Widespread flooding this monsoon season has affected 63 of Thailand’s 77 provinces and killed more than 500 people. Economically, it will have a severe effect on the hard disk drive (HDD) industry and worldwide PC shipments through the first half of 2012, according to a new report from International Data Corp. (IDC).
HDD factories in Thailand accounted for 40 percent to 45 percent of worldwide HDD production in the first half of 2011, IDC said. And as of the beginning of this month, nearly half of the country’s HDD production capacity was directly affected by the flooding. Assembly and component facilities were also flooded, and IDC said the industry faces work stoppages due to poor access and power outages.
The flood waters have yet to recede in as many of 24 of the country’s provinces, so it may be some time before the full extent of the damage to the HDD industry factories will be known. However, IDC said it is clear there will be HDD supply shortages in the first half of 2012.
Western Digital (WD) is one of the HDD vendors that have been affected by the flooding, along with firms like Seagate and Apple. In the quarter that ended July 1, 2011, WD (NYSE:WDC) shipped about 54 million hard drives from its facilities in Thailand and Malaysia. About 60 percent of those drives came from its Thailand sites, and the company said its Thailand operations source much of its supply of components from local suppliers. It was forced to suspend its Thailand operations in October due to the rising floodwaters, and then extend that suspension when its facilities in Bang Pa-in Industrial Park and Navanakom Industrial Park were flooded and submerged its equipment.
In a conference call last month, WD President and Chief Executive Officer Jeff Coyne told investors that the company’s employees in Thailand were all safe and accounted for, but that recovery from the disaster would be a challenge.
“Having addressed the safety of our people and put in place programs to continue supporting them in this crisis, we have now turned our focus and energies to maximizing our capability to meet our customers’ needs in the near term and to return our operations to normal as soon as possible,” Coyne said. “Full recovery will be a multi quarter challenge.”
He added, “We believe the unconstrained HDD demand for the December quarter is flat to slightly down from September quarter ship levels. Having said that, due to the concentration of HDD supply chain factories in various industrial parks in the flooded area, it is apparent that the HDD industry will be constrained in meeting that demand. Since WD has greater direct manufacturing exposure to the flooded areas, we believe the impact on our business in the short term will be greater than to other HDD manufacturers.”
Coyne also noted that while recovery from the flood will present the company with a series of daunting challenges in the next several quarters, he is also confident that the WD team will be able to overcome that challenge.
As a result of the effect of the flooding on HDD manufacturing in Thailand, IDC said PC vendors will have to plan for significant HDD shortages through the first quarter of 2012, which is likely to mean higher HDD prices as demand exceeds supply. The research firm said vendors should expect pricing to begin stabilizing in June 2012, with the industry approaching normal in the second half of the year. IDC also noted that this represents an opportunity for larger PC vendors to take enterprise accounts away from smaller competitors.
“In response to the crisis, priority will be given to the large PC manufacturers that drive HDD shipment volumes as well as the high-margin products used in enterprise servers and storage,” said John Rydning, research vice president, Hard Disk Drives and Semiconductors, IDC. “But the HDD vendors can’t neglect their smaller customers, whose business will continue to be important once capacity is fully restored. Some interesting production and partnering arrangements with customers can be expected as HDD vendors scramble to bring production back up while simultaneously angling for strategic advantage.”
Loren Loverde, program vice president, IDC Worldwide Consumer Device Trackers, added, “The HDD shortage will affect smaller PC vendors and lower-priced products most, including mininotebooks (aka netbooks), emerging markets and entry-level consumer PCs. However, even the largest vendors are expected to face HDD shortages, particularly for portable PCs where the market is more consolidated. Nevertheless, the shortage will relieve some pressure on pricing and margins, and present some opportunities for strategic share gains among the larger players.”
IDC did say that the shortage is only likely to have a limited effect (less than 10 percent) on fourth quarter PC shipments because a large part of PC production for the quarter has already taken place or can be completed with existing HDD inventories. However, in a worst case scenario, total PC shipments could be depressed by more than 20 percent in the first quarter of 2012.
