Just over five months since the historic flooding began in Thailand, the water levels to the north and in parts of Bangkok have begun to recede. Meanwhile, the massive runoff continues to place southeastern regions on high alert.
Even with a history of flooding, elaborate sluice gates, and complex irrigation systems, no one seems to have been truly prepared to handle the rain and runoff, which quickly covered an area the size of Kuwait. As human and financial tolls continue to mount, global supply chains are revisiting disaster management strategies and the costs of agglomeration.
Low consumer confidence in mature economies means soft enterprise purchasing, yet emerging economies continue to expand. The global electronics supply chain has been in a push-pull situation and has responded with leaner inventory, localized and low-cost manufacturing strategies, conservative utilization levels, and a scaling back by many in capital expenditures to build, improve, or expand production capabilities.
When the flood warnings in Thailand were issued, there was a small window during which some finished products and some equipment could have been moved to higher ground. However, the majority of the equipment in these industrial high-tech parks is immovable. Little time was available to seal buildings to withstand well over 10 feet of rushing and now standing water, where fish and crocodiles swim over loading docks.
Lean inventory management, the agglomeration from localized manufacturing, and a historic natural disaster have created a major global supply chain disruption for the semiconductor and electronics industry. Not only were major manufacturers caught in the floodwaters, but the smaller but still critical component suppliers were also shut down. Furthermore, there has been a huge toll on employees, many of whom face not only emotional hardship, but also the loss of logistical infrastructure in areas north of Bangkok.
Assessments are still pending for almost all semiconductor and electronics companies that operate in Thailand. The end of November may bring better visibility into the duration of production halts and the enormous efforts required to rebuild, power, and restart electronics manufacturing in the affected regions.
Meanwhile, we do know that the effects are global, deep, and costly. Hard disk drives (HDD), both external and internal, are already in shortage situations that will likely worsen during the first quarter and hopefully ease during the second half of next year. As a result, production costs and purchase prices are rising for HDDs and PCs, in particular. But the price hikes have extended to other sectors, such as automotive, optics (including digital cameras and fiber optics), LEDs, packaging, and test and assembly equipment for the semiconductor and electronics industry.
On the financial side, reduced margins and lost sales due to lost production volume will take a bigger bite out of revenues for many companies beginning this quarter and likely lasting through the second quarter of 2012 at least. For some small and midsized companies in an already extremely challenged economic arena, this “perfect electronics storm” caused by lack of product and limited production may prove insurmountable.
On the positive side, we'll likely see serious re-examination of current business practices to make global supply chains more dynamic, more diversified, and stronger.