Thailand Floods Raise Havoc On Hard Drive Business As Customers Scramble For Supplies

Massive flooding in Thailand is grinding a significant portion of the industry's hard drive production to a halt, sparking concerns about its impact on an IT industry that depends on the devices and is already causing constraints in supply to the channel.

Thailand is suffering from a growing floods caused by near record high monsoon rains that has covered a large portion of the country, including the capital, Bangkok, causing widespread shutdowns of factories producing hard drives and related components.

Analyst firm IHS iSuppli estimated that about 25 percent of the world's hard drives are manufactured in Thailand. In addition, a disruption in the production of key components, including electric motors and slider assemblies, threatens at least part of the production in other countries.

Western Digital, which has a significant portion of its hard drive manufacturing in Thailand, has been forced to curtail production in that country and put both storage OEMs and reseller customers on allocation.

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Seagate's drive production facilities are located in other countries, including Malaysia, and so have not been hit directly by the floods. However, there are concerns about supply chain disruptions impacting at least part of that production.

John Coyne, president and CEO of Western Digital, said this week during his company's first quarter financial conference call that the hard drive industry will be constrained in meeting 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 said, according to a transcript of the call provided by Seeking Alpha.

Timothy Leyden, Western Digital COO, said that in addition to hard drive production stoppages, the flooding also impacted the company's assembly test and slider facilities, as well as supply of components from other vendors, and is expected to constrain capacity for several quarters.

"We are working with our suppliers to affect the recovery of their supply chain and to ramp existing capacity in other locations," Leyden said. "We are proceeding with all possible haste and ingenuity to address the situation because we are mindful of the impact on our employees, customers, suppliers, shareholders and the communities in which we operate. We are also pursuing all possible options to maximize our Malaysian facility's throughput."

Western Digital declined to comment further about the situation.

Seagate, in supplemental material provided Thursday as part of its first quarter financial report, said that its Thailand component and drive assembly factories are operational and running at full production, but that the situation is different for some of its component suppliers.

"We expect to experience significant impact to our production levels while our suppliers work to get their businesses up and running," Seagate wrote.

Because of the supply constraints from the Thailand floods, including those of its "primary competitor," a reference to Western Digital, Seagate wrote in the supplementary materials that it expects the effects to last several quarters.

"As we strengthen our supply chain and optimize our output, we are engaged with customers to re-align build schedules, product mix and to reset delivery expectations," the company wrote.

As a result of the constraints, system builders are scrambling to place much larger orders than normal to secure supplies to meet their customer demands for servers and storage appliances even as distributors begin allocation.

Next: System Builders Scramble To Secure Hard Drive Supplies

One system builder, who requested to remain anonymous, said Seagate told his company that tier-one storage vendors will be getting priority shipments, and that pricing will continue to rise. For instance, the system builder said, a 500-GB Seagate desktop hard drive that was priced to the channel at $37 a week ago was now priced at $51.

Another system builder, Andy Kretzer, director of sales and marketing at Fremont, Calif.-based Bold Data Technology, said that it is getting hard to find suppliers who will sell hard drives.

"No one knows how bad it will be," Kretzer said. "Some people are saying the situation could last two to three quarters. People with inventory are holding it."

That includes the distributors, Kretzer said. "Distributors seem reluctant to let go of the inventory they have," he said.

Kretzer said he got a quote from a server supplier on Wednesday for servers with Western Digital and Seagate drives, but that the supplier on Thursday called back with a new quote that raised the hard drive prices by over 10 percent.

Erik Stromquist, COO of CTL, a Portland, Ore.-based system builder said that his vendors are coaching his company to hurry and place larger orders than normal.

"So internally, we decided to take an even larger position on orders than normal," Stromquist said. "We're taking a 4X position (compared to previous orders)."

Distributors are declining to talk on the record about inventory or expectations from their hard drive suppliers. In response to requests for more information, a number of distributors e-mailed prepared statements to CRN which seem to indicate that allocation is in progress.

A top executive of one distributor, who requested anonymity, told CRN that when prices go up in situations such as hard drive shortages in the wake of the Thailand flooding, products will go on allocation.

That allocation stems from a need to ensure existing stocks don't dry up as a result of shipments to a few buyers, the executive said. "Everyone is in a cautious state of mind. No one wants to liquidate inventories even though they could sell all their hard drives quickly."

That executive said the distributor is already seeing 1-TB Western Digital hard drive prices jump 20 percent, and that Western Digital is not committing to replenish its hard drive channels.

Prices for drives already in the channel have risen because Western Digital has eliminated all its special pricing programs, the executive said. "They even used the force majeure clauses in their contracts," the executive said, referring to a clause that frees the parties in a contract from legal liability in case of circumstances beyond their control.

Seagate has also said it is raising its prices Monday, the executive said.

The executive has been in touch with PC vendors, but has seen no panic from them yet. "But if this situation lasts for more than one quarter, it could impact the PC business," the executive said. "For the notebook business, more manufacturers make the 2.5-inch hard drives. Fewer make the 3.5-inch hard drives that go into desktops and servers."

The worst case scenario is that the shortage of hard drives lasts long enough to where manufacturers of other products such as motherboards and memory cannot ship products because system builders can't fulfill orders from a lack of hard drives, the executive said.

Next: Distributors Talk Allocation Without Saying "Allocation"

Ingram Micro, in a statement from Paul Bay, executive vice president for North America, wrote, that the company is assessing the short and long-term impact of the Thailand floods on the IT channel at large. "Although we have inventory, we are being very mindful of the circumstances until we can get a better understanding of how this will impact the global supply chain and IT ecosystem," Ingram Micro wrote.

A statement from Arrow noted that the company is monitoring and addressing developments globally via the company’s global business continuity teams, and is in ongoing contact with suppliers to gauge any impact. "We are putting contingency plans in place with the goal of minimizing any effect on operations for our suppliers and solution providers and for Arrow," the statement read.

Tech Data in its statement wrote that it is in close contact with vendor partners impacted by the flooding. "It is still too early to confirm the mid-term potential impact of these events on the overall IT supply chain, but we continue to monitor the situation and will keep our channel partners (informed)," its statement read.

A Synnex spokesperson said that the distributor is getting updates constantly, and is not able to answer specific questions because what is true one day may be different the next.

The spokesperson said that after the massive Japan tsunami which in April disrupted the production of several key electronics components, Synnex was able to handle its supply chain fairly well, and that there is no reason to think this time would be different.

Officials of the top-tier storage vendors declined to discuss the hard drive situation either on or off the record.

However, EMC was forced to discuss the impact on Tuesday when the company announced its third quarter financials.

David Goulden, EMC CFO, said in response to questions from financial analysts about EMC's hard drive inventory and the potential impact on EMC's supply chain that the company is not sure how bad the situation will be because water levels in Thailand are still rising.

However, Goulden, in a transcript of the question and answer session provided by EMC, said that EMC is not expecting supply chain constraints or changes in the pricing environment for its supply change to change in the fourth quarter. "Bear in mind, we tend to be our supplier's largest customer and get pretty good treatment when it comes to situations like this," he said.

Goulden admitted, however, that EMC is still working with its suppliers about potential impacts for the first quarter of next year. "We just haven't finished all our analysis with our suppliers on Q1 yet for supply," he said. Smaller storage vendors said they are closely watching the Thailand floods, but are not panicking, in part because of the nature of the production in that country.

Eric Kelly, president and CEO of Overland Storage, said the situation will not be like the huge 600 percent to 800 percent spike in DRAM prices resulting from production cuts caused by a massive 1999 earthquake in Taiwan.

Kelly said he is seeing indications of spikes in hard drive prices and some drive shortages. "We're still checking with suppliers," he said. "Right now, we're OK. But we don't want to see a bidding war drive prices up."

Next: Dual Sourcing, Managing Inventory Are Key

Overland Storage is dual-sourcing its hard drives from both Seagate and Western Digital, and so is able to shift suppliers, Kelly said. "The companies that will be most hurt are those who single-source from Western Digital," he said. "They can move to Seagate, but need six weeks to qualify the drives for their systems."

The toughest part for storage vendors is that they have been keeping inventories to the bare minimum even more so than in the past because of the economic slowdown, Kelly said.

"This is one time I can tell my operations people to go buy the disks we need and not worry about the price falling," he said.

Philip Black, CEO of Nexsan, said is company is probably less impacted by the hard drive shortage than others because it purchases only enterprise-class hard drives.

"To the best of my knowledge, Western Digital plants in Thailand focus mostly on desktop drives," he said. "But I'm still hesitant. There may be things we don't know."

Cameron Presley, vice president of global operations for Nexsan, said that it is important that companies carry some inventory for risk mitigation, deal with multiple sources, and have a bonded supply, which is a supply of components like hard drives which is committed to a particular customer like Nexsan.

"Between what we have on hand and what is bonded for us, we're in a good position based on everything we know today for this quarter," Presley said.