeast Asia and works
on launching the production. The two firms actively exchange information during this course.
The reason for conducting the pilot run at the overseas location is that, even if the trial
products created in the product and process development phases comply perfectly with the intended
design, when they are moved to the mass production phase, the percentage of good-quality products
can be low due to the peculiarities of the actual facilities and the process characteristics. Also, even if
a component manufacturer delivers good-quality components that meet the 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 insolving 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, and informs the results to the HDD manufacturer. If the HDD manufacturer requests
correction of a product’s attributes, the firm makes adjustments by changing the parameters in the
production process.
Due to the need for frequent adjustments in the mass production phase and early9

Based on an interview with Hoya’s subsidiary in Singapore (February 2004).
31

Tomofumi Amano

achievement of economies of scale, it is highly beneficial for component manufactures to locate theiroperations 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 human resources and technology spillovers. Thisrefers 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, the manufacture often faces
the need to establish a new plant or suddenly expand its production capacity. In such a case, it would
be too late to start developing human resources that have the know-how to launch such operations.
The key to determining 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, and had engineers from Saha-Union dispatched to the
Prachinburi Plant. In this case as well, the yield upon the initial production launch was very low atabout 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 forlaunching 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 the engineers hired at this time werepeople who 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 other firms brought their subordinates with them.
A similar situation occurred in Singapore. IBM established a production base for HDDs forservers in Singapore in 1994. The person who supervised the launch of this production base was anengineer who had over 20 years of experience with IBM’s competitors, including Seagate. He took
his subordinates with him when he joined IBM. A person who was assisting him stated as follows.
When he started business in 1994, many senior staff members gathered under him. All of us
had worked with him for ten years or more. I had the experience of working with him for another32Competitive Strategy of Global Firms and Industrial Clusters

firm for ten years. We had accumulated work experience, sometimes in the same firm, andsometimes in different firms. However, when he was going to establish IBM Singapore, we allcame back to him. So we already knew each other and had experiences at the time ofestablishment. This is why we could launch the business so quickly. 10

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 theiroperations to Asia in a decisive manner launched 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 to acquire a large number of experienced human resources alongwith the manufacturing equipment.
In an industrial cluster, information moves around through movement of labor, closebusiness relationships between firms, and frequently held seminars. Best practices concerning
production or distribution operations often come to be shared within an industrial cluster throughvarious routes. By establishing a production base in a cluster and taking root there, a firm is able toincrease its sensitivity to such information and effectively incorporate it into the firm’s operations.
Meanwhile, it is likely that many of the Japanese general electric appliance manufacturersthat invested 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 ofJapanese electric appliance manufacturers is considered to be attributable in part to limited access toexperienced human resources at the locale. Therefore, they had to dispatch many engineers fromJapan. Consequently, 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 proportion to the increasein the production scale.

Section 5

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 modularization of HDDs and a trend toward global competition. With
additional involvement of the element Asia, investment competition took place to gain dominance in
10

Based on an interview with IBM Singapore (December 1998).
33

Tomofumi Amano

this region, which is rich with management resources.
U.S. HDD manufacturers and Japanese component manufacturers that managed 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 use of industrial clusters were backed by long-term principles, and gradually involved theentire region. In that sense, they were strategic.
On the other hand, Japanese HDD manufacturers expanded into Asia in a passive manner todeal with yen appreciation and competitive pressures from U.S. firms. It also cannot be denied thatthey could 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 and speed.
However, from the end of 1990, they also began to expand the scale of operation though M&A andare making efforts to form full-fledged industrial clusters in the Philippines and China, following theexample of U.S. HDD manufacturers.
In the HDD industry, the expected functions of industrial clusters became more advancedwith the increase in competitive pressures, so firms have exerted efforts to enhance the functions ofindustrial clusters and develop human resources. The countries on the receiving end of investment
also developed industrial policies for sophisticating the industrial clusters. The efforts of theSingaporean 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 specificindustries including HDDs.
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 that involves short payout periods and requires intensive development of production
technology at the locale. The initiatives targeting the HDD industry, including development ofengineers and operators, technical/management support for local vendors, and support for R&D andcommercialization of magnetic recording technology at the National University of Singapore 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 their technology development and operational management function, so as to pursue scale andspeed as well as improve the quality of local management. Additionally, the engineers andsupervisors that had been developed at the local bases became indispensable human resources 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 some Japanese component
manufacturers were able to achieve competitive advantages in this industry because they quickly
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Competitive Strategy of Global Firms and Industrial Clusters

selected their business in line with technology and market changes, and committed themselves topursuing potential in Asia in order to achieve an advantage in that business area. They did not merely
aim to establish buffer locations for taking advantage of low wage levels, but aimed to enhance theirglobal competitive advantage through building global production networks with bases in Asia among
their core bases. The local governments approved such large schemes, and industrial clusters wereformed to serve both parties’ interests.
Finally, if multinational firms aim to strategically advance the functions of investment
locations, and local governments develop support measures that match the needs of the industry, it
will bring extremely significant benefits to the country on the receiving end of investment. While theestablishment of large-scale bases will naturally have the effect of creating employment, particularly
important factors are the advancement of the functions of the local bases and the improvement in thequality of local human resources through the creation of diverse educational opportunities within theindustrial cluster.
Firms need to clearly indicate their goals for advancing the functions and developing humanresources at the respective bases of their global production network, as well as take advantage of theexternal effects of industrial clusters, for the sake of their own competitive advantages. Then the
countries on the receiving end of investment also need to create ideas in cooperation with firms so as
to produce employment opportunities for the workers and to foster the development of potential
leaders within their ranks. This is because these precious business fields, where the global strategiesof the firms and the industrial and human resources development policies of the country’s
government and universities intersect, are considered to provide fruitful opportunities for developing
high-quality human resources in the recipient countries..
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