Sales at Intel Corp. (Nasdaq: INTC) in the fourth quarter will be as much as $1 billion below the high-end of the company's previous forecast due to the negative effects of the recent flooding in Thailand on the electronics supply chain. It was not the first time that weather or other natural disaster-related events had clipped the industry's wings, and it won't be the last.
The electronics supply chain remains very fragile and its segments highly susceptible to events beyond the control of individual companies. In the case of Intel, the company had projected sales could be as high as $15.2 billion for the December quarter with gross profit margins rising as high as 67 percents. The update provided by the company on Monday indicated sales are now expected to be between $13.7 billion and $14 billion, about 9 percent below its former projection.
For Intel, a $1 billion sales shortfall isn't a big deal. First, the company's total annual sales dwarf its nearest competitor by more than $16 billion, according to IC Insights. Second, whatever sales Intel is losing this quarter won't be picked up by any of its competitors since they are equally vulnerable to the same supply chain deficiencies -- in this case, shortage of hard disk drives following the recent floods in Thailand.
In fact, the hard disk drives supply constraints are so painful for microprocessor rival Advanced Micro Devices Inc. (AMD) (NYSE: AMD) that company will be taking steps to further reduce its cost structure. AMD said it will reduce its "global workforce by approximately 10 percent" and terminate "existing contractual commitments."
Rather than embark on a cost-cutting program, however, Intel will take the opportunity of the hard disk drives shortage to push for a bigger role in the market for ultra-thin notebooks and compensate for its weak position in the tablet PC segment, according to a report in The New York Times. The ultra-thin notebook market is forecast to grow strongly over the next years, boosted -- surprisingly -- by hot demand for tablet PCs; some consumers find tablets can't satisfy their full computing needs.
Still, the effects of the Thai flood serve as a reminder the industry still hasn't figured out how to prevent problems in one region from seeping across the entire system. Although component makers and sub-assembly services providers continue to try to broaden their manufacturing footprints, the tendency has been for companies supplying a particular set of parts to concentrate facilities in one country or region. This approach maximizes efficiency, but it also raises the danger level for the entire industry when supplies from that location are disrupted.
So far, the electronics industry has been spared a devastating blow: The Thai flood hobbled mainly the PC market, and the March earthquake and tsunami in Japan primarily hit the automotive sector. A major natural disaster in Taiwan would ravage not just the production of PCBs but reverberate throughout the entire supply chain and could result in manufacturing plants shutting down in almost all regions of the globe. Not even China would be spared.
The industry has been talking for years about building redundancies into the supply chain, but it still hasn't figured out how to implement this or how to distribute the costs across the system. The Thailand flood and the Japan earthquake are reminders to electronics executives that this is an important issue that requires urgent attention. Other warnings have been ignored in the past. I suspect these will soon be forgotten, too.