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.
When I talk to people outside the industry, the flooding in Thailand didn't even register. The Japan disaster got a lot of coverage--as it should have--but the Thailand event has had a greater impact on the electronics supply chain. Manufacturing still tends to cluster geographically--proximity to customers, etc.--but there has to be some diversification. The supply chain eliminated a lot of redundancy by moving to JIT and lean--but there's gotta be some leeway to put some back. There are many shuttered factories around the world that can be called into service. It's time consuming, but ultimately less expansive than a $1 billion loss.
Barbara, Correct. The problem is Intel won't want to bear alone the cost of ensuring its customers would have all the hard disk drives they need. If it secures diversity of hard disk drives because it wants to sell microprocessors, then it would have to secure supplies of other components that go into the finished equipment, ranging from capacitors to connectors, power products, cooling fans, enclosures, packaging supplies, the list goes on and on.
In some ways it's easier to imagine such a system than to actually design and operate one. Each region and country wants a share of the global supply chain but none is perfectly suited to harbor everything without jeopardizing the entire structure. Political instability in China, for instance, could probably derail the entire global manufacturing economy but I don't think this is even being discussed. We are all hoping this would never happen. Let's pray too it doesn't because it would be the mother of all supply chain disruptions.
It's not that the industry is unaware of the disaster, just that its impact isn't as widespread across the supply chain. Tablet PCs, for instance, don't have hard drives so Apple's supplies of components and assemblies for the iPad wasn't impacted.
@Ariella--sadly this is true. I did a little reality checking, and the flood got very little coverage from the usual media outlets--TV news, TV news Websites--compared with the Japan quake.
“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”
Its right because natural calamities can be happens at any time. In 2011 itself 2-3 major natural calamities happens like Hurican in US, tsunami in Japan, flood in Thai etc. previous years also similar calamities happened in different parts of the globe including Korea and European countries. Therefore, I think the only way is we have to foreseen such disasters in advance and has to take necessary precaution methods, in order not to have a drastic effect in supply chain and availability of the resources.
"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"
@Bolaji, this is very good move by Intel considering that fact that number of PC users is reducing slowly. More and more people are now opting for thin notebooks and tablets. What about other companies who are just selling HDD's, how are they planning to cope with this shortage ?
This is my ignorance speaking: how will Intel benefit from the HDD shortage? Don't ultrabooks use HDDs? Is Intel planning on replacing drives in some of these products with chips?
One of the key aspects of Ultrabooks is to replace hard drives with solid state memory ( flash RAM ) so that the end product looks more like a Mac Air. The advantages : "instant" boot - up when power is turned on, longer battery life and a thinner profile. Ultrabooks are not ready for this XMas but will be around by mid '12 and would cost north of $ 1k.
By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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