Consolidation Accelerates in the Hard Disk Capital Equipment Market

Implications: * Oerlikon sold its disk drive sputtering assets to Intevac and exits the hard disk drive business  * Oerlikon, in a former incarnation as Balzers used to be one of the major players in the disk sputtering equipment market but had lost most of its business over the last 10 years  * Despite making efforts to introduce new products in the last few years Oerlikon placed a distant third to Intevac and Anelva in the media sputtering equipment market  * Oerlikon had also been sued by Intevac for violation of patents on disk handling in sputtering systems  * The merger of Oerlikon’s disk equipment business into Intevac is only the latest development in capital equipment consolidation for the industry and certainly not the last

Analysis: Back in the mid-1990’s Balzers was one of the major manufacturers of disk sputtering equipment with equipment at many major disk manufacturers at the time including IBM and WD Media.  At the end of the 1990’s and early 2000’s Balzers underwent significant changes in focus (as well as name—they went through at least 4 name changes in about 5 years).  During this period the company lost its focus on the disk drive production equipment industry. 

The slow down during the dot-com bust combined with aggressive areal density increases reducing the average number of disks per disk drive left the industry with lots of surplus disk manufacturing equipment.  As a consequence there were several years with little or no new equipment purchases.   During the slow down companies such as Intevac and Anelva had to survive on equipment upgrades and maintenance while they tried to create some diversification in their customers. 

Anelva was acquired and became part of Canon and Balzer (and its many named descendents) ceased producing new products for the industry for several years.  When the market returned for more disk production equipment driven by disk drive unit volume growth, the cessation of component count declines in disk drives and the conversion to perpendicular recording Intevac and Anelva once again saw a renewed market for their equipment.  

In 2006 Oerlikon (the latest manifestation of former Balzers) introduced a new line of sputtering equipment but by then they had few if any customers remaining from their old Circulus line of sputtering machines.  The new equipment had a few sales to Samsung and some other companies for research purposes but it was never adopted for volume production by any of the disk manufacturers.  In addition, in 2007 Intevac filed a lawsuit for patent violation against Oerlikon.  

The disk drive capital equipment industry is extremely cyclical, especially for expensive, long lead time capital equipment like disk sputtering equipment.  While the equipment can take perhaps nine months from initial order until the equipment is installed at the customer and starting to build product, the market for disk drives can change in weeks and often undergoes long term spells of either intense sales or utter stagnation.   Thus 2006 was a great year for disk sputtering equipment sales as unit volume growth and the conversion to perpendicular recording drove sales of new sputtering equipment.  However by the second half of 2007 and in 2008 the market has declined considerably.  

Consolidation in the disk drive and component capital equipment industry is on-going and the Intevac purchase of Oerlikon’s disk sputtering technology should help the remaining vendors improve their overall profitability when the market picks up again—probably in 2009 with increased demand and the introduction of discrete track recording media.   

Stronger vendors will be better able to support the research and development as well as the cost of manufacturing these ever more complex machines.  As pointed out in Coughlin Associates’ "2008-2013 Capital Equipment and Technology Report for the Hard Disk Drive Industry" (www.tomcoughlin.com) total capital spending between 2007 and 2013 will be about $35 B to support cumulative revenue that could reach $313 B.  The price of disk sputtering equipment including patterned media manufacturing capability could rise to $10-15 M each.