HP closes disk drive unit, sees order loss

Electronic News, July 15, 1996 by Cynthia Bournellis

Palo Alto, Calif.--After 25 years, Hewlett-Packard is getting out of the internal disk-drive business. Due to its continued decline in market share and intense price competition, HP will cease operations of its Disk Memory Division (DMD) in Boise, Idaho, and Penang, Malaysia, by Oct. 31. The company will focus on the extended-storage market, including tape drives, libraries and CD-recordable technologies.

DMD's market includes high-end servers, mainframes and disk arrays. The division has been working on developing an 8.7-gigabyte drive. HP said it will now license that technology to other disk drive manufacturers.

HP reported a slowdown in order growth this quarter in many product lines and geographies, as well as in several areas of the computer and measurement businesses. The company said order growth will fall below the 24 percent increase it reported in the second quarter.

The announcement to cease drive manufacturing caught nary a soul by surprise. "It is an indication that the disk drive industry is maturing and all of the products are falling into the hands of a few suppliers," said Martin Reynolds, a PC analyst at Dataquest.

Battling against stiff competition from such players as Seagate, HP's market share has never exceeded 1 percent, according to Dataquest. "They (HP) are nothing but a nit in the industry overall," said Dataquest storage analyst Phil Devin. "I suspect IBM, Seagate and Fujitsu will be celebrating. In particular, Seagate will be relieved, because HP won't be bothering them in places like EMC."

EMC Corp. has historically been a Seagate account. But last year, HP talked EMC into co-developing a 9-gigabyte drive. Some units are currently under evaluation.

The closing of DMD's disk drive operation will result in a pre-tax charge against earnings of approximately $150 million in HP's 1996 fiscal third quarter ending July 31. The loss will be for inventory and other asset adjustments, as well as for employee severance packages.

These charges do not include DMD's anticipated operating losses of about $100 million in the second half of fiscal 1996. The company will report its results for the third quarter during the week of Aug. 12. DMD's 1,680 employees will be considered for other opportunities in Boise and Penang. HP will continue to support DMD's installed customer base.

Contract manufacturer SCI Systems, which supplied components to DMD, last week said it didn't expect the closure to affect its business, although the price of SCI's stock declined in the wake of the HP announcement. "While SCI has supplied HP with related components, sales and profits have not been material in recent quarters and have been declining," SCI said. "No significant inventory adjustments are anticipated."