WSJ on TDK: High Barriers to Entry, Low Cost Production, Flexible Culture (TDK)

Henny Sender's article on TDK Corp (TDK) in today's Wall Street Journal (paid sub req) portrays an almost ideal investment play where the firm has high barriers to entry as the world's leading manufacturer of hard-disk-drive heads, low cost production from neighboring China, and an increasingly flexible corporate culture that's being influenced by its more informal and meritocratic Chinese subsidiary.

I don't question the growth possibilities and sustainability of TDK's business over the next few years. That's even despite PC sales that may not be as strong as they were in years past in Japan and the US because overseas demand should drive growth for TDK.

Both portable and component audio/video players and recorders represent TDK's best sales and growth opportunities since TDK is poised to player either or both the hard-disk-drive and flash memory medium.

I am not excited about TDK's CD/DVD disc media sales and profitability. TDK is "hopeful" its media segment can turn a profit this fiscal year.

As for TDK enjoying its industry's high barriers to entry, Samsung could disrupt this if it is in fact developing a technology that could eventually render TDK's magnetic heads obsolete. Thus, TDK cannot be complacent.

Regarding its low cost production in China, this could be hurt by further appreciation of the Chinese yuan but simultaneously offset by a strengthening yen. With little or no competition at present, TDK should not have to look outside of China to lower its labor costs. If anything, it could look to streamline its facilities and processes within China.

Innovation will be key in helping TDK ward off Samsung. A merit-based corporate culture will certainly create incentive to innovate, cut costs, and widen the moat.

TDK Corp (TDK) 1-year chart: