Partnering with customers,
separating factory and R&D work
put Komag in strong position

Komag, Inc. is the leading independent supplier of thin-film disks for high-capacity digital-data storage in computers and consumer appliances for a reason. Or rather, for five reasons:

• it builds on its technology leadership through heavy R&D investments and by filling in the manufacturing gaps of disk-drive customers with internal media capacity;

• it improves efficiency and cuts production costs by making its product in Malaysia, in close proximity to its customers’ plant operations;

• it collaborates with disk-drive manufacturers in finding technological and design solutions that fill the performance gaps in its customers’ products;

• it seeks to diversify its customer base with a high-performing, competitively-priced and varied selection of products; and

• it works to balance capacity growth with customer demand through careful expansion and purchasing commitments.

Komag has kept that base despite a brief stay in Chapter 11 prompted by refusal of its venture capitalist owners to negotiate an extension of debt that had come due. The filing had nothing to do with Komag’s overall business health, which was and is sound, so the company came out of bankruptcy on the upswing.

If anything, Komag is positioned to gain clients, thanks to those five reasons that deserve a little fleshing out.

Komag’s not-so-secret weapon in keeping its technology edge is the location of 400 crackerjack U.S. R&D experts in Silicon Valley, the place where the design operations of the key disk drive makers are stationed. It’s a value-added feature for Komag’s customers who depend upon intensive R&D work to produce the innovative disk technology their state-of-the-art disk drives require. Komag alone has those deep pockets necessary for heavy R&D investment. The design and prototyping of the necessary technology – a 100-gigabyte-storage, three-and-a-half-inch micro disk spinning at 15,000 r.p.m. less that 2 micro inches below the recording head – “is very advanced and can only be improved upon in Silicon Valley,” claims Tan. “This is a tremendous advantage our Japanese customers don’t have.”

When it got too expensive to make the disks themselves in America, Komag relocated its manufacturing operations and 4,000 accompanying workers to Malaysia. That move has meant greater efficiency, and lower costs, to Komag. “Our business is a very high-fixed cost business,” Tan stresses. “Whether you make one disk or a million, you’re using the same amount of water and electricity.” Since Komag generates a huge volume of disks – some 20 million of them each quarter – per unit utility costs decrease. The firm’s local ties, built on a decade of doing business in Malaysia, enable it to buy raw materials in bulk from nearby sites at lower prices. “Since we have very deep connections to Malaysia, our suppliers buy locally and then ship to us – just across the street sometime,” Tan says.

How Komag leverages its collaborative relationships with disk drive manufacturers may be the most significant factor in its success. In effect, Komag provides the technology answers to the questions posed by the limitations of their customers’ new disk drives. “All four of them require our technology to combine with theirs to overcome their own customers’ final tests,” explains Tan. Komag works closely with the manufacturers to deliver disks that fix the design flaws in the disk drives. “We have the best knowledge of how every one of them solves the problem, and when we do that we copy all the bulletproof features into our disks,” adds Tan. “We put all four solutions into our disks, all these secret recipes that are needed, so that our disks are more robust than anybody else’s.”

Three of these firms have the internal media capacity to compete with Komag. But Komag completes rather than competes with them. “We go to a division of labor with them,” says Tan. That’s because they need a company like Komag to provide the money and the superior technological expertise to complete about half of the manufacturing process. “They’re looking for the strongest, financially viable and highest-technology supplier to partner with, because their goal now, after they are assured of 50 percent of their needs, is to let the rest of it be taken care of by a strong cutting-edge company,” continues Tan.

In this way, the customers don’t have to spend the money to build plants for the rest of the process, and they can leave Komag with what Tan calls “the dirty work” of figuring out and meeting the right volume and capacity levels.

Diversifying the customer base is a prime goal, also. Komag is going to expand to as many as six accounts, says Tan. One way to diversify is to target businesses that have different business cycles than computers and consumer electronics products. Towards that end, Tan hints that Komag will announce a major new project within the next two years that fits this diversification profile.

The demand for more digital-data storage will explode in the near future, forecasts Tan, who cites a prediction that storage capacity needs in the next three years will outstrip the total volume of this data throughout history until now. Komag will expand to meet the demand, but not before its factory production is at full capacity for at least six months. “I call that judicious capacity growth,” he notes. To guarantee that capacity doesn’t pile up, Komag is securing agreements requiring customers who want that extra product to use the capacity Komag brings on line or pay for it even if they don’t take it.

Meeting the technology demand for increased storage space is the industry’s “biggest technical challenge” in Tan’s estimation. Specifically, it involves making a 1-inch micro drive supply disk with five to 10 times the memory of flash cards (“which are getting cheaper and bigger in capacity,” Tan says). “We have to keep the technology moving at a faster rate than for the three-and-one-half-inch disks, which is the main size we are supplying into the desktop community,” he declares.

Driving the technology. Doing world class R&D. Paying lower production costs to make high-performance disks. They’re the things that keep Komag in its commanding industry position.