Job cuts help Seagate boost margins

Cutting 10,000 jobs worldwide has helped hard drive company Seagate to prop up its margins in the face of slow demand and falling prices. Following a drastic restructure in January, Seagate has cut costs to the point where it's making gross margins of 18.9%, up from 12.2% in the previous two quarters.

Cutting 10,000 jobs worldwide has helped hard drive company Seagate to prop up its margins in the face of slow demand and falling prices.

Following a drastic restructure in January, Seagate has cut costs to the point where it's making gross margins of 18.9%, up from 12.2% in the previous two quarters.

"That's down from 20% in the past," says BS Teh, Seagate's Singapore-based director of sales and marketing for South Asia-Pacific, "but it's only a matter of time before we get back to 20% to 22%."

Seagate, which still holds 24% of market share according to market researcher IDC, has managed to end its fiscal 1998 on a high note, posting net income of $US22 million for Q4 ended July 3. However, accumulated losses from the previous three quarters still resulted in a $US530 million net loss for the full year.

While the hard drive industry tends to be somewhat predictable, with drives invariably becoming more capacious and faster, Teh says in the past 12 months there have been some departures from the usual trends.

"Usually the entry-level capacity for desktop hard drives [currently 6Gb] lasts about six to eight months. Now the life span of any particular capacity point is lasting longer. Also, the Australasian unit price has been falling significantly. In the past it has been $US140 to $US180, but in the past 12 months it has dropped to $US120 en masse."

Teh attributes this trend to a number of factors, such as the realisation of the sub-$US1000 PC. "Disk drive storage is typically 20% of the cost of a PC, so you can imagine that to bring out these low-cost PCs the manufacturers have really been beating on us to lower our prices."

The absence of a truly compelling reason to upgrade is another factor, Teh says. "There hasn't been any radical development in IT that has carried the industry to a new platform. "Win98 shipped late and didn't really have enough impact to make people rush out and buy a new PC."

Third reason — the Internet. "The speed of the Internet is not dependent on how fast the PC is, it relies on bandwidth. That's the reason Intel had to offer an entry-level PC, because people don't need faster and faster PCs."

In a move similar to Intel's release of the low-end, low-priced Celeron chip, Seagate released 2Gb to 4Gb low-cost drives two months ago. They're aimed specifically at the sub-$US1000 PC market, says Teh.

While the desktop contributes 30% to 35% of Seagate's earnings, its traditional area of strength is at the high end where, despite the increasing importance of servers, unit shipments have not increased in the past two to three months. Teh says this is partly due to the manufacturers wanting to cut down on inventory.

"Everybody wants to become like Dell and keep inventory low, which is pushing back orders."

Seagate is distributed in New Zealand by Melco, Agate and VST New Zealand.

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