WD: Thai floods will force hard drive prices up

WD has warned disk drive shortages will linger well into 2012 and price rises are inevitable as it deals with the aftermath of the severe flooding in Thailand.

The country's worst floods in over half a century have so far claimed the lives of at least 317 people, affected more than nine million, and inundated 700,000 homes: 14,000 factories are under water and over 660,000 workers out of work.

John Coyne, CEO at WD, said in a conference call last night that the concentration of its supply chain factories in various flooded industry parks in Thailand means it will be impacted "greater than other HDD manufacturers".

He described resolution of the problems as a "multi-quarter challenge".

The situation deteriorated last weekend as the rising waters breached WD's HDD assembly test and slider facilities where the lion share of its slider fabrication resides. Meanwhile sub-assembly partners have been flooded or closed.

These facilities will not open until the flooding recedes but the firm is looking at ways of extracting the water, working with suppliers to remove or transfer the production equipment to other sites, and upping build rates at plants in Malaysia and the Philippines.

Distie stock in the recently ended Q1 was in the four-week range and OEM jet hub inventories will be at about the two-week range. WD said its rivals tend to carry more inventory – around one week more – and that it's own finished goods on boats was roughly in the one-week range.

Coyne said this will afford his company a buffer for the current December quarter – though there will be significant constraint – but he added: "You would have to surmise that it would be more difficult in the next quarter than in the current quarter."

Pricing is set to rise due to a number of factors including lower economies of scale, and increased logistical costs as it ramps volumes and overtime payments. WD was unable to specify the hike in average sales prices at this point.

"[Those costs] will have to be recovered in the pricing and by the people that are doing those extraordinary efforts. And we will have to give some monies to the suppliers in order to be able to do that also. I think there'll be upward pressure on pricing right through the supply chain," said Coyne.

The whole flooding issue is expected to impact cash flow by $375m to $475m excluding one-time expenditures, incremental services and replacement equipment.

Coyne stressed it would be "fair and equitable to all branches of our business" in terms of OEM, retail and B2B channel customers, confirming "product will be allocated appropriately to the long-term established business partnerships".

Clearly the largest OEM customers are expecting supply, with EMC CFO David Goulden stating earlier this week: "We are not expecting supply chain constraints in Q4 and we're not expecting the pricing environment for our supply chain to change in Q4 either.

"Bear in mind, we tend to be our supplier's largest customer and get pretty good treatment when it comes to situations like this," he added.

In its Q1 ended 30 September, WD made profits of $239m (£151m) compared to $197m a year ago and sales grew 12.5 per cent to $2.7bn (£1.7bn).

Seagate, which has been evaluating the impact of the flooding, will provide an update in its results tonight. ®