Invasion of the Gadget Snatchers
Thanks to tiny drives and a shrewd battle plan, tech pioneer Seagate is growing for the first time in a decade.
By G. Pascal Zachary

(Business 2.0) – They came from the air-conditioned chill of the server farm. Now they've penetrated the fiery heart of the digital revolution. Nondisclosure agreements prevent their manufacturer from confirming their existence, but the truth is out there. Just pry open a 6-gigabyte Apple iPod Mini, and inside you'll find the spawn of Silicon Valley's most surprising success story: a disc drive about the size of a matchbook that bears the logo of Seagate Technology.

Seagate, with $6 billion in annual sales and a head office in Scotts Valley, Calif., is one of the handful of companies that made the mass-market PC possible. In the early days, Intel manufactured the chips, Microsoft programmed the operating system, and Seagate crafted the magnetic disc drives that stored data. Rabid competition and vicious price wars, though, deprived Seagate of the financial spoils due an innovator. The company is the world's leading manufacturer of hard drives for high-end servers and PCs--mature markets with scant prospects for growth.

But about a year ago, Seagate began receiving orders from Creative Technology, Rio, Samsung, and others to make 1-inch-diameter hard drives for digital-music players. Sales of drives for consumer gadgets still make up a relatively small share of Seagate's unit sales--about 13 percent. But with similar drives beginning to show up in digital cameras, cell phones, and videocameras, Seagate is starting to look like a growth company for the first time since the 1990s. "Seagate has the chance for huge gains," says Dave Reinsel, a storage analyst at market research firm IDC.

The 1-inch drive is more than just an entrée into new markets, however. That's because only a radical transformation of the way it designs and builds disc drives has enabled Seagate to compete in the cutthroat world of consumer electronics. By replacing manual labor with automated factories, the company is churning out drives more efficiently than anyone else in the world. A fresh design approach has reduced new products' time to market and slashed defect rates--critical for devices that suffer daily trips to the gym. Seagate has been rolling out these changes to all the drives it builds, and the results are stunning: In the quarter ending April 1, revenue rose to $1.9 billion, a 35 percent increase over the same period a year ago, and net income (excluding one-time gains) jumped nearly fivefold. In March the company's stock price was near $20, its 52-week high. Says Dave Wickersham, Seagate's COO, "The 1-inch drive is the poster child for a new Seagate."

Hands-Free Drivemaking

Seagate's rebirth began six years ago, when then-CEO Steve Luczo faced an epic crisis. Long a proponent of cheap overseas labor, Seagate had become the largest private employer in Thailand and ran plants throughout Europe and Asia. Yet Luczo believed that hard-disc drives would soon become too small for human hands to assemble in volume. So he launched a "factory of the future" initiative. His goal: to produce finished drives in high quantities with virtually no human intervention.

Expecting applause, Luczo got raspberries. "People hated the idea," he says. For one thing, some analysts figured Seagate might spend a lot of money on equipment only to see demand flag. And while common in many industries, fully automated production was still new for drive makers. In fact, Al Shugart, Seagate's legendary founder who was forced out of the company in 1998, opposed automation, arguing that only humans were flexible enough to produce an ever-changing array of new drives.

Yet Luczo was confident that he could answer critics, thanks to a plan developed by Doug DeHaan, a Seagate engineer who headed the automation effort. DeHaan had toured cutting-edge factories in other industries, including one operated by Japanese watchmaker Seiko.

There, DeHaan's team saw something startling: Though Seagate's manufacturing gurus liked to think a disc drive was too delicate for robots to handle, Seiko was making wristwatches--even more delicate--on automated lines. Convinced that full automation could work for Seagate, DeHaan showed top management a film of Seiko's factory floor as part of his recommendation on how to proceed.

Luczo embraced the Seiko lesson and forged ahead with automation. Today, at Seagate's factories in Asia, each assembly line pumps out about 20,000 iPod Mini-style drives a day. Five years ago the company's factories required 600 people on 20 lines to produce that many drives. Now two material handlers and one technician can do the job. And with no humans touching drives as they're built, there's less chance for electrostatic shock, a primary cause of defects. Five years ago, out of every 1 million drives Seagate made, 10,000 arrived dead at customers' doors. Today the dead rate is down to 200 per million.

Getting in Line

Automation was just one way Seagate prepared itself to compete in consumer electronics. The other was an unprecedented effort to standardize how its designers develop new technology. Incredibly, the tiny 6GB hard drives that Seagate ships for music players are now made of the same basic parts as the company's much larger PC drives. Such design sharing has allowed Seagate to move new designs into production faster and with fewer people.

But getting engineers to work together on common specs proved tougher in many ways than automating factories. That's because Seagate is an amalgam of three companies: the original Seagate, which Shugart founded in 1979; Imprimis, a Minneapolis-based maker of mainframe and server drives that Seagate bought 10 years later; and Conner Peripherals, a PC-drive maker that merged with Seagate in 1996. As a result, Seagate's product teams have traditionally been highly fragmented, "separate silos that often competed against one another," says Bill Watkins, Seagate's current CEO.

The degree of fragmentation astonished even Watkins, who recalls a visit to a Seagate factory in Singapore in 1997, not long after he joined the company in the Conner deal. There he grabbed two drives, one designed in Minnesota and the other in Oklahoma. "The carriers were different--even the screws were different," he recalls. Then he threw the drives on a table and took them apart. Of the 300 components in each drive, only two showed up in both.

Watkins responded by consolidating Seagate's design centers from five to three and ordering developers to adhere to the needs of the automation initiative. He insisted, for instance, that all drives have rails for positioning on a conveyor belt, a hole in front for a data-collection chip, and screw-in top clamps that matched screwdrivers on the automated line. But even these minimal requirements touched off a fury. "Engineers told us we were being ridiculous, that we were constraining their designs," recalls DeHaan. Some designers scoffed at the idea that high- and low-end drives could be built on the same line and demanded at least two.

Watkins quashed the revolt, insisting on a single line and uniform specs for all products. The payoff has been immense, and not just because of fewer parts. In the past, each drive shipped with unique firmware--software that controls a disc's basic operations. Now Seagate plans to roll out a single set of firmware for all products, reducing costs for code development and bug fixing and speeding deployment of enhancements. Standardization allowed Seagate to release so many new products in 2004 that by year's end the company was supporting 10 product families--twice as many as when the year began--while research and development spending had actually dropped slightly. "The whole game is how much underlying technology can you leverage," says Pat O'Malley, who runs Seagate's consumer electronics business.

In fact, automation and standardization have prepared Seagate to compete in other storage markets, as demonstrated by its re-entry into laptop hard drives two years ago. The company first offered drives for laptops in 1990, but the product line--designed by 300 engineers--never won wide acceptance, and Seagate exited the market. This time a mere 80 engineers, working with Colorado-based designers of PC drives, delivered better results. Last year Seagate grabbed 6 percent of the laptop-drive market, which is dominated by Japanese rivals Hitachi and Toshiba. IDC predicts that Seagate will increase its share by a third to more than 8 percent in 2005.

The Big Little Opportunity

Of course, others have spotted the potential of the small-drive market. Hitachi, which supplies the 1.8-inch drives for the original iPod, is about tied with Seagate for the lead in storage for portable music players, and two startups, one in Colorado and one in Asia, have begun producing 1-inch drives. U.S.-based Western Digital says it will make them too. That old bugaboo of the disc-drive industry--ferocious price wars--could spoil the 1-inch party.

But no competitor has yet packed 6 gigabytes into a 1-inch drive the way Seagate has. And with more uses for small drives--Seagate is expected to announce a deal this year to put them in cars--the company's prospects seem bright. Annual revenue for storage worldwide languished at about $19 billion between 1999 and 2003. But last year it rose to $20 billion, and the Gartner Group expects the total to reach $28 billion by 2008.

Still, Watkins knows that it probably won't be long before his rivals are shipping 6GB 1-inchers of their own. He vows that Seagate will have a 10GB model by then. In April, setting out to lead his executive team in a three-year planning session, he had another idea to stay ahead. "We make a drive every three seconds, but we're making them one at a time," he says. "Maybe we should make them in batches."

They make watches that way. Why not?

Seagate's Formula for Infiltrating the World of Consumer Electronics