Thai floods: Expect months of hard drive shortages
Floods in Thailand have rattled the hard drive supply chain from component suppliers to giants like Western Digital and ultimately PC and server makers will be affected, say analysts. Thailand's disaster has shut down 14,000 factories, flooded hundreds of thousands of homes and put more than 660,000 out of work.
Last week, the impact of the flooding in Thailand played out very differently for hard drive giants Western Digital and Seagate, but shortages will loom into 2012, say executives.
Western Digital CEO John Coyne said that the company's December quarter revenue will fall 60 percent from a year ago since the company has a high concentration of supply chain factories in flooded areas.
Recovery for Western Digital, which includes helping many of its workers affected by the floods, will be a multi-quarter task. Western Digital operating chief Tim Leyden said last week during the company's fiscal first quarter earnings call that the hard drive industry will see tight supplies for a while. Leyden said:
We suspended production in all of our Thailand facilities from the beginning of last week in order to protect our personnel, and to move as much equipment as possible to locations less likely to incur water damage. At this point, we are thankful that all our employees are safe, and we moved much of the equipment which had been situated on the ground floors to higher floors. Despite the heroic efforts of our team, over the past weekend rising water, which had first penetrated the Bang Pa-in Industrial Park flood defenses, inundated the Company's manufacturing facilities there and submerged the remaining equipment on the ground floors.
Western Digital executives said that 60 percent of its drives are produced in Thailand compared to 40 percent for the industry overall. The problem: Western Digital doesn't know when it can get its plants running, but the problems will "continue into the March quarter and beyond," said Leyden.
Other companies such as Seyyon Semiconductor noted that it will take a year for the tech industry's base in Thailand to recover. Nidec, which makes spinning motors for disk drives, said it is trying to shift production from Thailand to China and the Philippines. Nidec's ability to shift production will determine the industry's ability to produce hard drives.
Seagate's facilities were largely spared, but the company will have to struggle to acquire components for its drives. Seagate CEO Steve Luczo said last week on the company's earnings conference call that "the flood disaster in Thailand is having a widespread impact on individuals and businesses of all types, including the hard drive industry, disrupting transportation, logistics, power generation, and the availability of labor."
As for the hard drive industry, Luczo said the situation is "serious and highly volatile." Due to pure luck, Seagate's plants are completely operational and running at full production. However, Seagate's component suppliers weren't as lucky.
Like Coyne and Leyden, Luczo said that the supply squeeze in the hard drive industry will extend for many quarters.
CNET: Hard drives could get scarce: Apple, analysts
Analysts expect Western Digital's market share to fall as Seagate gains. Nevertheless, hard drive makers won't be able to meet demand. Barclays Capital analyst Ben Reitzes said in a research note that he sees "significant implications for the hard drive industry as well as PC makers. HP and Dell will see higher component prices and shortages. Apple will see the least impact because it uses flash drives for the MacBook Air and iPad.
"Regarding PC makers, we believe that a prolonged disruption to disk drive production could impact the PC market as well," said Reitzes. "If drive makers remain supply constrained, we would expect PC makers to be negatively impacted from an availability perspective as well as from component pricing increases."
Apple CEO Tim Cook said on the company's fourth quarter earnings call that the supply situation is fluid. Responding to an analyst question, he said:
There are several factories that are currently not operable, and the recovery timeline for these factories is not known at this point. As you can appreciate, the weather really hasn't allowed an ability to assess those. From the work that we have done, we would say that our primary exposure is on the Mac because as you point out, of the number of drives or drive components that are sourced in or in Thailand is a significant portion of the total worldwide supply of drives. And so I can't give you a precise accounting. It is something that I'm concerned about. We do expect -- I'm virtually certain there will be an overall industry shortage of disk drives as a result of the disaster. How it affects Apple? I'm not sure.
Dell and HP will take an earnings hit due to higher hard drive prices. Western Digital and Seagate both indicated prices will increase. Reitzes estimated that 10 percent to 12 percent of a desktop's bill of materials derives from hard drives. For a laptop, a hard drive represents 8 percent to 10 percent of costs. HP and Dell will also face margin pressure on servers, said analysts.
The hard drive shortages may also hamper storage vendors such as EMC and NetApp, said Stifel Nicolaus analyst Aaron Rakers. However, David Goulden, EMC's chief financial officer, said that he wasn't expecting supply constraints. "We tend to be our supplier's largest customer and get pretty good treatment when it comes to situations like this," said Goulden.