Seagate Predicts Hard Drive Shortage to Continue in 2012

Thailand factories shut down by flooding struggle to return to production, pushing up hard drive costs and PC prices

   
Seagate Predicts Hard Drive Shortage to Continue in 2012

In the summer of 2011, Thailand experienced its worst flooding in over 50 years. While we tend to think of China as the producer of the world’s computer and consumer electronics components, many suppliers are based in Thailand, a fact that quickly became apparent as fallout from the floods began to hit the world computer industry.

According to a report from iSuppli, Western Digital (NYSE:WDC), the world’s largest producer of hard drives, employed 37,000 workers at its hard drive facilities in Thailand, where 60% of its global capacity was based. Seagate (NASDAQ:STX), the world’s second largest hard drive manufacturer, operates multiple factories in Thailand, and Toshiba (PINK:TOSBF), the fourth largest hard drive producer, has 50% of its manufacturing capacity based there.

In addition, component makers such as Nidec, which supplies 70% of all hard drive motors worldwide, had plants in the flooded country. Over the months since the disaster, some factories have managed to return to operation, while facilities outside of Thailand have added some capacity, but sporadic parts supplies have remained a concern.

No bump for solid state drives

While hard drive shortages were expected (it’s hard to avoid reaching that conclusion when roughly 30% of the world’s manufacturing capacity is sidelined), they didn’t hit as hard as expected in 2011. Computer makers were buying up existing inventory, which likely helped to cushion the immediate impact. An expected uptick in sales of solid state drives, or SSDs, has failed to materialize yet, largely because SSDs remain very expensive compared to mechanical hard drives, and they offer lower storage capacities.

Seagate announced last week that it expects continued challenges to its hard drive production volume through 2012. Computerworld says that the company—which paid $1.4 billion to buy Samsung’s (PINK:SSNLF) hard drive business in December— produced 110 million hard drives in the fourth quarter of 2011 while customers were looking for 175 million units. With component manufacturers based in Thailand continuing to struggle, Seagate and other drive manufacturers are predicting hard drive capacity production will remain constrained through 2012.

PC price increases, but not much upside for drive makers

As hard drive shortages continue, PC makers will be forced to pay more for a limited supply of hard drives (estimates from iSupply put hard drive price increases in the 30% range), or turn to more expensive SSDs. Either way, look for computer makers like Dell (NASDAQ:DELL), which offers many low-priced PCs, to take a sales hit in 2012. While Apple (NASDAQ:AAPL) was reporting shipping delays for some desktop systems, the company’s PCs tend to be premium priced offerings, making its customers less sensitive to paying extra for a hard drive, or upgrading to an SSD.

Don’t look to hard drive makers to make a killing on higher prices for their drives, however. Between reduced capacity and the cost to repair flood-related damage to their factories, they’ve also taken a hit. Profit at Western Digital dropped 36% in the quarter ending December compared to the previous year.

One possible side effect of the hard drive supply crisis? Apple already employs SSDs as standard equipment in its popular MacBook Air line of notebook computers. Many Ultrabooks, Intel’s (NASDAQ:INTC) answer to Apple’s compact offering, also feature SSDs. It’s possible that the hard drive shortage could help this segment of compact notebooks to grow in 2012.

As of this writing, Brad Moon did not own a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/02/seagate-predicts-hard-drive-shortage-to-continue-in-2012-stx-wdc-tosbf/.

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