Seagate Tries Less Production, More Tech Sharing In China Retrench

| About: Seagate Technology (STX)

Summary

Seagate's factory closure, combined with its earlier formation of a Chinese technology-sharing joint venture, reflect the changing approach away from local manufacturing that western tech firms are taking toward China.

China is losing its attractiveness as a manufacturing ground for high-tech products partly due to a campaign by Beijing to build up a globally competitive domestic chip sector.

What's the meaning of this factory closure and the newer joint venture, and what's the outlook for semiconductor and high-tech equipment manufacturing in China?

New reports are saying that hard disk drive maker Seagate (NASDAQ:STX) is closing down a factory in the eastern city of Suzhou as part of a restructuring plan to revive its operations. Such a development isn't huge news, since the global semiconductor sector is undergoing a major consolidation.

But this particular closure also comes just months after Seagate announced a new tie-up with Chinese partner Sugon to tap the local market for IT products and services. So the bigger question becomes: What's the meaning of this factory closure and the newer joint venture, and what's the outlook for semiconductor and high-tech equipment manufacturing in China?

The answer seems to be that China is losing its attractiveness as a manufacturing ground for high-tech products partly due to a massive campaign by Beijing to build up a globally competitive domestic chip sector. At the same time, selling IT products services into China is still a lucrative area for foreign makers of chips and networking equipment. But they can only do that now in partnership with Chinese firms, following Beijing's recent roll-out of a tough new national security law.

We'll look more closely at the bigger picture shortly and what it might mean for big foreign tech names in China, but first let's review the basic facts surrounding Seagate. The company is saying it will cut 2,000 jobs as a result of closing its Suzhou factory, which is part of a previously announced broader global restructuring plan (English article).

That plan is aimed at reducing its manufacturing footprint as Seagate and other chip and memory designers look to third-party contract manufacturers to do that capital intensive work for them. Such outsourcing of manufacturing has been going on for quite a while, so in that sense it's not surprising to see Seagate making this move.

Next let's look at the bigger picture surrounding Seagate and some of its western peers in China. One of those, Western Digital (NYSE:WDC), was hoping to secure big funding from China by selling 15 percent of itself to Tsinghua Unispendour last year. But that deal was ultimately nixed after coming under scrutiny by the US agency that reviews such transactions for national security concerns. Another similar deal that would have seen memory chip giant Micron (NASDAQ:MU) get bought by a Unisplendour sister company also collapsed previously for similar reasons.

Seeking China Cash?

It's not really clear if Seagate was ever seeking a similar cash infusion from a Chinese partner, though I certainly wouldn't be surprised if it was approached by Unigroup or other similar investors at some point. China has made no secret that it wants to build up its local chip-design and manufacturing capacity, and Unigroup and several other local names have embarked on a global buying spree to try to import the necessary expertise.

But political resistance has been unexpectedly strong in the US, and signs are emerging that European governments also are reluctant to lose such companies to China. Thus even if Seagate was hoping for a cash infusion from China, which could have included assistance to revive its Suzhou plan, it probably realized it might never get such help due to resistance in Washington.

Realizing their access to manufacturing assistance from China might be limited, Seagate, Western Digital and most other major western chip and IT product makers have taken a different tack in China. That has seen most form joint ventures with Chinese partners, which is now required by Beijing from western companies that want to sell to government agencies and big state-owned enterprises.

Seagate and Western Digital both announced new ventures last year with the same partner, Sugon, an up-and-coming Chinese tech name. Those and other similar pairings look like end-runs around Washington since the US partners will be required to give Sugon sensitive information like product source codes and other specifications under tough requirements in Beijing's national security law.

All that brings us back to the original issue of the outlook for high-tech manufacturing in China over the next few years, against the backdrop of rising costs, a slowing economy and the global semiconductor retrenchment. The Seagate example would seem to show that China-based manufacturing is becoming less attractive. In its place, technology-sharing tie-ups with local partners could be the new preferred form of investment going forward.

Disclosure: None.

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