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China's STILL holding up the full WD-HGST integration. Why?
There's an elephant. In this room, with us
Comment WD's buyout of HGST took place in 2012. MOFCOM, China’s Ministry of Commerce – here concerned with competition – said it was delaying its approval for two years. During that time, HGST and WD had to be run as two separate businesses subject to strict conditions.
Those conditions were:
- Maintenance of HGST at pre-transaction state capacity, including research and development, production, procurement, marketing, sale, administrative, and other roles
- HGST continuing to produce its existing production lines and maintain its production/sales teams
- The implementation of firewalls to ensure no exchange of competitive information between WD and HGST
- Monthly reporting of production capacity and output to the supervision of a trustee.
Here we are three years later, and MOFCOM is still withholding approval, preventing a full integration of HGST and WD operations. Western Digital owns both WD and HGST and keeps them as separate disk drive manufacturing and supply operations.
It is why HGST has its helium-filled drives giving it an additional platter in the same enclosure, while WD has not; a ridiculous state of affairs.
Analyst haus Stifel Nicolaus' MD, Aaron Rakers, says Western Digital (WD + HGST) has 80,767 employees, compared to Seagate’s 53,602. He says this is a “+50 per cent differential with only 8 per cent difference in capacity shipped.” Such operational inefficiency is costly. Imagine what would happen to Western Digital's costs if it could eject 35,000 employees and bring its operational efficiency up to Seagate levels.
Western Digital CFO Olivier Leonetti is quoted by Rakers as saying conversations with MOFCOM remain “positive, frequent, substantive…we [W. Digital] want to be cautiously optimistic about the outcome.” Rakers thinks “a Plan B discussion could become more prevalent if no MOFCOM decision is rendered over the next 2-3 quarters.”
What could be in such a Plan B which would cover what WD and HGST could do if MOFCOM refused to countenance their integration? One extreme would be to reverse the acquisition; unlikely though. The other would be to integrate anyway with China probably banning the import of WD/HGST drives and having WD/HGST plants in China closed down.
How about Western Digital transferring HGST and WD assets to a separate enterprise which builds and sells drives but not in China, while leaving a MOFCOM-compliant subsidiary operating in China? Would that have legs?
How about taking investment from a Chinese agency? In effect, let China buy in to the WD-HGST operation? IS that what MOFCOM is actually holding out for, behind the scenes? What is its game?
Perhaps MOFCOM doesn’t want to see Chinese workers in WD/HGST plants fired and it’s willing to have its citizens pay higher prices for drives as a result. In which case we are all paying more for WD and HGST drives than we need to because of MOFCOM’s obduracy. ®