Tandon Battles to Remain on Top : Disk-Drive Maker Files Patent Infringement Complaints

The way Tandon Corp. figures it, the computer disk-drive business is tough enough without Johnny-come-latelies slipping across the Pacific to steal its secrets and infringe on its hard-earned patents.

So Tandon, based in Chatsworth, has opened a second legal front in its battle to retain world leadership in the fast-growing but perilous $3-billion industry. The company has accused three big Japanese competitors of illegally using its patented design for what are known in the business as two-sided floppy-disk drives.

The International Trade Commission voted 5 to 0 Tuesday to investigate Tandon’s charge against Sony Corp., Mitsubishi Electric Corp., TEAC Corp. and their U.S. marketing subsidiaries. That begins a yearlong process that could lead to barriers against any offending equipment--and a probable windfall for Tandon.

By then, the ITC will have decided an earlier complaint by Tandon that a Korean electronics firm, Gold Star Tele-Electric Co., stole a floppy-disk-drive design in an act of industrial espionage. This unrelated case and a companion $150-million lawsuit were filed last summer.

Accusations of underhanded tactics by competitors, especially those from the Far East, are not unusual in the electronics business. But the patent case offers a glimpse at a volatile industry in which an edge of a few months and a few dollars can make a winner.

A disk drive is a box-shaped unit of a computer with magnetic heads, similar to those in tape recorders, that store and “read” information on inserted disks. In part, it is to a disk what a phonograph is to a record, and it can account for 25% or more of the cost of a microcomputer. In the case of some cheap home computers, a separate disk drive can cost more than the computer itself.

Tandon, begun by Sirjang Lal (Jugi) Tandon in 1975 to make magnetic heads in his California home, devised a drive for floppy disks that could economically record on both sides of a disk--doubling its memory. Today, the patented technology is widely licensed by Tandon to other firms, including giants International Business Machines Corp. and Hewlett-Packard Co. Tandon, which also makes more costly rigid-disk drives and related equipment, posted revenue of more than $400 million last year.

Its corner on the technology for two-sided drives for floppy disks, and its standing as the most efficient U.S. manufacturer of disk drives generally, have helped shield Tandon from an industry shakeout as demand fell and foreign competition toughened. The most recent example was Xerox Corp.’s decision last week to get out of the disk-drive business and jettison its Sunnyvale, Calif.-based Shugart Corp. unit.

As the drives for various types of floppy disks have become a commodity rather than a costly high-tech product, the manufacturing skills and efficiencies of the Japanese have quickly come into play. James Porter, editor of the Disk/Trend report, a trade publication, says Japan emerged last year as the world’s leading producer of floppy-disk drives for the first time.

“There’s no doubt about it: If you can make a watch or a camera, you can make a floppy drive,” Porter says.

It was in this climate that Sony, Mitsubishi, TEAC and other Far East firms began peddling floppy-disk drives in this country. According to Tandon’s complaint, the firms undercut Tandon’s own prices on two-sided floppy-disk drives by up to 30% per unit--in one case, a Japanese drive sold for $109.50, while a comparable drive by Tandon went for $137. That sort of price competition is one big reason even Tandon suffered a small net loss in its latest quarter. But more galling to Tandon was being beaten to the market last year by Sony’s two-sided drive for a popular, new small disk.

“Sony’s early introduction . . . was due, in major part, to the utilization without permission of Tandon’s patented technology,” the company says. “Tandon is now at a disadvantage, since some (computer manufacturers) will have already selected the Sony product and will not consider Tandon for a prime source contract.” Sony’s major customer for that product so far is believed to be Hewlett-Packard.

More important, Tandon claims, Sony’s ill-gotten head start threatens to prevent the development of a “domestic industry” for this particular product. Tandon won’t be able to get its equivalent disk drive to market until this spring or summer, by which time it may be too late.

It is unclear what Tandon means by “domestic industry.” Though Tandon and other firms still make some disk drives in this country and have major testing and other facilities here, analysts say Tandon has helped lead the flight of manufacturing to such places as Singapore and India. In fact, in voting to investigate Tandon’s patent complaint, the ITC rejected the notion that the Japanese threaten the creation of a domestic industry. The commission will proceed with its investigation on the basis that Tandon could be damaged.

90% Assembled Overseas Analysts estimate that 90% of all U.S. manufacturers’ floppy-disk drives are assembled overseas. Indeed, “that is their strength,” Robert Grandhi, an E. F. Hutton analyst in New York, says of Tandon. “And, even though the jobs are created abroad, the profits flow back to the U.S. and U.S. investors.”

Grandhi adds: “I sympathize with Tandon. The Japanese are known to use U.S. designs on occasion. If it’s illegal, it’s illegal.”

But Grandhi says no great catastrophe will befall Tandon or the American industry if the company loses the case of the two-sided floppy-disk drives. “If they lose, there is no damage,” he says. “If they win, it will add to their earnings per share.”

An ITC victory would be profitable because the Japanese, already committed to supplying drives to U.S. computer makers, would presumably be forced to take Tandon licenses. Says Porter: “Tandon would have them by the throat.”

The defendants, like Tandon, declined comment on the case. But Porter says the Japanese “think it’s a stacked deck.”

Tandon Employees in the United States

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