Thai Flood, Intel & a Brittle Supply Chain

Sales at {complink 2657|Intel Corp.} 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 {complink 103|Advanced Micro Devices Inc. (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.

16 comments on “Thai Flood, Intel & a Brittle Supply Chain

  1. Barbara Jorgensen
    December 13, 2011

    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.

  2. Ariella
    December 13, 2011

    Really, Barbara? The Thai flood was devastating to the area, not just the industry. I'm surprised people are so unaware of it.

  3. bolaji ojo
    December 13, 2011

    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.

  4. bolaji ojo
    December 13, 2011

    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.

  5. Barbara Jorgensen
    December 13, 2011

    @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.

  6. Ariella
    December 13, 2011

    Hmm, I guess the media has its own version of most favored nation status.

  7. Daniel
    December 14, 2011

    “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.

  8. Anand
    December 14, 2011

    “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 ?

  9. Barbara Jorgensen
    December 14, 2011

    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?

  10. chipmonk
    December 14, 2011

    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. 

  11. bolaji ojo
    December 15, 2011

    Correct. Apple is ahead in selling Ultrabooks and Intel is eager to follow. The Ultrabook's main selling point is the abscence of the hard disk drive, which would help reduce both cost, weight and size.

    The question in my mind is whether the market hype around the Ultrabook isn't a problem. What are the chances of the Ultrabook succeeding and could it end up in the same position as netbooks, which have faded in terms of demand? I wonder at times if the market isn't searching so hard for an alternative to tablets it is ready to embrace any alternatives.

  12. Barbara Jorgensen
    December 15, 2011

    Thanks cmonk and Bolaji. There's a review in the WSJ on ultrabooks vs. MacAir. Each has its pros and cons as one would expect. From what I read, though, solid-state isn't living up to expectations…although those expectations were set based on the performance of hard drives. At any rate, they are all pricey compared with our “old” laptops. I plan to get to an electronics store this weekend and test drive some of these things (and finally do some holiday shopping)

  13. Mr. Roques
    December 15, 2011

    I can't imagine that phone call: “hey Bob, just wanted to let you know that… well, you remember the 15.2 billion forecast?… well, yeah… it's not gonna happen… might be 1 billion less… hello? hello?”

    The “good” part is that demand wasn't satisfied by another supplier, they are waiting for them to catch up, so if Thailand gets up and running, forecast for next year might be even greater.

  14. Barbara Jorgensen
    December 16, 2011

    Mr. Roques–heck, what's a couple of billion among friends?

  15. SunitaT
    December 20, 2011

    Bolaji, now we have severe floods in Philippines. Will this also impact the supply chain ? Do we have major semiconductor manufacturers operating from Philippines ?

  16. t.alex
    December 20, 2011

    Will this bring down the price of SSD or it may push up the price due to surge in demand?

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