Disk drive makers shut S'pore plants

Disk drive makers shut S'pore plants

Jennifer Tan, Reuters, Singapore

Walking the factory floor of Western Digital Technologies Inc in Kuala Lumpur, John Coyne is comforted by the thunder of well- oiled machinery.

But the hum comes at deafening price for nearby Singapore. The U.S. hard disk drive maker shut its factory in the city state four years ago and moved its production lines to lower-cost Malaysia, resulting in the loss of 4,000 jobs.

Other companies have followed suit, with the world's largest disk driver maker Seagate Technology Inc and rival Maxtor Corp gradually shifting their lower-end factories out of Singapore to cheaper manufacturing centers in Malaysia, Thailand and China -- the hottest investment destination these days.

"In a 10-year horizon, China will become a very formidable challenge across the board in terms of levels of technology activity, looking at the rate at which the country is pumping out university graduates and as local industries provide them with the platform to gain the necessary skills," said Coyne, a senior vice president of Western Digital.

To be sure, Singapore remains the world's top disk drive producer and is fighting back by moving up the food chain, using its well-educated work force to focus on research and development.

The production of hard disk drives, a staple of Singapore industry, is facing unprecedented threats amid the harsh global tech downturn that has hammered margins and squeezed prices.

Singapore is home to Seagate and Maxtor plants that make higher-end enterprise computing and server network drives, but its position in lower-end drive manufacturing could be eroded by China, analysts and industry experts said.

"Singapore will probably have to share its key position in the hard disk drive manufacturing industry with China in several years' time -- the writing is on the wall," said Russell Tan, an analyst with consultancy Netresearch-Asia.

Maxtor said late last month it would invest up to US$200 million to set up a new factory in China, which would take over the manufacturing of entry-level disk drives from Singapore, leaving the city-state with higher-end production.

Seagate houses two of its high-performance disk drive plants and one research and development (R&D) facility in Singapore, while its factories in Malaysia, Thailand and China produce lower-end disk drive components.

Tan Choon Shian, director of electronics at the Economic Development Board (EDB), Singapore's investment planning agency, told Reuters the city-state remains "a dominant player" in disk drive manufacturing, producing over a third of worldwide disk drive volumes in the last five years.

Disk drives also represent the largest component of Singapore's non-oil domestic exports, contributing 16 percent.

In contrast, China accounted for only five to seven percent of global hard disk drive volumes in 2002.

The global disk drive industry is also expected to post robust growth in the coming years, according to research house International Data Corp (IDC).

Unit shipments of hard disk drives are seen growing at a compounded annual rate of 12.4 percent between 2001 and 2006, driven by personal computer sales and new emerging applications in the consumer electronics and gaming areas.

This gradual migration of low-end production out of Singapore into China will keep happening in the next five years, industry experts and analysts said.

But higher value-added activities like R&D should remain in the city-state, which has strong technical talent, at least for the next decade.

"The critical mass of talent that exists in Singapore is a powerful engine that will continue its contribution to the disk drive manufacturing industry," said Western Digital's Coyne.

Moreover, low-cost centers like China have yet to get their act together in providing established infrastructure and a network of supporting industries, all of which contribute to the total cost, said Gartner Dataquest analyst John Monroe.

"China as a factory for the world -- there's some truth to that, but doing a profitable business in China is complicated -- there are graft and peculiar tax laws to contend with," he said.

"China is being used more as an adjunct to Singapore rather than a replacement at this point in time."

In time, the country could become a very different animal, said Coyne at Western Digital. While Western Digital has no immediate plans to jump on the China bandwagon, this market is never far from Coyne's thoughts.

"China would be a very strong candidate for future investments -- it is an area I keep a close eye on," he added.

Singapore must face up to the fact that low-cost centers like China will always remain a threat, Maxtor's executive vice president, K.H. Teh, told reporters earlier this month.

"It's really how the threat can be managed. Singapore has advantages and can hang on," he noted.