Catastrophic flooding in Thailand last year disrupted the hard disk drive industry, which isn't likely to return to normal for a while.
It has been almost a year since Thailand was hit with severe floods that ravaged the hard disk industry, where many of the industry’s remaining players’ production facilities were located.
At the time, pundits and OEMs predicted that it would take at least four quarters for the water to retrieve, factories to dry out and for the industry to recover. So here we are at the end of Q2, and things are no better.
BACKGROUND: Impact of Thailand floods continues to bite tech industry
Thailand floods may affect global electronics production
So, what’s going on, and how does this affect Microsoft? Let’s start with the latter because that’s easier. Microsoft has a new operating system to sell come this fall, and from the sounds of things, people aren’t exactly chomping at the bit to buy it, either. If hard drive prices keep the prices of laptops elevated, especially Ultrabooks, that makes hardware a tough sell in an economy that just won’t get moving.
Now for the complex part. IHS, formerly iSuppli, notes a few things are conspiring to keep prices elevated. The first is consolidation. There are only three significant HDD makers left: WD, Seagate and Toshiba. Toshiba bought Fujitsu’s business a few years back, Seagate bought Samsung’s business and it acquired Maxtor several years ago, and WD recently bought out Hitachi’s business.
These three companies have all seen their revenues skyrocket due to the shortage, and, with few competitors, well, there’s nothing to drive down prices. That’s basic economics, unfortunately.
Then there are the long-term agreements OEMs signed with the three HDD makers. These contracts typically run for a year. Now, the supply situation has improved since January, but do you think the HDD manufacturers are going to be magnanimous and drop their prices? Not for a minute.
Supply remains constrained compared to last year. The HDD vendors shipped 159 million drives in Q2, but in Q3 of 2011, before the floods, they shipped 173 million drives. Since OEMs like Apple, HP and Dell take precedent, guess who gets screwed? Retail.
I was recently in a Fry’s Electronics, a major electronics and computer store here on the West Coast, looking to replace an aging hard drive that had been acting funny. The hard drive shelves were… bare. Old Mother Hubbard bare. The only things in supply were external drives, which cost a premium, and 2.5-inch laptop drives.
IHS figures it will finally be the third quarter of this year when shipments are expected to exceed their 2011 quarterly levels. But it will not be until 2013 before prices drop, when those long-term agreements expire. Even then it will take about four quarters with a 6% sequential decline in the HDD average selling prices to reach the pre-flood pricing level, and there haven’t been price declines like that in years.
So while the price of everything else drops, higher hard drive prices are the new normal. Get used to it.
