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Thailand Flooding: Pain Ahead For Disk Drive-Dependent Manufacturers?

by: Rufus D

The major floods in Thailand have put a large crimp in the worldwide production capacity for hard disk drives. Analysts estimate that about 1/3 of all disk drive production has been interrupted, meaning that there will soon be a shortage of 50 million drives. At an estimate $50 contract price per drive, this represents a potential $2.5B revenue hit for the major drive makers like Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC). Prices for existing inventory and production from other factories in China and elsewhere are already rising, and will go higher. This will soon begin to impact technology companies across the board.

Let's take a look at a few of the 'A's as examples. Amazon (AMZN) is very dependent on a large supply of disk drives to build and expand data centers for its cloud computing initiatives. With the new Kindles beginning to ship in large volume, the last thing the company needs is network problems due to capacity constraints. Likewise Apple (AAPL), which could be impacted both on its iCloud initiative and the ability to get sufficient disk drives for its notebook and desktop Macs.

Meanwhile, PC companies like Acer (OTC:ASIYF) and Asustek (OTC:AKCPF), which are heavily dependent on Black Friday and holiday sales to boost revenue for the year, may run into product and configuration shortages that could limit sales. For example, notebooks that were planned to have 1TB drives may wind up at the last minute with availability of only some other size drives. This will complicate the channel ordering and fullfillment process, put pressure on pricing and margins, and impact sales.

Beyond, the 'A's, other companies which are heavy consumers of hard disk drives are also likely to be impacted including Dell (NYSE:DELL), EMC (EMC), Lenovo (OTCPK:LNVGF), HP (NYSE:HPQ), IBM (NYSE:IBM), Panasonic (PC), Samsung (005930.KS), Sony (NYSE:SNE), and Toshiba (OTCPK:TOSBF).

If there is a shortage or delays of up to 10% of PC shipments, this represents a potential revenue hit of up to $25B spread across these companies. They all have long term contracts with disk drive makers in place, and many may have enough inventory to cover sales and data center expansion through Q4, but analysts estimate there will be serious shortages beginning in December and throughout Q1 2012.

Disclosure: I am long AAPL, AMZN.