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Silicon Valley companies may feel impact of Thailand floods
[November 04, 2011]

Silicon Valley companies may feel impact of Thailand floods


Nov 04, 2011 (San Jose Mercury News - McClatchy-Tribune Information Services via COMTEX) -- The historic floods in Thailand, the world's largest manufacturer of computer hard disk drives, could ripple across the global tech economy and disrupt an array of industries, from PC makers to cloud computing.



The rising monsoon waters, which began in July and have killed more than 400 people and forced thousands to evacuate their homes, have swamped seven major industrial parks housing many of the nation's hard-drive factories, which supply critical components to companies such as Apple (AAPL). The floods have also wreaked havoc with other manufacturing sectors, from automobiles to jeans.

While Thailand would never make anyone's list as a technology hub the way China or Taiwan would, the Southeast Asian country's role as the components assembly-line for the computer industry underscores how problems in one link of the PC global supply chain can disrupt other industries.


Thailand supplies about 40 percent of the world's hard disk drives -- the heart and muscle of most computers -- and is also a major producer of parts that are shipped to hard-disk-drive makers in other countries. With many factory floors now under water, the country's hard drive output could be slashed by 25 to 40 percent, according to research firm IDC.

That in turn would force computer makers to scramble to find other sources of hard drives and pinch their profit margins should the dearth of the devices push prices up. Other industries could be hurt, as well. Semiconductor manufacturers, for instance, could experience a slow-down in chip sales should production of desktops and laptops slip as a result of the shortages. Even companies offering cloud computing or heavily reliant on the technology, such as Facebook, Google (GOOG) and Amazon, could suffer if they need to acquire more hard disk drives to increase storage capacity in the short term.

"We are living in a world that has strong interdependence," said Hau Lee, a supply chain expert at Stanford University's Graduate School of Business. "It's not possible for you to be divorced from major disruptions. You may think your industry is not affected, but it is." Western Digital, which has extensive operations in Thailand, said product shipments could drop from 58 million for the quarter ended Sept. 30 to 22 million to 26 million for the current period. Seagate, whose corporate officers are based in Silicon Valley, said its hard drive factories in Thailand were unaffected by the flooding. However, it said its shipments could drop by as much as 20 percent this quarter.

To what extent the damage from the floods spreads across the sector is unknown. However, executives are keeping a close eye on supply chains.

"Like many others, we source many components from Thailand and have multiple factories that supply these components," Apple CEO Tim Cook said during a conference call with analysts in October. "There are several factories that are currently not operable, and the recovery timeline for these factories is not known at this point." He said a supply problem would hit Apple's line of Macintosh computers, though not its hot-selling MacBook Air laptops, which use solid state drives that are made in other countries, including the United States, Japan, Taiwan and South Korea.

Still, Cook added, "It is something I am 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." Intel (INTC), with no operations in Thailand, does not yet forecast a direct threat to its business, company spokesman Chuck Mulloy said. The PC industry, for which the Santa Clara-based chip maker supplies chips, has shown it can weather a disaster, such as the earthquake and tsunami that struck Japan earlier this year.

"It's also important to note that the combination of multi-sourcing and existing inventories will help mitigate the impact on the PC supply chain," Mulloy said.

But, he added, "The situation is certainly dynamic and we're talking with our customers and HDD suppliers regularly." During a conference call with analysts late last month, Rory Read, CEO at Sunnyvale-based Advanced Micro Devices, said the "flood doesn't appear to be a major factor at this point. We're going to continue to monitor it." Jim Handy, the principal analyst at Objective Analysis, believes a build-up of chip inventories, already in the making because of sluggish computer sales this year, is apt to be exacerbated by the hard-drive shortage.

"This could push us into a chip oversupply and cause prices to collapse" early next year, he said. "What will it mean for the valley? The valley has been doing a lot of hiring. There could be a cut back in that. That would cause the apartment rental market that is now booming to slack off a little bit. The earnings from semiconductor companies would likely take a hit." The disaster could even put a crimp on whether cloud computing companies can roll out new services, IDC analyst John Rydning said.

"Cloud companies will need to remain cautious about launching new services or scaling-up existing services until they have a better view of when they can add storage capacity for those services," he said. At a minimum, he added, they should expect to spend more money to add storage capacity.

With supply chains spread across the globe, company executives need to keep an eye on bad weather and natural disasters, Stanford's Lee said.

"My advice to companies is, 'You can't not pay attention,'" he said. "Most people just focus on their own supply chains. But they need to look at their customer's supply chain, as well." Contact John Boudreau at 408-278-3496.

___ (c)2011 the San Jose Mercury News (San Jose, Calif.) Visit the San Jose Mercury News (San Jose, Calif.) at www.mercurynews.com Distributed by MCT Information Services

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