Monday, August 18, 2014

How hard disk drive sector lost its mojo

Aug 17, 2014

Twenty years ago, Singapore accounted for up to half the hard disk drives shipped across the globe. Soon, the last hard disk drive assembly plant will shut down. The Sunday Times traces the rise and fall of the industry and the lessons it holds for the electronics sector.

By Chia Yan Min

It was a perfect match: a small nation with no natural resources seeking compatible new industries for a long-term relationship and a cutting-edge technology looking for hard-working, reliable partners to help it take the next step forward.

It was the 1980s, and Singapore and the hard disk drive industry looked made for each other.

Their relationship moved quickly. From 1986 to 1996, Singapore accounted for up to half of the hard disk drives shipped across the globe and employed around 80,000 people in the industry. One academic called Singapore the "single most important location in the world for hard disk drive assembly".

Sadly, that match made in cyber heaven has hit the rocks.

While dozens of hard disk drive manufacturers planted their flags in Singapore in those heady years, now there is only one assembly facility left - HGST, a unit of United States-based Western Digital.

But even this final flame is flickering. HGST plans to eventually shift its disk drive assembly operations to Thailand due to cost concerns.

The company's remaining Singapore operations will focus on the research and development (R&D) of new hard disk drives.

Last year, HGST laid off 530 workers as part of these restructuring efforts, three years after rival disk drive maker Seagate Technologies shut its factory in Ang Mo Kio and retrenched 2,000 workers.

These are stark illustrations of how rising land and labour costs here are changing Singapore's role in the industry's global supply chain.

It's not just Singapore's love affair with disk drive assembly that is fading. The nation's electronics sector, once the pulsating beat of its economic heart, has been lagging other industries for years and dragging on growth.

Some economists cite irreconcilable differences: Singapore's currency is too strong, its domestic costs too high and its reliance on the personal computer segment too irrelevant in the age of smartphones and tablets.

As the hard disk drive era in Singapore comes to a close, it is worth examining the lessons the industry's rise and decline hold for the broader electronics sector.

A perfect match

One clear takeaway is that relationships - and industries - need the right conditions to flourish.

Like many good matches, the one between Singapore and the hard disk drive industry started with an element of serendipity, when each needed the other the most.

In 1982, manufacturing manager Tien Sing Cheong was at work on a Saturday when his eye was caught by a job advertisement calling for a materials procurement manager.

He went straight for the interview at the Shangri-La Hotel in his weekend work outfit - shorts and slippers.

As it turned out, the interview was with Seagate, founded just three years earlier. The company owned a new technology called the disk drive - a hardware device used to store all the information on a computer - and was seeking new opportunities to expand its production outside the US.

Mr Tien was just the Singaporean Seagate wanted. The 34-year-old had two degrees in engineering - a bachelor's from Hong Kong University and a master's from Stanford University - and had worked for General Electric, IBM and start-ups in California.

"I believe the company's initial plans might have been to first start a procurement office in Singapore and then eventually move into manufacturing," recalled Mr Tien, now 66 and the executive chairman of CEI Contract Manufacturing, which makes industrial and analytical equipment.

"Perhaps I was able to convince (Seagate co-founder Tom) Mitchell that it made sense to begin manufacturing right away," he said.

After a four-hour interview with Mr Mitchell, Mr Tien was offered the job of starting up Seagate's large-scale disk drive assembly operations in Singapore, the first factory of its kind here.

The job offer, handwritten on Shangri-La note paper, heralded the beginning of Singapore's role in the surge of an industry that would revolutionise personal computing.

In the book Heart Work, former Economic Development Board (EDB) officer Ong Choon Hwa outlined the mutual benefits of Seagate's investment in Singapore.

"A manufacturing facility in a productive and low-cost location such as Singapore would undoubtedly sharpen Seagate's cost-competitiveness," wrote Mr Ong.

In turn, Seagate's venture was part of a wider effort by the EDB to develop high-technology industries in Singapore as these products "would be less vulnerable to trade protectionism from developed countries", he added.

The country was especially keen to attract companies making computers and computer peripherals - fast-growing sectors in the 1980s. In 1981, Apple Computer had become the first company to manufacture PCs in Singapore for world markets.
There were many "pull" factors here for makers of disk drives and other high-tech products, Mr Ong wrote, including a strong base of supporting industries, tax incentives, modern infrastructure, cost-competitiveness and a skilled workforce.

Former prime minister Lee Kuan Yew recalls in his memoirs that 4,000 Singapore workers trained in precision engineering by German camera maker Rollei were primed for disk drive work when Rollei failed in the early 1980s.

As a result, Seagate's move to Singapore was quickly followed by other hard disk drive makers, including Maxtor, Miniscribe, Microscience, Conner, Rodime, Western Digital and IBM.

Booting up, shutting down

FOR his part, Mr Tien put together a senior management team at Seagate's new Singapore facility. One recruit was Mr Lee Seng Chean, previously Mr Tien's colleague at a major electronics firm.

"I was unsure about the move initially... When Mr Tien and I first started talking about Seagate, he didn't even have a hard disk drive to show me because the technology was still so new," said Mr Lee, now 61 and vice-president of business process and re-engineering at hard disk drive component maker Broadway Industrial Group.

Early hard disk drives looked like "large boxes" and could store a laughably small amount by today's standards, but still required "a lot of technology", said Mr Lee, also the committee chairman of the Asia-Pacific arm of the International Disk Drive Equipment and Materials Association.

Over the years, hard disk drives shrank, their storage capacity grew and the technology became ubiquitous in PCs.

By the mid-1990s, Seagate's Singapore facility had 18,000 workers and was the second-largest private-sector employer here.

Each of the world's largest hard disk drive firms had also set up a significant manufacturing presence here, making Singapore a dominant regional hub for hard disk drive assembly, wrote National University of Singapore (NUS) Business School Professor Wong Poh Kam in a 1999 paper about the industry.

But the party did not last long. Technological advances lowered barriers to entry, sent prices and margins plunging and sparked widespread consolidation.

Disk drive makers fell on hard times amid fierce pricing strategies and formidable competition, particularly from Japan and South Korea. The industry's supplier base began moving out of Singapore to countries with lower labour costs, said Mr Lee.

"From a manufacturing standpoint, it was hard for companies to stay here... There was very intense price competition among the disk drive companies, which were all trying to eliminate each other," he added.

A major casualty was Singapore-owned Micropolis, which was wound up in 1997, losing $575 million in investments and loans.

In 1998, Seagate retrenched 1,800 employees - a tenth of its local workforce - as part of a US$300 million ($528 million) global restructuring. Western Digital axed 500 jobs in 1998 and 450 in 1999, also as part of restructuring.

American disk drive maker Integral Peripherals shut down all its operations in Singapore in 1998, just weeks after it laid off a quarter of its 300-strong workforce.

The fierce shake-out in those years has left just three major hard disk drive makers: Western Digital, Toshiba and Seagate, the largest.

And Singapore is no longer a significant disk drive assembly location for any of them, though Seagate and Western Digital both maintain a strong R&D presence here.

Mr Tien left Seagate after six years for trading firm Intraco and then joined CEI in 1995.

The grandfather of three is still in touch with old friends from the industry, including former EDB officers Mr Ong and Mr Liow Voon Kheong, who were among those directly involved in convincing Seagate to set up shop here.

The way forward

For those committed to Singapore's electronics sector, reflecting on the trajectory of the hard disk drive industry is about more than nostalgia.

The industry has been plagued by rising business costs and competition from countries with cheaper land and labour - the same issues that eventually forced hard disk drive assembly plants to shift elsewhere.

This raises the spectre that the local electronics industry could he hollowed out amid ongoing restructuring efforts.

To survive, Singapore will have to be nimble and adaptable and willing to train a skilled workforce that can attract strong and committed partners.

New relationships have already been formed. In the 2000s, the focus here shifted to higher value-added segments of data storage: assembling enterprise drives and making hard disk media.

The Lion City is now the world's top hard disk media manufacturing location, making up more than 40 per cent of global hard disk media output.

Seagate and Western Digital, as well as Japan's Showa Denko, have together invested close to $2 billion over the years in hard disk media manufacturing here.

Companies in Singapore that sprang up to support the hard disk drive industry have also diversified into new areas of business.

Armstrong Industrial, which makes foam and rubber parts used by the automotive and electronics sectors, derived 79 per cent of its business from the hard disk drive industry in 1998, but only 18 per cent last year.

"It is an industry that has not been growing much, but it still has steady volumes. We must continuously improve our processes to maintain profitability," said deputy chief executive Steven Koh.

As costs went up over the years, Singapore moved from the low-level assembly of PCs to the relatively capital-intensive business of producing high-end chips, said Barclays economist Leong Wai Ho.

Now with China and Taiwan "building monster-sized plants" in North Asia, the need to constantly upgrade into higher value-added activities is intensifying.

"It has been a journey of constant change and upgrading," said Mr Leong, acknowledging that "it is hard for Singapore to compete on costs and scale".

"But with good intellectual property protection laws and supportive regulators, Singapore has evolved into a place where you can test and develop new frontier technologies - like nanotech," he added.

He and other economists believe that as long as the country continues to "push the curve", electronics will retain a role in Singapore's economy - and its position in the heart of the manufacturing sector.

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