CONNER PERIPHERALS, INC. History

Address:

3081 Zanker Road
San Jose, California 95134-2128
U.S.A.

Telephone: (408) 456-4500
Fax: (408) 456-4501

Public Company
Incorporated: 1986
Employees: 8,200
Sales: $1.59 billion
Stock Exchanges: New York

Company History:

Conner Peripherals, Inc., the second-largest manufacturer of hard disk drives after Seagate Technology, has grown faster than any other company in United States history between 1986 and 1990. Conner Peripherals started business in 1986 after Finis F. Conner, a well-known computer entrepreneur, and John Squires, a former disk drive engineer at MiniScribe, Inc., agreed to create a new company to manufacture the compact hard disk drive that Squires had created.

Conner, the son of an Alabama carpenter, started in the computer business in the 1970s as a salesman for Shugart Associates, an important but short-lived disk drive manufacturer. Although Shugart developed good products, the company suffered from poor marketing and production planning, and was eventually bought by Xerox Corp. Speculating that better storage and retrieval of large amounts of information would prove crucial as computers became more important in the workplace, Conner contacted Shugart's former head, Alan F. Shugart, and in 1979 they co-founded Seagate Technology to manufacture 5.25-inch hard disk drives for desktop computers. With the desktop computer revolution just beginning, Seagate's sales took off: by 1984 it had sales of $344 million and was the largest maker of hard disk drives. However, while Conner wanted to develop new, more innovative drives, Shugart and two other partners preferred to concentrate on selling the main disk drive; after months of fighting, Conner left Seagate, having made $15 million.

Conner joined Squires when Squires left MiniScribe, a small manufacturer of 3.5-inch hard drives on the verge of bankruptcy. Squires had completed a prototype 3.5-inch hard drive on his own and had decided to start a company to produce and market the drive. Using software that positioned the recording head on the disk rather than using hardware to perform that function, as other drives did, Squires's product resulted in a faster, more reliable hard disk that could withstand greater shocks without malfunctioning. Aware of Conner's reputation in the computer industry, Squires proposed using Conner's name on his drive and Conner's money to start up the company. Conner was impressed with the drive, and agreed to the plan provided that he be allowed control of the company's strategy and growth rate. When Squires agreed, Conner set about building a company--Conner Peripherals--around a 'sell, design, build' strategy.

The market for hard disks had become extremely competitive, with about 70 companies chasing $1.2 billion of business and many manufacturers going out of business. Seagate had become a commodity producer, producing large quantities of standardized disk drives at low margins. Other hard disk drive manufacturers, such as Quantum and Maxtor, survived by producing small, fast, state-of-the-art drives and selling them at premium prices. Commodity producers risked having changes in technology render their products obsolete, and the high-margin producers risked spending too much on research and development and then having their products rejected by computer makers. Conner decided that the ideal strategy would be to sell computer companies on a disk drive before it was made, negotiating specifications like the drive's size and power consumption, then designing and building the drives.

In early 1986, Conner began taking a prototype of Squires's disk drive to computer makers, seeking investors and customers. Despite Conner's reputation and the quality of Squires's drive, venture capitalists were wary. Salvation came from Compaq Computer, a new firm that was growing rapidly. Trying to stay ahead of rival IBM through strong relationships with the manufacturers of sophisticated computer components, Conner convinced Compaq's president, Rod Canion, that Squires's small but tough drive would be perfect for Compaq's portable computers. Canion was impressed by Squires's prototype, and the firm decided to finance Conner Peripherals so it would have a sure source of quality hard drives. Compaq invested $6 million in June 1986, and another $6 million in early 1987, obtaining a 49 percent stake in Conner at its peak. Compaq also bought 90 percent of Conner's output for 1987, its first year of production, and by August 1987, Conner was off the ground with another $27 million in venture capital from other sources.

During this time, desktop computer sales were booming, and many makers were installing 3.5-inch drives in their computers, presenting Conner with a ripe market. Conner initially concentrated on 3.5-inch drives that stored 40 to 100 megabytes and sold for up to $1,000. With Compaq as its primary customer, Conner's sales took off immediately from $10 million in the first quarter of 1987 to $30 million in the third, for a total of $113.2 million for its first year of sales--a record for a manufacturing startup. The results brought the firm immediate attention.

To keep operations running smoothly in the midst of immediate, explosive growth, Conner quickly assembled a management team, including William J. Shroeder as president to manage day-to-day operations. The company continually sought to simplify operations, making products with fewer parts in fewer steps; rather than periodically designing radically new drives, it constantly improved drives in smaller steps, keeping new models flowing quickly and smoothly. To avoid cash-flow problems, Conner bought all components from suppliers instead of producing them. The company also leased assembly and testing plants rather than building and owning its own and arranged for factory space in Singapore, where labor costs were far lower than in the United States.

Conner continued its policy of not engineering a new product unless at least one major buyer had agreed to purchase it, but was quick to spot opportunities and take advantage of them. In 1988 the company entered the market for laptop and notebook computers, the fastest growing segment of the computer market, and its quick entry won it a huge market share. Notebook computers, book-size portable computers with as much power as desktop computers, were beginning to sell in great numbers, and Conner's small, low power-consumption drives fit the limited space and power availability of notebooks better than any other manufacturer's. By making lighter, more powerful computers possible, Conner's drives were in part responsible for the takeoff of notebook computers.

In April 1988 Conner went public, raising $40 million and earning Finis F. Conner $25 million. At the end of 1988, with growth still explosive, William Almon, who had been with IBM for 29 years and had run its low-end disk drive manufacturing arm, was named president and chief operating officer, while Shroeder was named vice chairman. Sales for 1988 were $256.6 million, making Conner the fastest-growing company in the United States.

In 1989 Conner launched its first 2.5-inch high-capacity drive, geared to the surging notebook computer market, as well as three other hard drives, and quickly dominated the notebook computer market, making 85 percent of the 2.5-inch drives used in notebooks by 1991. It manufactured 2.5-inch drives for Compaq, NEC, Sharp Corp., and Zenith Data Corp. Also in 1989 Conner tied Compaq's record for fastest-growing manufacturing startup by reaching the Fortune 500 in three years. In the meantime, Conner was expanding beyond its close relationship with Compaq. Demand for Conner's products was growing rapidly, and it began producing hard drives for large Japanese computer firms like NEC and Toshiba. As it transferred production to its expanding Singapore factory, the firm laid off about 200 employees out of the 1,000 it employed at its San Jose location.

Nevertheless, Conner expanded quickly. Almon was arranging for assembly space nearly a year before it was needed to make sure the company could keep up with demand. In January 1990 Conner decided to open a European assembly site. Locating a site in Scotland, the company began installing equipment in March and had finished products rolling off the line in early summer. The Scotland plant was a copy of the one in Singapore and was opened with a complete manufacturing team on loan from Singapore.

In late 1989 Conner designed a drive for Compaq's popular LTE notebook computer. The computer sold faster than either firm had expected, and Conner initially had trouble keeping up with demand. Compaq officials were displeased, but Conner caught up by working on weekends and holidays. Despite the large number of LTE drives sold, Compaq's share of Conner's output was down to about 25 percent, due to Conner's sales to many other firms.

In 1990 Conner set a record by reaching $1.337 billion in sales in four years, without acquisitions, making it the fastest growing manufacturing startup in United States history. Conner made its first major acquisition that year when it bought Domain Technology's disk-coating operations. The company also released seven more drives, staying ahead of Japanese competitors by quickly moving products to market. Six of the new drives were geared toward desktop or laptop computers, including models incorporated into Apple and Compaq computers. The seventh drive was designed for laser printers and fax machines, a new market for Conner. With hard drives becoming smaller and less expensive and laser printers and fax machines becoming more important in offices, Conner hoped to get into a lucrative new market before its competitors.

Conner's unusual set up, with the development and manufacturing arms located in different countries, initially worked well. The development engineers were free to work without distraction, meeting only with the manufacturing engineers to negotiate the final details once a prototype was ready. Once the manufacturing branch in San Jose had completed the final design details, the drive was brought to Conner's huge assembly plant in Singapore, which employed 4,500 workers in 1990. However, Conner's policy of buying parts and renting factory space caught up with it in 1991 as a parts shortage slowed down sales. Recording heads and aluminum disks were in short supply early in the year, right at the beginning of a Conner product cycle, which left the company unable to keep up with demand. The competition was also catching up to Conner. Seagate, still the largest hard disk drive manufacturer, had been slow to introduce new products, but released 14 new drives in the fall of 1990. At the same time, Quantum was slicing into Conner's market share for high-quality 3.5-inch drives. To lower its costs, Conner cut 80 workers from its United States work force, and shifted more of its manufacturing to Southeast Asia.

Conner released a new type of hard disk drive in 1992, a 1.8-inch removable drive targeted at the emerging market for handheld computers. At the other end of the spectrum, it released new high-capacity drives for workstations, powerful computers used for research and design. The firm's most important move, however, was into producing data storage products. Early in the year it had signed an agreement with Intel Corp., a maker of processors and memory chips, to jointly develop flash memory chips, which some industry analysts thought might supplant hard drives in smaller computers. In June 1992, Conner formed a subsidiary, Conner Technology, Inc., to develop and market high-capacity tape drives, usually used to store or back-up computer data, and named Jeffrey Nash, a Conner vice president, as president of the new unit. The firm also signed an agreement with 3M to use some of that firm's magnetic tape technologies in its tape drives. At the same time Conner introduced new 3.5-inch, 85- and 170-megabyte drives, which were sold with the newest operating-system software from the Microsoft Corp.

In 1991 Conner made $92.5 million on $1.599 billion in sales, reflecting lower margins caused by higher competition. Despite this growing competition, Conner's move into data storage, as well as its continuing efforts to encourage computer companies to design Conner drives into their products, promised to keep it in the first tier of computer peripherals manufacturers. The 2.5-inch disk drive market is expected to grow at a greater than 40 percent annual rate through the mid-1990s, and according to the company's annual report, Conner still holds 75 percent of that market.

Principal Subsidiaries: Conner Technology, Inc.

CONNER PERIPHERALS, INC. History

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