Thai floods

Are the Thailand Floods About to Kill Computer Companies?

By John Thorpe

Forbes,

8 November, 2011

Many people wait until the holidays to upgrade their home computer on the cheap. Between the pre-Christmas sales and the post-Christmas inventory sell-offs, good bargains can usually be found around the holidays.

This year, I wouldn’t count on such deals.

As of now much of the country of Thailand is underwater, the result of a ridiculously heavy 2011 monsoon season. To date, just over 500 people have been killed by the floods, which began in July and show no sign of letting up any time soon. In fact, matters appear to be getting worse, as the flooding is putting  the sewer and drainage system in Bangkok to the test.

The death toll is sad – and obviously, as human beings, we weep for those who have lost their lives, as well as the 2.3 million who have been displaced and affected by the flooding. Having said that, I would like to focus on an aspect of the flooding that has not been well-covered in the American media.

(Check out Rackspace’s earnings here.)

Thailand is a key cog in the international manufacturing of computers. The country is the second largest producer of hard drives in the world, manufacturing some 25 percent of the world’s total. The factories that produce those hard drives are now closed, as the industrial parks where they are located are under several feet of water.

One major manufacturer, Western Digital, has had its factory in Thailand closed for over two weeks now, as floodwaters have overtaken the area. Even when the floodwaters recede and the Thailand floods stop being a story, WDC and other Thailand-based companies could face severe waits to get back online.

Flooded plants means flooded manufacturing equipment.

There is no guarantee that any of that equipment will even work when the water does recede. Even if, by some miracle it does work, or is easily replaced, will the workforce be there? It’s not like the company was on strike and the workers can simply come back. Cleaning up after a flood is difficult and time-consuming. Where will the employees live? Will they be able to return home? Will there be sanitation, or will there be polluted water everywhere? These are all factors these Thailand manufacturing plants are working out right now as they plan their rebound.

In the short term, we can expect computer prices to go higher, not lower, this Christmas season. Already, hard drive prices have nearly doubled. These prices are only expected to get worse, as competing manufacturers run out of inventory and capacity to make more units.

It’s not just computer manufacturers that cannot get the parts they need. Camera makers like Sony cannot get the parts they need to manufacture digital cameras. Some auto supply chains have also been disrupted by the floods.

For now, experts are predicting between six and twelve months to sort out the supply chain mess and either get Thailand back online, or get capacity up at other firms, other plants, or other countries. That means you just might want to stay away from computer shopping this holiday season, and perhaps put off your new purchase until they get this all sorted out.

Of course, these higher prices will almost certainly have an effect on the American economy. If fewer people buy computers (seriously, would you buy one at a higher price today than you could have paid 6 months ago? Not a chance.), then it would follow that computing companies could be in for a rough holiday season.

Computer makers like Dell and even Apple could be in for a rough ride if this is the case. It would make sense to monitor those stocks through the holiday season, as there might be a “buy low” opportunity after the Q4 numbers come out — if they come out weaker, of course.

 Given the flood and the time frame for recovery, it almost seems certain that there will be some lower numbers by then. Whether those lowered numbers stick to just the affected HDD manufacturers or if they spread through the entire system remains to be seen.

If other investors move on and forget that some sales loss can be attributed to these supply-chain, flood-based events, then perhaps there is some profit available for you.