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Western Digital Boss: Watching, Reacting

Arif Shakeel now is chief executive of Western Digital Corp. after years as the disk drive maker’s pivotal operations man.

But don’t expect Shakeel to tell you much about his new title.

Shakeel, formerly chief operating officer, still has the same corner office at the company’s Lake Forest campus. He keeps it casual, recently donning a navy blue sweater vest. For him, the promotion is important. But he’s not reveling in it.

“We are not about that,” said Shakeel, who joined Western Digital in the 1980s. “I don’t look at my business card a lot.”

On Oct. 1, Shakeel took over as chief executive from Matt Massengill, a Wall Street favorite for his turnaround efforts since 2000. Massengill now is executive chairman and still has a hand in running things.

Some Wall Street observers were surprised by the move and wondered if Shakeel was given the job to keep him from jumping ship to another company where he could be chief executive. Some wondered if he had an offer on the table.

Shakeel emphatically denied that.

Massengill, 44, wanted to step back as chief executive, Shakeel said, and recommended him to the board of directors.

“No thought has ever come into my mind (about leaving),” Shakeel said. “There were no discussions.”

This isn’t an executive shake-up by any means. Shakeel has run Western Digital alongside Massengill for years. The two are something of a buddy team.

“Believe me, I don’t feel any different,” Shakeel said. “I do take it seriously. Ultimately, it is my job that I drive the business.”

Shakeel takes the reins at a time when the company is coming off a five-year turnaround. Western Digital is in new markets and is trying to better manage the huge swings the disk drive business is known for.

Massengill, who still has his own corner office down the hall from Shakeel’s, plans to work with Wall Street. He was on Western Digital’s recent quarterly call with analysts.

Shakeel plans to continue focusing on operations.

“He and Massengill were working very tightly together,” said Brian Alger, an analyst with Pacific Growth Equities LLC in San Francisco. “Don’t kid yourself. (Massengill’s) going to be involved in it.”

There will be no power struggle, Shakeel said. After all, he and Massengill have worked at Western Digital for about 20 years.

“I’m not for a moment going to feel like, ‘No, I should be doing that,'” Shakeel said.

Still, Shakeel, who also spent seven years as vice president of marketing, is set to bring his own style to the company,one that’s a little more subdued.

“I think he’s more quiet-spoken than his predecessor,” Alger said. “No question.”

Massengill, who took a pragmatic approach that stressed production muscle over lavish research spending, is known for his humor.

Shakeel and Massengill have gotten play in the past few years for their efforts to right a company that was fading into obsolescence in the late 1990s. Back then, a glut of disk drives robbed companies of growth and profits.

Western Digital’s numbers began to rebound in 2001.

For the September quarter, Western Digital’s net income more than doubled from a year earlier to $69 million. Without the cost of expensing stock options, profits were $74 million.

Sales rose 23% to $1 billion.

Western Digital’s shares are up about 30% this year, with a recent market value of $2.6 billion.

Shares of rival Seagate Technology in Scotts Valley are up about 15% for the year. Maxtor Corp. of Milpitas is flat.

The company’s turnaround came from a fundamental shift in the approach to the disk drive market.

Massengill and Shakeel realized drives no longer were on the cutting edge. They’re commodities, and the business needed to reflect that.

Instead of throwing wads of cash at research and development, the pair wanted to make the company more about efficient manufacturing and logistics, like other commodity makers. The focus turned to getting costs down and manufacturing speed up, while reducing drive defects.

Western Digital gave up trying to outspend industry leader Seagate just to get to market first.

The company seems content looking at what is selling and then ramping up production of those products.

“Time to market does not have as much value to us, as do time to volume and time to quality,” Shakeel said.

Seagate already has said it soon will roll out new drives that pack more data. Western Digital has said it will release similar drives sometime next year.

“Western Digital has taken the approach of rapid follower, providing the best of what the customer wants now, not what the company wants,” analyst Alger said. “They’re generating a lot of cash doing it. It’s pretty hard to argue with them.”

In the September quarter, Western Digital’s gross profit margin hit 17.7%, up from 13.7% a year earlier.

Western Digital quit some unprofitable businesses in the past few years. But the bulk of its strategy has focused on production in Asia.

In early 2001, Western Digital acquired an old disk drive assembly plant in Thailand. Within 18 months, the plant was producing more than a third of the company’s drives.

The company saw similar results at a plant it acquired around that time in Malaysia.

In late 2003, Western Digital bought failing Fremont-based Read-Rite Corp., which gave Western Digital a key source of drive parts,and boosted profits.

Shakeel said he knows on a daily basis what each plant’s producing and how they’re performing financially.

His goal: more products and fewer mistakes. All the while, the plants have to get drives to customers faster.

Shakeel didn’t give specifics but pointed to the company’s track record,it has sped up time to production in the past two and a half years.

Shakeel said he is constantly driving plant managers to do better.

“It is almost fanaticism within the company,” he said. “Our success the last five years is solely due to our operational excellence.”

A big push for Western Digital has been for drives for portable computers. The bulk of the company’s drives go into desktop PCs.

Last year, desktop customers asked Western Digital to make drives for portables. The company exited the portable drives market back in 1997 when it was more of a niche business dominated by laptop makers IBM Corp. and Toshiba Corp.

The company’s return to portable drives has been swift. It’s come at the expense of market share for other players, according to analysts.

In just six months, Western Digital went from zero to 1 million portable drive shipments. Within a year, it could reach 30 million.

The company also is going after consumer electronics, from digital video recorders to portable music players.

This is more of a leap, and Seagate has a bigger head start.

One product Western Digital won’t be supplying drives for: the latest Xbox video game console from Microsoft Corp.

Western Digital made a “large chunk” of the earlier Xbox’s drives. But it won’t be in the upcoming version. Shakeel said he couldn’t get the price he wanted and decided to pass.

The prospect of another drive glut is on Shakeel’s mind.

In the past quarter, the company said it would try to “substantially” lower its five weeks of inventory. The move forced Western Digital to temper its outlook for sales during the December quarter.

It makes sense to burn off inventory during the strongest quarters, Shakeel said, and bring supply more in line with demand going into the start of the year.

“It’s something you have not seen in a disk drive company, and frankly, it’s refreshing,” analyst Alger said.

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