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[ 1st Half of fiscal 2001 Performance Briefing ]On the recording media business

Jiro Iwasaki Executive Managing Director General Manager of Recording Media & Systems Business Group

Jiro Iwasaki
Executive Managing Director
General Manager of Recording Media & Systems Business Group

First, let me apologize for the year-on-year decline in earnings and operating loss in the interim period.

Now, I would like to talk about the forecast for the current fiscal year and areas we are concentrating on. Three products-audiotapes, videotapes and CD-R discs-form the core of our recording media business. They are also the three pillars of sales in this segment. However, volumes and prices of audiotapes and videotapes are declining. This is particularly true of volumes. The number of audiotapes sold worldwide in 1994 was 2 billion. This year it is expected to be approximately 1.2 billion. In videotapes, volumes peaked in 1996 at 1.3 billion units but will be 1.1 billion this year. Our share in both audio and videotapes, however, is increasing year after year. At present, we have a worldwide share of 36% in audiotapes and 22% in videotapes. While these figures give us the top market share, total demand is trending downward.

In CD-R discs, sales volumes are showing extremely strong growth. Forecasts for this year call for 3.1 billion CD-R discs to be sold worldwide. And it is estimated that sales will be 5.0 billion in 2 years from now. Some estimates suggest that sales will be 8.6 billion discs in the next term, but TDK estimates that sales will exceed 5.0 billion discs in 2 years from now. However, there is an imbalance between supply and demand. This is illustrated by the fact that world supply capacity is over 6.0 billion units yet demand stands at only 3.1 billion units. This imbalance has resulted in prices dropping sharply in one year. In fact, sales prices in the first six months of the current fiscal year were approximately 40% lower than a year ago. And sales prices are expected to fall by up to 60% in relation to prices in the first half of the previous fiscal year. This is the situation the world over. As a result, CD-R disc operations face an extremely difficult operating environment with both falling sales and falling profits.

In light of these operating conditions, our major theme is restructuring our consumer media business. In other words, we are restructuring our audiotape, videotape and CD-R disc manufacturing bases. We are streamlining and consolidating operating bases to raise efficiency taking into account product cost competitiveness and regional characteristics. Also, we are aggressively outsourcing production, more than we have done in the past. These actions are geared to achieving worldwide shares of 40% and 25% in audiotapes and videotapes, respectively, in the fiscal year ending March 31, 2004. Both audiotapes and video tapes are mature product lines, but one of the patterns in the past in the media industry is to extract profits as one of the remaining participants in these markets. Just to reiterate, we are restructuring bases and rationalizing audiotape and videotape operations to generate profits until these two markets are no longer significant.

In optical media moving forward, we are pursuing a two-pronged plan. That is, we are carrying out development and production of high-end products in-house, while outsourcing production of standard and low-end products. At present in recording media operations, we have 4 audiotape manufacturing bases, 4 video tape manufacturing bases and 3 CD-R manufacturing bases. However, the actual number of plants is smaller because some locations produce two or more types of media. By shuttering these and through consolidation, we will end up with 3 audiotape bases, 2 videotape bases and 2 CD-R bases. We should finalize plans within a year. By implementing this plan, we will streamline existing consumer media operations ensuring our continued survival in the market.

Now, let me talk about the two new businesses we intend to focus on moving forward. One is development and production of next-generation optical media in Advance Optical. The other is digital content products in software operations. Let's look at Advance Optical first. The theme is realizing a recordable and rewritable optical disk format and drives that offer 3 times more capacity and are three times faster to match the needs for high capacity and high-speed data transfer in CD-Rs. At present, we are developing ML (MultiLevel) recording technology with U.S.-based Calimetrics, Inc. Because media is controlled not by ICs but by circuitry, capacity of around 2 gigabytes is possible. Circuitry is completed and we are inviting interested parties to come and take a look at the demonstration of this technology in action at the Comdex Show next week. The DVD appears to be positioned to replace CD-Rs at some point. As you know, DVD demand is expanding for use in PC peripherals and AV products. The DVD market is expected to come of age next year. In respect of DVDs, all types of DVD disks have already been commercialized.

In the years ahead, we will have a number of types of recording formats to choose from, including optical disks such as high-end CD-Rs and DVDs, hard disks and semiconductor memories. But we are convinced that optical media will capture a major share of the recording market because of its low cost, compatibility and ease-of-use. We believe that the market is looking for cost performance, higher capacity and greater speed. It is vital that we combine TDK's proprietary technologies with those of drive and hardware manufacturers to propose entire optical recording systems. Naturally, nothing will come of this if we don't solve patent and IP issues in the process.

At present, a capacity of 4.7GB and a transfer rate of 11.08 Mbps is standard for DVD-Rs and DVD-RWs. We have already developed disks in the laboratory with capacity and transfer rates of 22GB and 35 Mbps, respectively, as well as disks with capacity of 27GB and 70 Mbps, respectively. In addition, disks with a capacity of 30GB and transfer rate of 140 Mbps are not far off. If we reach that point, these disks be suitable for broadcasting applications. This is an extremely large and important market. As you probably know, disks with a capacity of 22GB and transfer rate of 35 Mbps can hold a 2-hour high-quality digital satellite broadcast without the need for compression. Also, the transfer of a similar 2-hour from a hard disk takes 1 hour. A disk with twice the speed, 70 Mbps, can complete this transfer in 30 minutes, while at 140 Mbps it would require only 15 minutes. Thus, high-speed, high-capacity optical disks could be used along with hard disks in a home server. I believe this is a highly attractive opportunity for TDK.

The other area we are focusing on, is the entertainment digital content field in software operations. TDK has over 25 years of experience in the content field. Presently, we are selling CAI (Computer Aided Instruction) CD-ROMs as well as educational videos and software for preschoolers. And, we are branching out, in interactive software and visual software specifically. We started this business on a trial basis in Europe in October last year. For this, acquired rights from Sound Source Interactive Inc., which owns popular children's' titles such as Casper, Babe, The Land Before Time and Maisy. This content is being used to develop games for the PlayStation and Gameboy platforms. We taking advantage of TDK's distribution channels in Europe and the U.S. as well as our brand name to sell these products. Close to 30 titles have already been produced. We are now looking to move into full gear in these operations. In the current fiscal year, we plan to put out around 5 titles, including CD-ROMs, and 10 titles next fiscal year. While we may have caused you some concern given the disappointing results of existing products, we want to effect a recovery in results through the next fiscal year.