Seagate, the biggest company in the disk drive market, has been hit by major over-capacity and relentless competition in the sector. Its decision to pull out of Clonmel also results from much cheaper production costs in the Far East, where products can be made at a third of the cost in Europe.
But whatever the reasons put forward for the closure of Clonmel, one thing is clear. Seagate got its sums badly wrong in its decision to commit investment to Ireland. It misread the industry trends and incorrectly calculated that customers in Europe would pay a little more to have a disk drive production plant on their doorstep. Price pressures in the industry dictate that the major computer companies will buy their disk drives from wherever they are cheapest.
Seagate moved into Clonmel in 1995. But the following year it swallowed a smaller disk drive company called Conner Peripherals, leaving it with excess production capacity worldwide. A series of rationalisations in Italy, Scotland and Singapore followed. And now Clonmel is to close, with the company tersely stating the plant there " has the highest cost-per-drive in the company." Low production costs and the fall in the value of Asian currencies mean that major companies such as Seagate will increasingly locate production in that part of the world for what are essentially commodity type products. The market for disk drives, the unit which stores and runs all the information on a computer, is notoriously volatile. It has recently entered another downturn, leading industry experts to predict a "war of attrition" among the top players. Even though the market is growing at more than 15 per cent a year, competition is fierce, as ever more powerful drives come on the market.
The competition is hitting Seagate particularly hard. The company has traditionally dominated the drive market for servers, the units which store vast amounts of data that can be accessed by many users. The high profit returns available in this sector have attracted a high number of competitors to take on Seagate. While as recently as a year ago IBM was Seagate's only competitor in this sector of the market, now all the major drive companies are marketing these products.
And other sectors of the market are facing the same competitive pressures, as companies start to cut prices in an attempt to build market share. Seagate has been hit hard by these competitive pressures. In October the company announced that it intends to write off more than $100 million in restructuring costs this quarter.
Shocked IDA Ireland executives learned only early yesterday that Seagate had decided to close. And they will still be trying to assess the prospects for the proposed major investment in Cork going ahead; it will be well into 1998 before the prospects for this planned investment become clear, although the omens are not good. The choice for IDA Ireland now is whether to try to attract one major replacement project or seek a number of smaller projects. But the organisation will not change its course of seeking major inward investments in the electronics sector. Some 33,000 people are now employed in the sector, and job numbers have risen by 4,000 a year over the past couple of years. This will be no consolation to the people of Clonmel. But it will mean that IDA Ireland will continue to sell Ireland as a location for major inward investment in the hope that the job gains provided will continue to outpace the losses.