IBM Shifts Hard-Drive Business To Hitachi, Forms Design Services Unit

IBM said it would also form a new design services organization that will focus on consulting with other OEMs on system design--a move to cash in on its intellectual property while cashing out on much of its component-manufacturing business.

The centerpiece of the move is a deal between IBM and Hitachi under which IBM will essentially sell off its HDD unit to a new, independent company that will be majority-owned by Hitachi. The arrangement calls for a transfer of 18,000 IBM employees into the new company.

"For the last two years [that IBM was making their own hard drives, they were aggressive in the channel," said David Chang, president of Agama Systems, a Houston-based white-box maker. "All of a sudden, a few months ago, we heard that IBM was going to get out of the business."

The problem, Chang said, is that he believes IBM aggressively drove down pricing in a manner that has put even more pressure on margins for systems builders.

"Once [prices are down, they're down, until, to a point, the inventory is almost gone and people still want IBM [drives," Chang said. He added that he does not currently have a business relationship with Hitachi and would wait to see how the market responds to the new independent company before deciding where to obtain HDDs he once got from IBM.

Other alternatives would be rivals including Seagate and Maxtor.

The details of the plan--the foundation of which was laid in April when the companies forged a broad partnership in the HDD area--call for the new company to be based in San Jose, Calif. It will be "managed by an independent team comprising executives from Hitachi and IBM's existing HDD operations," the companies said in a joint statement.

The as-yet-unnamed new company will be headed by Jun Naruse, corporate managing director of Hitachi Ltd. and formerly CEO of Hitachi Data Systems, as its CEO. Douglas Grose, general manager of IBM's Storage Technology Division, will be COO of the new company.

Hitachi plans to select a board, and IBM will have no involvement in its operations, the companies said. They agreed to multiyear supply commitments from the new entity, they said.

In its announcement, Hitachi said it expects the new company will reach the $7 billion mark in annual sales by 2006.

After making that deal public, IBM also took the wraps off a plan to form its new technology design services unit and cut 1,500 employees from its Microelectronics division.

"Our intention is to leverage and learn from . . . IBM Global Services," said John Kelly, IBM's senior vice president in charge of its Technology Group. Kelly, speaking in a conference call to reporters and security analysts, said he remained confident in IBM's technology, research and development, even in the face of tough competition.

"Copper, SOI [silicon-on-insulator . . . are not easy to manufacture or design, but they are becoming must-have customer designs," Kelly said. "I assure you many more companies are claiming to have mastered these production techniques than have succeeded. I know, because some of them are paying us to show them how to do it."

IBM did not immediately reveal details on the new unit, including how many would work there or from where they would come.

The Microelectronics unit, which reportedly has been struggling for some time, will also change its focus. Kelly said the company, which manufacturers PowerPC processors in addition to custom logic, will move out of the aluminum-based processor business and focus primarily on technology surrounding copper-based processors.

"There is undoubtedly excess aluminum capacity in the industry and at IBM. By and large, this is older technology," Kelly said. "Though, keep in mind that IBM uses a portion of our aluminum capacity in Burlington for production of silicon germanium--a leadership technology IBM invented and in which we are the leading supplier.

"However, the excess aluminum capacity is, in part, evidence of the fact that the new semiconductor industry is moving to new materials," Kelly said. "So, we are therefore adjusting our aluminum capacity. We are, however, 100 percent filled in our copper capacity and we're looking forward to our new all-copper 300 mm facility coming online later this year."