In many respects, Intel's warning earlier today that its fourth-quarter sales and margins would significantly trail both investor expectations and its previous guidance is hardly a surprise. As major flooding in Thailand continues to hobble the global hard drive industry — a core driver of demand for computer systems based on Intel processors, chipsets, system boards and related technologies — the broad and deep impact on the overall technology supply chain, and bellwethers like Intel, is just now coming into focus.
Intel, unfortunately, isn't alone. Texas Instruments has also served notice that flooding-related turbulence will hit its bottom line. Even companies with no apparent direct link to hard drive manufacturing are feeling the pain: DuPont says demand for chemicals used in the component manufacturing process is down because of the crisis.
Like many industries, the hard drive sector has undergone significant consolidation in recent years. While there used to be dozens of global hard drive manufacturers, there are now barely ten major players left. Thailand now accounts for about 40 to 45 per cent of world production, and half of Thailand's capacity was knocked out by the flooding. Do the math: it's ugly.
Worse, the parts that go into the drives sometimes come from just one manufacturer. For example, every hard drive requires something called a "slider" - a tiny component that controls the read/write head's movement. Before the waters rose, one company supplied a quarter of the world's supply of sliders. Its factory floor is just now drying out.
This high degree of consolidation and supplier-interdependence means even if one company's hard drive factory wasn't touched, it may be forced to sit idle because many of its sub-component suppliers can't deliver. Seagate, a top manufacturer whose Thailand facility was high and dry throughout the crisis, had to shut down as it waited for parts from still-drenched suppliers.
The current crisis likely wouldn't have been as acute had Thailand's government been less aggressive in courting global vendors to build there. Manufacturers took the bait of huge tax breaks and other massive economic incentives, ignoring the fact that they were setting up shop on a relatively constrained stretch of flood plain. It may have made for a tight, efficient manufacturing community. But in an era when businesses build disaster recovery plans designed to maximize redundancy in case chunks of the company are knocked out of commission, the all-eggs-in-one-basket scenario in Thailand represents a staggering misstep.
The bottom line for consumers
The impact takes on many forms. Immediately, prices for the drives themselves and the products they go into are either increasing or holding firm at a time when they would normally be dropping. Although it can take weeks for a new drive to navigate from the factory to the consumer, prices are beginning to increase in anticipation of tight supply. Price gouging isn't out of the question. Laptop and desktop PCs aren't the only devices affected. These days, drives are finding their way into an ever more diverse array of devices such as PVRs, backup drives and car-based navigation systems. They, too, are facing pricing and availability pressure.
The timing couldn't be worse, as all this comes just as retailers are bulking up - or trying to - for the holiday buying season. Of course, store shelves won't be completely empty by Dec. 24th, but there will likely be less choice as shipments from the flood zone begin to drop off and supply tightens. Vendors will be hit especially hard as holiday shoppers shift their buying elsewhere. Unlike other times of year, when consumers will simply wait it out if a particular product isn't available, Christmas and related year-end holidays represent a deadline of sorts to shoppers: Once they reallocate their spending elsewhere, those dollars aren't coming back.
The impact will extend well into 2012, as flood recovery is expected to take upwards of a year. Affected production facilities packed with highly intricate fabrication equipment could take months to bring online.
The one saving grace could lie in the industry's gradual transition away from hard drives toward solid-state drives, or SSDs. As the name suggests, SSDs have no moving parts, and are starting to make inroads in higher-end machines like Apple's MacBook Air and the just-introduced line of thin laptops built to Intel's Ultrabook standard. While the typical SSD still costs more and holds less than a hard drive, expect the gap to narrow in the coming year. As smartphones and tablets continue to expand their influence and market share, solid state storage of all types will pick up the slack. In the coming year, expect Intel to push this segment hard to limit the damage from the Thailand crisis.
It may not be enough to calm investors spooked by Intel's vulnerability to one flood in one geographically limited region, but it should placate those taking a longer-term view.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. email@example.com