Profile of the Worldwide Semiconductor Industry–Market Prospects to 1997. Market Prospects to 1997

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Because of the SME sector's role as a key supplier industry for electronics more broadly, trends in this sector will continue to be watched closely. It is particularly appropriate to assess U. An examination of recent trends and possible future developments here could shed light on the sustainability of recent U. The development and competitive dynamics of the SME industry are tightly linked to conditions in its customer base, the semiconductor device industry.

In the early days of the semiconductor industry—the late s and early s—device makers such as Texas Instruments grew their own materials and designed and built their own tools. However, it was only in the late s and early s that the SME industry truly emerged. Higher levels of device integration and performance, along with more stringent and sophisticated manufacturing demands, raised equipment development costs. At the same time, abundant technological opportunities and the availability of capital to fund ventures encouraged a stream of managers from existing device makers to form new firms.

As capabilities grew in these dedicated equipment vendors, even large device makers increasingly turned to them for new process technology advances. Expanding business opportunities attracted market entry by existing manufacturers of other types of precision instruments, such as Varian Associates. The environment in which the semiconductor and SME industries developed in the United States encouraged a ''commoditization" of capabilities and arms-length market transactions.

This discouraged long-term cooperative relationships and advance planning. By the mids, when a serious business slump hit the semiconductor market, the SME industry consisted of a few larger companies operating in several equipment segments Varian, Perkin-Elmer, General Signal and numerous small and financially vulnerable firms. The SME industry experienced a serious shakeout due to the slump, as chipmakers canceled equipment orders.

When orders picked up again in the late s, many equipment makers were wary of increasing production too quickly. Tight demand created crucial market opportunities for Japan's emerging SME companies. Semiconductor Industry Washington, D. Until the late s, the U. SME industry experienced considerable success in penetrating the Japanese market, enjoying an 80 percent share in Tokyo Electron Limited TEL , today the largest Japanese SME company, started as a specialized distributor of foreign-made equipment, gaining considerable marketing and technological expertise.

Through links with U. Although TEL is not closely linked through financial ties to any of its major Japanese customers, other Japanese equipment makers started as subsidiaries or closely affiliated suppliers of the major Japanese semiconductor companies. Despite rapid gains in consumer electronics through the s, in the early s Japan's electronics industry appeared to be falling behind the rapid pace of innovation set by the United States in key areas such as computers and advanced integrated circuits. The coordinated industry government strategy that was formulated at that time is today seen as one of the great success stories of Japan's industrial policy.

Japanese device makers used a conservative approach to product and process design in order to beat U. With success in the rapidly growing DRAM market, Japanese device makers expanded capacity and purchases of domestic machinery, while U. These trends set the stage for dramatic shifts in market share.

Between and , the share of the world SME market held by Japanese companies rose from 18 to 39 percent, while the share held by U.

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The foremost of these was lithography equipment used to transfer circuit patterns to silicon wafers. As a result, lithography is. Stowsky mentions direct and indirect contributions of the VLSI program to the development of Nikon's wafer steppers; Canon's projection aligners; E-beam lithography equipment developed by Hitachi, Toshiba and JEOL; Advantest's testers; Ulvac's ion implantation system; Nikon's first X-ray aligners; Dai Nippon Printing's X-ray masks; Kokusai Electric's deposition-and-etch systems and ion implanters; Tokuda's dry etch machinery; and Ando Electric's testers.

Semiconductor Wafer Processing Equipment Industry, Semiconductor manufacturing equipment can be divided into the machines used in the "front-end" processes of wafer fabrication and those used in the "back-end" assembly and testing stages. In the former category are lithography, deposition including chemical vapor deposition or CVD , etch and strip, ion implantation, and thermal processing.

In optical wafer steppers, the largest lithography product category, the share of the world market held by U. By the late s and early s, Japanese SME firms were extending and consolidating their gains in the U. SME vendors. During this period, IBM and other U. As in other high-technology and manufacturing industries in which Japanese companies made rapid gains in the s and s, the situation in the SME industry has shifted considerably in recent years.

The share of the world SME market held by U. Several factors have contributed to halting the decline of the U. SME industry's competitive position in recent years. The most obvious has been a shift in market trends. A consistent trend in semiconductor manufacturing has been the increase in minimum efficient scale. However, the payback on a billion-dollar fab now occurs in as little as three to five years.

At the same time, the cost presented by equipment has risen from 40 to 70 percent of the total, partly due to the need to assure redundancy if equipment should break down. Just as the earlier problems suffered by U. SME rebound. These segments of the market have grown considerably in recent years, particularly the microprocessor market, which is dominated by Intel.

Consequently, capital. Perkin-Elmer's lithography assets were eventually split up. The E-beam business was spun off into a separate company, Etec, owned by a coalition of companies, including IBM. A controlling interest in the optical lithography operation was bought by Silicon Valley Group. The Department of Justice then challenged the sale on antitrust grounds but the challenge was turned down in court. Perhaps the most important end-market development has been the breaking of Japan's dominance of the DRAM market by the entry of Samsung and other Korean conglomerates. SME vendors have enjoyed a higher market share in Korea than in Japan.

Although the rapid improvement in business climate enjoyed by U. SME vendors in the period has leveled off, and some parts of the chip industry have suffered serious slumps, U. SME vendors should continue to enjoy relatively favorable market trends in the next few years. Particularly interesting is the trend toward increased investments by Japanese chipmakers in capacity outside Japan, including several facilities being built in partnership with U. Some U. Since Japan is a major component of the overall market, participation there is necessary to gain a return on investment in new technologies.

Box develops a metric for associating market share and the ability to invest in technology development.

A key question is whether Japanese-owned fabrication facilities outside Japan will bring increased opportunities for U. SME vendors with competitive equipment or whether Japanese chipmakers will find it desirable to maintain a high level of reliance on Japanese equipment vendors in their overseas facilities. The Japanese semiconductor industry built its competitive advantage on high levels of investment and continuous improvement in manufacturing practices, which enabled higher yields and lower costs.

By the mids, industry observers had noted a considerable gap in yields between Japanese and U. An ongoing study of semiconductor manufacturing performance by the University of California at Berkeley indicates. According to Dataquest data, Japanese equipment spending was almost double that of North America in and In the capital spending levels were about even.

Several U. The impact of continued difficulties in accessing the Japanese market on the ability of U. SME industry at the margin:. Broken down by region, U. From the annual reports of 10 of the top public U. SME vendors, based on sales, U. Based on U. For example, had U. A number of U. Expected accuracy could be improved with more complete data. VLSI Research data were used here because market share by vendor nationality was provided.

This group accounts for about one-fourth of U. SME industry sales. Although some caution should be used in interpreting the interim results because of the small sample size, the study indicates that Japanese semiconductor manufacturers, through utilizing superior manufacturing practices, still achieve higher manufacturing performance relative to U.

The practices associated with superior fabs include 1 strong information systems capability to provide process control and the collection and analysis of data, 2 organizational capability focused on problem recognition and solving, 3 necessary internal technical talent and vendor support to implement improvements continuously, and 4 effective procedures for managing the introduction of new process flows. These practices are easier to implement in the Japanese context because of the human resource environment of Japanese companies and because of the characteristic close working relationships between equipment vendors and device makers, which were discussed above.

A new emphasis that appears to be paying considerable dividends is a shift from total quality management to total preventive maintenance TPM , or from perfect product to perfect machine. In many areas of the SME market, U. Because of its superior technology and investment in an independent sales and service structure in Japan, sales in Japan have grown rapidly, in line with overall performance.

Department of Defense, has made a significant contribution to encouraging closer customer-supplier ties in semiconductor manufacturing. The consortium's experience also illustrates the limits of policy solutions focused solely on technology development in maintaining or restoring U. In its five-year, three-phase program aimed at demonstrating. Robert C. Leachman, ed. Despite successful development by GCA of the XLS and advanced steppers, judged by a number of industry observers to be superior to the latest generation of Nikon and Canon steppers, GCA succeeded in winning only one major production contract during the investment period for sub-.

Because high quality support for lithography equipment is essential to chipmakers, these doubts discouraged purchases from the U. In GCA was shut down after several efforts to spin the firm off from its parent, General Signal, failed. Throughout semiconductor device makers announced new plans for expanded capacity. However, SVG had booked enough orders to allow it to walk away from the agreement and not seriously impair its long-term prospects in the lithography business. Its experience to date has illustrated several important lessons and highlighted unresolved questions about how U.

See Lucien P. In this case there were a number of options potentially available to government and industry had it been decided that keeping GCA afloat would advance significant U. Under Section of the Trade Promotion Act, imported steppers could have been determined to endanger national security, and tariff protection for U. Several new public-private research programs have been launched in the past few years. The prospects for the U. SME industry will remain tightly linked to those of U. Due to its relatively small size and segmentation, the industry is likely to retain a more "national" character in terms of employment and technology base, compared with device makers that are increasingly global, and other industries examined in this report.

Despite considerable gains by US. This is likely to persist in the future. Although the US. Given the sudden onset of unfavorable circumstances, the industry could find itself in deep trouble once again. The information industries sector is somewhat difficult to define precisely because of rapid technological changes, market growth, and structural shifts. Fast-moving innovations are blurring the lines between industries that have been considered the primary information-related sectors such as telecommunications services, computer hardware, and computer software and other industries such as entertainment, consumer electronics, and publishing.

In contrast with the United States, where civilian technology programs are extensively debated, the new Japanese programs and organizations were developed through government-industry consultation and coordination. The latter report defines the information technologies sector as including telecommunications and networking equipment and services, computers, storage devices, terminals, peripheral equipment, software and associated services, office machinery, packaged software, data processing, information services, facilities management, and other associated services.

Most of the industries and technologies underlying the ongoing "information revolution" were pioneered in the United States, and U. The government was also a lead user of advanced information systems and enabling technologies, such as the SAGE air defense system in the s and the space program in the s, and promoted the diffusion of knowledge through its research support and antitrust policies.

Chemical Sensors

By the s, a growing commercial market for data-processing equipment and services had emerged, and U. The mainframe computer was the central product, and business demand drove market growth. The Japanese government and the integrated Japanese electronics firms were aware of the significance of mainframe computers from an early date. A catch-up strategy was developed, with one key priority being to control market participation by IBM and other foreign vendors while promoting the transfer of critical technologies.

A government-subsidized leasing company was set up to match IBM's marketing edge, which lowered market risks for hardware makers and stoked demand for mainframes and data-processing services. This strategy, combined with the decision by two of the three Japanese computer companies to adopt IBM-compatible architectures, was quite effective for a number of years. The Japanese computer makers were able to build sufficient capabilities to meet the needs of domestic users and gradually closed much of the technology and market gap with IBM and other U.

By the mids, Japan's IBM-compatible mainframes were competitive, and the Japanese computer industry was making important inroads in supercomputers. At the same time, spillovers between U. It began to appear that U. Several technological and market developments prevented this from happening. Continuing rapid innovation led to dramatic improvement in the cost performance characteristics of data. Council on Competitiveness, op. See Richard N. Langlois and David C. Software Industry," in David C. Mowery, ed.

Marie Anchordoguy, Computers, Inc. With the advent of the minicomputer, workstation, and particularly the personal computer, the market for computers grew from its base in large businesses and government agencies to include a wider range of organizations and eventually individuals. Just as the Japanese computer industry was catching up with IBM and Cray, the center of gravity for information technologies markets shifted dramatically toward distributed computing, the development of packaged applications software for open architectures, and more recently to new business and entertainment applications enabled by the Internet.

In this environment the continuing advantages of the U. Structural features of the Japanese system, several of which provide sharp contrasts to characteristics of the U. Japan's strategy of utilizing government-industry cooperation to encourage inward technology transfer while developing domestic industry strengths has proven difficult to pursue effectively in the rapidly growing and largely unregulated markets centered on PCs.

Japan's lower emphasis on software and its different approach to software development, described below, also have played a major role. Finally, the patterns of globalization pursued by U. In the late s it appeared that the collective strength of Japanese companies in many areas of computer hardware would be leveraged to gain greater control over global information technology markets.

However, competition from companies based in Asia in. It should be pointed out that the relationship between intellectual property protection, industry structure, and innovation are complex, particularly in these industries. Strong intellectual property protection encourages innovation, but may also contribute to the emergence of an industry structure that discourages new entry. Therefore, the impacts and interaction of intellectual property policy and competition antitrust policy are very important.

See Robert P. As pointed out in other parts of the report, however, these programs probably produced less tangible benefits in the form of training and improved research infrastructure. Different approaches to direct investment in Asia by U. This has created an alternative supply base and competition for Japanese firms. In contrast, Japanese investments in Asia have until recently tended to focus on local markets and to transfer less sophisticated products and processes.

As a result of their disparate development paths and institutional legacies, Japanese and U. Several aspects of Japanese industry approaches and business practices are currently seen as disadvantages. The first is the lower level of diffusion of information technologies, particularly PCs, relative to the United States. Figure shows trends in U. Despite accelerated growth in recent years, Japan still lags the United States in the diffusion of PCs, particularly networked PCs used in business. Another characteristic of Japanese information industries is a relative emphasis on the development of custom versus packaged software.

Experts have noted Japanese strength in developing customized software and the advantages of the ''software factory" as an organizational tool. Japanese demand is likely to shift toward packaged software as distributed processing becomes more widespread. For Japanese users the cost differential between maintaining large investments in unique solutions run mainly on mainframes and switching to standardized solutions run mainly on distributed open systems is growing as the U.

Adaptation of foreign-developed applications to run on Japanese systems also is becoming less expensive. A key turning point was the development of the Japanese version of Microsoft Windows, which has spurred rapid growth in the Japanese PC market and is spelling the demise of the closed proprietary PC standards maintained by Japan's leading computer manufacturers. Electronics," in Eileen Doherty, ed. About 90 percent of U. See Nihon Keizai Shimbun, July 22, , p. Michael A.

William V. Rapp and Hugh T. Friendship Commission, August Today, Japanese companies are largely absent from the packaged software market, including operating systems as well as the most important and rapidly growing application segments for businesses and consumers such as groupware, Internet browsers, and relational databases. However, it would be a mistake to make too much of these relative weaknesses or to downplay Japan's strengths. Japanese companies remain quite strong in significant areas of information technologies. These include computer and video games, high value-added hardware components of information systems displays, optical storage , embedded software in products such as numeric control software for machine tools, and vector supercomputers.

In these areas, differences in the structure of the Japanese market have not constituted a disadvantage. For example, fragmented standards have not been a major barrier to the diffusion of "stand-alone" systems like games and machine tools. Japanese companies and the Japanese government are also taking steps to adapt and become more competitive. For example, anecdotal evidence indicates that the large Japanese electronics companies are maintaining their investments in longer-term research and expanding their collaborative work with Japanese universities.

As of June , 85 percent of the 20 top-selling software packages in Japan were localized versions of foreign programs. However, the PC is even mounting a strong challenge in numeric controllers. For example, a group of 21 Japanese univerisities and 10 electronics companies, including foreign capital companies such as Texas Instruments and IBM, announced plans for a four-and-a-half-year, 1 billion yen research effort in the area of parallel computing. NEC, Fujitsu, and others are now positioned to reenter the U.

PC market, which they had largely abandoned in the late s. There are also signs that the business culture in Japan is changing. One company that is pursuing a very different strategy toward information industries than other Japanese firms is Softbank Corporation. From its base in Japan as a software and peripherals distributor, Softbank has concluded a broad and dynamic array of acquisitions, minority investments, and strategic alliances, mainly involving U.

In contrast to traditional Japanese corporate strategies in this industry, which are focused on hardware, inward technology transfer, and catching up with U. Also, a number of Softbank's alliances appear to be aimed at facilitating access by small-and medium-sized U.

Softbank's ultimate degree of success remains to be seen, but the existence of a maverick Japanese firm pursuing high-risk strategies raises the possibility that U. Although Softbank is something of an outlier in the Japanese context, Japanese companies are increasingly willing to engage in reciprocal relationships with U. Despite current leadership in this industry by U. For example, despite global market leadership by U. One important example was Hitachi's decision to purchase microprocessors for its mainframe computers from IBM.

See Ibid. There is some debate among experts about the extent and significance of this trend. For example, a significant market shift from PCs to the emerging "network computer" could lead to new opportunities for Japanese firms. The dynamic, rapidly growing U. One important question for the future is whether the Japanese market will come to play a similar role.

Japan's competitive, dynamic market plays an important role in pushing new technology in areas such as consumer electronics and games. Despite the fact that Japan's markets in computing and communications are somewhat more open. Telecommunications services are particularly important. In contrast to the United States, where deregulation and the break-up of the Bell System has led to increased competition and lower costs, the Japanese market is still highly regulated.

NTT still holds a dominant position in providing long distance and local service, and costs are still several times higher than in the United States. With the implementation of new legislation in , the U. Meanwhile, debate in Japan over deregulation of telecommunications markets and restructuring NTT has focused on how changes would. There are however indications that this may change and that market contestability may improve. Some possible explanations are reviewed, building on a conceptual framework introduced by G.

Richardson and I analyze how globalization affects competition and distinguish forces that foster concentration and forces that are conducive for market disruption. I conclude with suggestions for future research on the determinants of market structure and firm behavior. University of California at Berkeley. Introduction : two puzzles. How does globalization affect market structure and competition? The dominant view, based on the assumption of neo-classical trade theory, is that globalization will increase competition and hence will act as a powerful equalizer both among nations and among firms.

One of the most sophisticated proponents of this neo-liberal globalization doctrine is Richard E. Take his widely quoted book Multinational Enterprises and Economic Analysis, first published in by Cambridge University Press, which since then has been re-printed eight times Caves, Chapter 4 of this book deals with "Patterns of Market Competition" that result from the spread of international investment by MNEs. Caves argues that by increasing the number of buyers and sellers that can enter the contest in a given market, globalization is likely to decrease concentration and hence to intensify competition.

The key sentences are: " T he occurrence of new entry by MNEs tends to reduce the level of concentration, even considering that entry now is often affected by acquiring a local firm" ibid. This lends " This may sound like a reasonably plausible proposition. Yet, as a brief look at the empirical evidence of industrial dynamics shows: "it ain't necessarily so! A high degree of globalization may well go hand in hand with increasing concentration. This is the first of the two high-tech competition puzzles that I address in this paper.

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I show that one of the most globalized sectors of the electronics industry, hard disk drives HDD , also displays one of the highest degrees of concentration: multinational corporations, after all, may not be such effective "spoilers of concentration". Following Bain, and Blair, , one would have to conclude that the HDD industry constitutes a very tight oligopoly. This conclusion however does not square well with the fact that the HDD industry is characterized by continuous price wars, very short product cycles and highly volatile market positions.

Market leadership positions change hand in this industry at very short notice. This brings me to the second puzzle that I address in this paper: despite an extremely high degree of concentration, this industry fails to act like a stable global oligopoly. The paper is organized as follows: I start with a discussion of the first puzzle, presenting evidence on globalization and concentration. I then address the second puzzle, linking high concentration to high volatility. Some possible explanations are reviewed in the third part of the paper, building on a conceptual framework introduced by G.

I conclude. Hard disk drives HDDs are the workhorses of mass storage and are widely used in computers of all sizes, from the most powerful super-computers to the most tiny laptop PCs. This industry provides an excellent example for our first puzzle: under certain circumstances, globalization can go hand in hand with high and increasing concentration. Let us first look at three indicators of globalization: the international dispersion of production sites, employment and production networks.

Production sites and employment. Until , IBM was the only disk drive manufacturer. IBM's Winchester design, introduced in , became the de facto standard during the s. Until the early s, almost all HDD production remained in the U. This began to change in when Seagate, only three years after its founding, decided to move a large part of its drive assembly to Singapore. One year later, in , Seagate then moved on to establish a second affiliate in Thailand in the Bangkok metropolitan area.

Since then, all the leading HDD manufacturers have shifted most of their final assembly to Asia. In , we find for instance that Conner Peripherals had three affiliates in Asia in Singapore, Malaysia and China , Maxtor had three in Singapore, Hong Kong and South Korea , and Seagate, which by then had become the industry leader, had six Asian affiliates one each in Singapore, Malaysia, Indonesia and China, and two in Thailand.

The result is an extreme reliance on international production that goes well beyond what we find in other highly internationalized sectors of the electronics industry, like semiconductors and consumer electronics 2. In , less. Slightly less than half of the world's disk drives come from Singapore, with most of the rest of the region's production being concentrated in Malaysia primarily in Penang and Thailand. This heavy reliance on international production is also reflected in the geographic distribution of the HDD industry's employment. International production networks and specialization.

Over time, HDD firms have progressively integrated their erstwhile standalone operations in individual host countries into increasingly complex international production networks IPN 4 : they break down the value chain into discrete functions and locate them wherever they can be carried out most effectively and where they are needed to facilitate the penetration of important growth markets. Reduction of transaction costs is one important motivation. Of equal importance however are access to clusters of specialized capabilities and contested growth markets, and the need to speed up response time to technological change and to changing market requirements.

Consider a stylised international production network IPN. The lead company derives its. One such source of strength for instance is the intellectual property and knowledge associated with setting, maintaining and continuously upgrading a de facto market standard. This requires perpetual improvements in product features, functionality, performance, cost and quality. The lead firm outsources not only manufacturing, but also a variety of high-end support services, such as engineering, research and development.

The result is that an increasing share of the value- added shifts across the boundaries of the firmas well as across national borders. Three stages can be distinguished in the HDD industry's value chain: the fabrication of key components drive heads, media, silicon wafers, and semiconductors which is highly capital-intensive and requires mastery of complex process technology; the insertion of key components into sub-assemblies; and final assembly and testing. Geographic dispersion dominates the latter two stages, with most sites having moved to Asia. The picture is different only for wafer fabrication and media production which remains highly concentrated within the Triad, primarily the US 5.

Let us take a closer look at the IPN of Seagate, the current industry leader. Today, Seagate operates 22 plants worldwide: 14 of these plants, i. Let us now look at the regional breakdown of Seagate's employment. Again, Asia's expansion occurs at the cost of the US. The absolute figures speak for themselves: out of a total worldwide workforce of 65, in June , Seagate employed 55, people in Asia. The fact that Asia's share in employment is substantially higher than its share in capacity, while the opposite is true for the US, indicates a clear-cut division of labor: labor-intensive volume manufacturing has been shifted to Asia, while the US retains the high-end, knowledge-intensive stages of the value chain.

Asia has absorbed most of the high-volume assembly activities. For instance, Seagate Magnetics, the affiliate that produces media, has concentrated all production in California. And wafer fabrication, a core process of head manufacturing, is concentrated in Minnesota, as is automatic slider fabrication for MR heads 6. It is important to emphasize that the geographic dispersion of the value chain through IPN goes hand in hand with increasing geographic concentration. Most of Seagate's volume manufacturing is heavily concentrated in Asia. We need to add a second aspect: an extreme spatial concentration within East Asia.

Let us start again with capacity figures. A similar picture of intensive geographic concentration within Asia emerges from Seagate's employment figures. These figures nicely show that Singapore increasingly takes on the role of a coordination centre, with the result that, in Singapore, the share of employees per sq- ft is much higher than elsewhere in the region.

An increasing share of this indirect labor force today is recruited on the international labor market, and includes managers from the Philippines and India, and engineers from China and India, and many other countries. Finally, Penang' s low ratio of employment relative to its share in Seagate's production capacity clearly indicates that Penang' s production facilities have been rapidly automated and include now higher-end manufacturing activities such as component manufacturing.

Over time, Seagate has developed a quite articulate regional division of labor in East Asia. Bottom-end work is done in Indonesia and China. Malaysian and Thai plants make components and specialize in partial assembly.

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Singapore is the centre of gravity of this regional production network: its focus is on higher-end products and some important coordination and support functions. It completes the regional production network, by adding testing, which requires precision. The HDD industry is one of the most highly concentrated sectors of the electronics industry and its concentration continues to grow. Only computer operating systems, microprocessors and computer network equipment routers, switches and hubs are more highly concentrated, due to the de facto monopoly position that Microsoft, Intel and Cisco Systems occupy in these three sectors.

Compared to these sectors however, the HDD industry is much more globalized. One indicator of increasing concentration is the rapid decline in the number of worldwide drive manufacturers: the total has shrunk from 59 in to 24 in , with most of the decline taking place after In , nine companies went out of business, and only three companies entered the fray, all of them in niche markets 7.

During the same year, Seagate, the current market leader, acquired Conner Peripherals, the company which, in , was the world market leader. If we look at market share data, we find that, by all standards, the HDD industry today is characterized by a very high degree of concentration. American companies are clearly in a dominant position: the top six HDD companies are all US-based firms 8. Concentration ratios are also quite high for the two main key components: heads and media Compared with both HDD assembly and head manufacturing, the media industry is less concentrated.

A few of the smallest firms are, however, increasing production in The very high degree of concentration that characterizes the HDD industry, raises the question whether this industry is controlled by a tight oligopoly. This is an important issue. If we would have to conclude that this industry is indeed governed by a tight oligopoly, this would imply that the development of technology, products and markets is shaped by a small group of American firms.

It would also imply that outsiders from Japan or elsewhere would have very limited chances to expand their market share, indicating a low degree of market contestability. One might even argue that, as a tight oligopoly decreases competition, the pressure to globalize may slacken. This would be a perplexing finding: globalization has acted as a powerful force behind increasing concentration; yet once concentration reaches a certain level, it may in the end constrain further globalization.

Does high concentration lead to a tight oligopoly? One way to address this question is the structure-conduct-performance SCP theory. In this view market structure, as captured by concentration of sellers, is the primary determinant of both conduct and performance.

Profile of the worldwide semiconductor industry-market prospects to 1997.

Take one of the classic sources, Joe S. Bain's Industrial Organisation, published in Bain argues that high levels of sellers' concentration, protected by high entry barriers, will induce firms to engage in price collusion, which inevitably will constrain static efficiency allocation as well as learning. If we use this criterion, we would have to conclude that the HDD industry is indeed controlled by a very tight oligopoly. We can also use a second classification of market structure which is widely used in the literature and which goes back to the pioneering work of Bain Using this classification, we would again be forced to conclude that the HDD industry is definitely a "very highly concentrated oligopoly".

Despite a number of major shake-outs, the industry remains highly unstable: market positions keep changing at short notice, and not even market leaders can count on a guaranteed survival. Let us look at the figures for the non-captive HDD market. Yet, one year later, in , Quantum had leapfrogged both Conner and Seagate to become No. Data for show that, once again, the industry has experienced another round of swapping market leadership positions, with Seagate now re-capturing the top position from Quantum.

Furthermore, successful entry did occur, albeit in an indirect manner. Probably the most interesting case is that of Matsushita Kotobuki MKE , an affiliate of the powerful Matsushita group. Since , Kotobuki has contended itself for many years to remain an apparently humble contract manufacturer for Quantum, one of the leading American drive producers. Today, MKE produces Quantum's full product range, including the highly profitable high- end drives for mainframes and network servers.

One wonders how long MKE will wait till it disconnects itself from Quantum and enters the market on its own. Major changes are currently again transforming this industry, with the result of a drastic re-positioning of market shares and a redefinition of the rules of competition. Industry-specific developments are closely intertwined with the impact of the Asian crisis. The result is a pervasive profit squeeze and a fall in asset prices: HDD firms which are negatively affected by these developments, are forced into a defensive chain reaction.

The most prominent example is the erosion of Seagate's market leadership position since the fall of To some degree, this decline is due to the company's earlier extremely ambitious quest for market leadership: i the acquisition of Conner Peripherals and of the disk drive division of DEC has over-extended its limited management and financial resources; ii the same is probably true for its aggressive strategy to strengh- ten its position in higher-end disk drives; iii excessive recent re-integration moves related to key components and sub-assemblies, which ran counter to the industry's long-term trend towards increasing outsourcing; and, possibly, iv arrogance and complacency have led to a failure to continuously upgrade its technological capabilities.

However, Seagate's decline also reflects an accelerated pace of market volatility. IBM, the sleeping giant, has finally woken up and is now aggressively competing for market share New aggressive lower-cost suppliers from Japan and Korea are also successfully expanding market share. Fujitsu has been the most successful 13 : it has aggressively developed a highly productive low-cost production base in the Philippines followed by Hitachi and Toshiba. As Fujitsu is much larger than the current industry leader Seagate, it has the resources necessary for this aggressive frontal attack.

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