Data-storage company EMC Corp. (EMC) had plenty of fat in its operations before the tech downturn hit. Inventory turned over just four times a year, while competitors moved goods several times faster. The company tested its refrigerator-size storage devices for 28 days; other companies felt seven was plenty. When newly tough competitors and a weak economy pushed prices down 60% in 2001 and an additional 40% in 2002, EMC lost 26 percentage points of market share in the high-end market that it long dominated and had to cut costs to stay in the game.
So CEO Joe Tucci sharpened his knives, and the results are impressive. By slashing bloated areas such as marketing and engineering support, he brought the company's quarterly breakeven point down to $1.4 billion from $1.7 billion. Tucci explained to technology correspondent Faith Keenan how he has managed to keep EMC alive and kicking.
Q: Is the worst over for EMC and for the industry?
A: For EMC, yes. For sure.
Q: What makes you think so?
A: The potential war aside, I expect this year to be just slightly better than last year. I have a better cost structure, a much better product line, and we're attacking a market we've never attacked before--the mid and lower tiers--with partners. Our software has matured. And our executive team has really come together.
Q: What's your read on information-technology spending this year?
A: Our survey shows that storage is one of the top spending priorities. If IT spending is flat, which is what I predict, then storage will be slightly better than flat. Assuming that happens, we're going to grow and take share.
Q: How much of that expected gain is riding on the new high-end product line you recently unveiled?
A: A lot. Not everything, but a lot. It's our biggest product line.
Q: Yet the new line is late. Was it worth it to achieve and incorporate the new technology?
A: Part of my legacy of success or [failure] rides on that product. I drove that thing. When we set those [specifications], we said this is probably going to cost us six months. But now we have ranges of performance and capabilities that we've never had before.
Q: How do you combat IBM and HP's strategy to bundle servers, storage, and services?
A: If you're a large company, what you really want is someone who will give you great service. Well, who has a better service reputation than EMC? I think IBM's (IBM) strategy is a good one for them. And they'll pull it off. But it's a huge market. The majority will still be buying from me.
Q: Do you worry that commoditization could sink your business?
A: Far from it. Certainly there's a lot of commonality in components. And as we design systems, we try to use off-the-shelf technology. In our systems--in the drives, the boards, the frames--the more you use [in common], the better value you can pass on to customers. Our value comes through in making sure we assemble these systems with the highest reliability, performance, and functionality. And that comes through software. That's why, for years, we've been saying that 75% of the value in our system is in the software.
Q: How do you balance offshore and domestic production?
A: A lot of components we get are made offshore. But these big arrays can weigh tons--they're the heaviest per square foot of any device in the computer room. If we put them together in China and shipped to Boston, freight and handling would kill us. So we assemble them in two U.S. plants and at another in Ireland.
Q: Where did you look when it came time to trim costs?
A: We had a lot of costs around areas like marketing. Also, as manufacturing volumes go down, you can take out the same percentage [in labor costs]. And we looked at how many individuals in the engineering organization weren't engineers. There was a whole host of support people. So we were able to take tremendous cost out.
Q: Have you learned from your Dell partnership?
A: Absolutely. Dell (DELL) has a tremendous supply chain system. And we watch closely. We share in some of those gains. By leveraging each other's supply sourcing, we can both cut costs.