Delays in PC hardware supply have hit the channel as the effects of the disastrous Thai floods bite. Demand is expected to significantly outstrip supply for several quarters and PC prices are tipped to rise.
The delays come as multinationals with manufacturing facilities in Thailand struggle to deal with the situation.
Thailand has long been a popular location for outsourced manufacturing of parts such as hard drives and memory and two of the hardest hit companies are significant players - Western Digital (WD) and Seagate.
Western Digital suspended production at its two factories in Thailand in mid-October after they were inundated by floodwater.
The move was a significant setback for the company, as it manufactures about 60 per cent of its hard drives in the region, with the remainder in Malaysia.
“Many of our component suppliers have been impacted as well, leaving material for hard drive production and hard drive supply to customers considerably constrained,” a WD spokesperson said.
WD’s flooded buildings in Navanakorn and Bang Pa-In industrial estates, north of Bangkok, were responsible for hard drive assembly and a substantial majority of its slider (recording head) parts.
WD employs about 37,000 people. There are no clear indications when the facilities will be reopened and start production again.
The company did point out that all of its other factories, such as in Malaysia and Singapore, are operational and it is currently working to maximising output at the Malaysian one in order to eliminate the bottleneck.
As for how long the hard drive supply will be affected, WD is unable to tell as the spokesperson said "it will bringunprecedented challenges to the HDD industry for multiple quarters”.
The question many resellers and customers may ask is how this disaster will affect prices.
WD admits that there will be limited component availability throughout the HDD supply chain. Efforts by manufacturers to bring systems back online as quickly as possible "might have the affect of raising" hard drive prices, it said.
In order to make a speedy recovery, WD will continually evaluate the situation as it waits for the water level to recede.
Efforts to remove water and extract and transfer the equipment to other locations where it can be decontaminated and refurbished prior to re-commissioning are also being accelerated.
“We are working with our suppliers to effect the recovery of their supply chain and to ramp existing capacity in other locations,” the spokesperson said.
Another HDD manufacturer that had its operation in Thailand affected by the floods was Seagate.
For the majority of the crisis, all of Seagate’s factories in Thailand were operational and there were no logistical issues with employees reaching its factories. However, the manufacturer’s hard disk drive component supply chain was disrupted and certain components in the supply chain were constrained.
“Relative to Seagate’s business operations in Thailand, our component and drive assembly factories are operational and accessible,” a Seagate spokesperson said. “Our production is constrained only by the availability of specific externally sourced components.
”Since Seagate’s Teparuk and Korat facilities, which produce head stack and head gimbal assemblies, slider, head assembly and hard drives, only suffered minor disruption, the manufacturer will focus on supporting its external component suppliers’ efforts to rebuild the supply chain as quickly as possible.
While the company states that it is actively managing its supply chain and factory output to “align production capabilities and optimise its build schedule” to meet customer requirements, it still anticipates “hard drive supply will be constrained throughout the current quarter” as a result of the disruption caused by the floods, a Seagate spokesperson said.
The company predicted unconstrained demand was expected to be about 180 million units for the December 2011 quarter, but due to the supply disruption, demand will significantly outstrip supply not only in that quarter, but for the following quarters as well.
“As such, it is now expected that industry shipments will be limited to about 110 to 120 million units,” the spokesperson said.
For the December 2011 quarter, Seagate now expects to report shipments between 41 and 45 million units, though the company admits that the volatility of the situation makes it unclear what the magnitude of the supply chain disruption will be to Seagate’s hard disk drive output from its Thailand operations.
PC manufacturer, Dell, is one of the many companies that can expect the flooding to significantly impact the hard drive supply chain.
A Dell spokesperson said the complexity of the issue made it difficult for the industry to pinpoint the magnitude or duration of shortages, but it expects the industry to “be in an allocation environment” at least through Q1.
As Dell has experience with working through various forms of industry supply shortages in the past and the different variables that come into play, it has found that its operating model has proven to be the most adaptable and effective at managing these situations.
“The direct model has advantages in this environment, and in October we made strategic purchases of inventory and pulled in supply,” a Dell spokesperson said.
“We have teams working with impacted suppliers to manage our HDD supply chain and qualify new sources of supply, and our goal is to mitigate any impact to our customers and the company overall.”
While it is clear that impact of the HDD shortage will be industry wide, IDC market analyst, Amy Cheah, expects that industry leaders will adapt from a position of relative strength, and the shortages might even result in competitive opportunities.
Prices to go up
“PC vendors are scrambling to lock in supply quickly, raise prices and prioritise higher margin and/or higher end PCs, as well as adjust product build by shifting to lower cost and capacity drives,” Cheah said.
“HDD suppliers are also expected to protect priority accounts, thus smaller players, particularly whitebox PC manufacturers, will face significant difficulty in securing HDD supply.”
As a result, IDC foresees smaller vendors lagging in their response and having much less leverage in their response, contributing to a larger impact for these players. Cheah said the concentration of HDD supply among top-tier PC vendors, as well as a shortage environment, will lead to higher prices and fewer discounts.
IDC also expects the pricing situation to worsen before it gets better, with prices expected to go up from December 2011 when existing HDD inventories will become depleted, thus driving up demand.
Cheah anticipates that the supply of HDDs will steadily start to recover in Q2 2012.