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.

Green Chemistry: Sleeper Hit in Supply-Chain Compliance?

These days, environmental regulations are changing the rules of the game in terms of how things are made, sourced and distributed in manufacturing and supply chains. The rules define the product and the process. More so than ever before.

Green Chemistry might be the sleeper key to compliance

Regulations make the brand? Regulations such as REACH, RoHS, “China RoHS,” “China REACH” and WEEE have huge impact on finished goods as they move through a supply network.  The impact of regulation is felt in all stages:

  1. design
  2. procurement
  3. storage
  4. manufacturing processes
  5. waste procedures and
  6. product distribution.

This is true in aerospace, automotive, packaging — but especially true in electronics, ever more so as the electronics industry becomes increasingly plastic-oriented.

We’re talking about products increasingly defined and designed by environmental interests.

Electronic paper. Of course, late last week the electronics industry became paper-based, or paper-esque shall we say (origami telephones, anyone?) when BBC London announced the debut of the paper cell phone.  Yes, you read that right. It’s a cell phone made of electronic paper. You could make an airplane out of it and try to get your friend’s attention — rather than call.

Increasingly we see more regulations and faster creation to disposal cycles. So how can the electronics industry cope?

E is for Electronics, Environmental, and EHS. Regulations are usually either strictly Environmental regulations or Environmental, Health & Safety (EHS).  Categories of regulations in electronics manufacturing and supply include:

  1. fire safety
  2. toxic substances
  3. product end-of-life
  4. air quality.

The last one, air quality, is a hot topic right now but is no more important than toxic chemicals, end-of-life or fire safety in electronics manufacturing.  Air quality typically comes down to Hazardous Air Pollutants (HAPs).  HAPs as a class cause serious environmental fall out.  HAPs include:

  1. sulfur dioxide
  2. nitrogen oxides
  3. volatile organic compounds (VOCs)
  4. hazardous air pollutants.

Green chemistry might be key. Action to reduce emissions can be done either by converting the waste itself or by using cleaner ingredients to begin with.  The latter is at the heart of green chemistry.  Green chemistry in fact addresses most environmental regulatory concerns:  the greener the chemistry, the fewer the environmental regulatory concerns.

To find out about Green Chemistry without the struggle of navigating the web site, try GC3 or Green Chemistry Council out of University of Massachusetts-Lowell.  Under the “Publications” section there are some helpful documents, including case studies by big companies like HP and Seagate who are seeking environmental regulatory compliance worldwide through greener chemistry.  Read up, go green, and as always: track, track, track your data.

Because it’s critical to be compliant, it becomes key to be green.  Remember:  there is no substitute for year-over-year tracking data for demonstrating to shareholders just how green you’ve been.

Green Chemistry image (top) courtesy of Actio Corporation Communications, used by permission.

Whither Kaifa?

Should Shenzhen Kaifa Technology be included in EMS Top 50 lists?

It’s not an easy question to answer. On revenue alone, perhaps: Kaifa, as the company is known, had sales of about $4.4 billion last year. Using that gross number would place it squarely between Sanmina-SCI and Cal-Comp in the Top 10.

But there’s more to it than that. Kaifa generates an extraordinary amount of its revenue from making and selling hard disk drives to Seagate. In fact, under most classifications, Kaifa would rank as an ODM, and not just of printed circuit board assemblies.

Then there’s the confusion of what, exactly, is Kaifa.

The company, which is supposedly traded under the ticker symbol 000021 on the Shenzhen Exchange, has no current listing. However, it is also apparently a subsidiary of China Electronics Corp.

CEC is giant: the conglomerate says its annual revenues topped $8 billion back in 2006 and it employs more than 70,000 workers across some 61 subsidiaries, including 13 listed holding companies. Among them are cellphone and datacom OEM Panda Electronics,  computer and TV manufacturer Greatwall Technology, and yes, Kaifa.

It also is state-owned, and operates directly under the administration of China’s central government.

Forget, for the moment, how strange it is for what is essentially government entity to be publicly traded. Consider instead whether a government business can be considered a contract manufacturer, especially in China, where the Communist Party still holds sway over most economic policy and can pick the winners and losers at the drop of a hat.  Want to get a government contract? Use a government provider. It becomes hard to distinguish between what is competitive bidding and what is political.

Then there’s the matter of CEC’s financials. They are dense, to be sure. It’s hard to tell what revenue comes from external customers and what is just “padding” from its own pyramid. Among those that can be discerned, Great Wall alone made up $1.6 billion in revenue last year. Read the fine print and you’ll see the company has several “deals” in place to buy components and services from other CEC subsidiaries.

So should Kaifa be listed on the Top 50 EMS charts? Because it is next to impossible to know what its true revenue from EMS related activities is, I say no, while respecting the decision of others to disagree.