Thai Floods’ Hidden Asset

In a perverse way, the flooding in Thailand might have a hidden benefit — it could help boost pricing in a way the market otherwise would never allow.

Seagate today said as much in an SEC 8-k filing. The HDD maker noted the severity of disruption the floods have wrought on the hard drive supply chain, causing it to project total industry shipments of 110 million to 120 million units for the quarter. That’s in line with IHS iSuppli’s forecast of a 28% year-over-year drop. Better rethink gifting a  PC for Christmas.

But there quite possibly a silver lining. When capacity is reduced and demand is constant, prices rise. Deutsche Bank senior analyst Sherri Scribner said as much today, noting “Despite the significant shortfall in total available market this quarter, we believe Seagate and the industry will see a gross margin benefit from HDD supply disruptions. As we have already begun to see in the channel, limited availability of HDDs is driving prices higher and pricing is the primary driver of gross margins.”

She also points out that the effect will be lingering, as HDD pricing is set based on prior quarter prices.

We saw this a few years ago, when a fire at ASE in Taiwan took an estimated 10% of the world’s flip-chip capacity offline and pushed up prices and delivery times for several quarters.

The electronics supply chain has long been in dire need of a little inflation. This could help.

Predictions, Revisited

In mid July, I made five predictions for the second half of this year.

Here’s how I fared:

Prediction 1. All of 2009’s 10 largest EMS companies – Foxconn, Flextronics, Jabil, Celestica Sanmina, Cal-Comp, Elcoteq, Venture, Benchmark and Plexus – will be intact at year end, and with the exception of Elcoteq, will finish 2010 in the same order. Outcome: Fourth quarter sales remain to be reported, but given their outlooks, I nailed it.
Prediction 2. One of the mid-tier publicly traded EMS companies will be acquired, however. Outcome: Nope. After the Sanmina-SCI bought Breconridge (announced in late April), things became awfully quiet, especially given the amount of cash many top tier EMS players have on hand. I’m guessing concerns over end-market visibility coupled with tight external financing are keeping the major players on the sidelines.
Prediction 3. Component availability issues will not ease until mid 2011. Outcome: TBD, but parts are becoming somewhat easier — but not easy — to get.
Prediction 4. Foxconn’s many employee problems will blow over as the media tires of the story. Outcome: Got this right.
Prediction 5. “Computer-aided innovation” will become the big buzzword in software. Outcome: Wrong.
So for those scoring at home, that’s two right, two wrong, and one partial.

Thai Wage Rate Offers Financial Food for Thought

China isn’t the only Southeast Asia nation struggling to come to grips with rapidly increasing wages.

Thailand’s government is considering a 21% hike in the minimum wage, leading several executives to warn that the move could push labor-intensive jobs elsewhere.

Thailand is home to several of the world’s largest EMS firms, including Cal-Comp (no. 8 on the CIRCUITS ASSEMBLY Top 50), Team Precision (n0. 19), Delta Electronics, Hana Microelectronics ( no. 29) and SVI Public Co., not to mention Fabrinet, which is based in San Francisco but whose factories are in Thailand.

We will hear more and more of this as Asia faces the same, inevitable swell of worker pushback. Thailand suffers through massive worker strikes each year, and its government may finally be capitulating. With higher wages come increased overhead, although it would take far more study and space than allowed here to examine whether the expenses related to training, turnover and (lower) end-product quality exceed those of a higher minimum wage.

What we do know, however, is that much of the world’s economic model balances on the import economies of the US and Europe. Over time, this will have to change, lest we continue to endure sharp boom-bust cycles every few years.