by Jim Woods | November 4, 2011 8:00 am
It’s a scene reminiscent of the book of Genesis, only this time, Noah has to pilot the ark through Thailand. Since July, the southeast Asian nation has experienced heavy monsoonal rains that have caused severe flooding described as the country’s worst in more than 50 years. Months of intense rainfall and subsequent flooding already has claimed hundreds of lives, and now there is fear that additional rain and more flooding will paralyze the country. That paralysis could lead to a severe curtailing of production in several major industries, including automotive, cameras and, perhaps most significantly, hard drive and semiconductor chip makers.
Many Japanese and U.S. firms in these sectors call Thailand their home, and many have major production facilities that have been forced to shut down because of the flooding. A recent report from research firm IHS iSuppli said the Thai floods have been harmful to tech manufacturing, and in particular to the operations of disk-drive maker Western Digital (NYSE:WDC).
According to the report, the most direct impact will be felt by the hard disk drive business, which will see total shipments fall approximately 28%, to 125 million units from 173 million in the previous quarter. That would represent the biggest drop since the final quarter of 2008, when the sector was hammered with a 21% drop.
The production drop in HDDs might result in significant price increases that could cause consumer hard drive prices to rise as much as 10%. And while IHS iSuppli says the PC industry has enough drives on hand to make it through a temporary shortage, the effects of a long-term drive shortage could start to impact Q1 2012 notebook computer production. That’s not a positive for PC makers such as Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ).
On Thursday, analog chipmaker ON Semiconductor (NASDAQ:ONNN) CEO Keith Jackson was interviewed on Fox Business Network, and he said, “… we don’t expect the (floods) to completely recede for another month. At that point, we’ll be able to get into the factories and really understand the damage and have a clear path to recovery.” Jackson said his company’s earnings guidance for Q4 2011 and Q1 2012 reflected the impact of the floods, but until the damage is fully assessed, the impact on the bottom line for chipmakers won’t be fully understood.
In addition to the hard drive shortage, the flooding is likely to slam Japanese camera manufacturers Nikon and Sony (NYSE:SNE), which also have halted production at Thai facilities because of the disaster. Both companies have manufacturing facilities that make digital single-lens reflex (DLSR) cameras, and both were directly damaged by the flood.
Then there’s the auto industry, which will be hit by production shutdowns from car electronics maker Pioneer Corp. (PINK:PNCOF). Honda Motor Corp. (NYSE:HMC) was forced to suspend production at its automobile plant in Ayutthaya, Thailand, because of flood waters. The latest casualty is Toyota Motor Corp. (NYSE:TM), which actually shut down production at U.S. facilities for one day because of a shortage of parts from Thai suppliers. Ford (NYSE:F) and General Motors (NYSE:GM) are having similar production shortage snafus due to impaired facilities in Thailand.
Given the potential for a serious production shortage in hard drives, as well as supply chain disruptions to varying degrees in sectors such as PCs, cameras and autos, smart investors need to consider the circumstances and their yet-unknown impact before putting money to work in stocks with exposure to the Thai flood zone.
As of this writing, Jim Woods did not own a position in any of the aforementioned stocks.
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