Last time, we discussed why we think that Supply Risk Will Continue to Impact Companies in 2012 and used the Thailand Floods as an example of an environmental disaster that has been very costly to many, many companies. Just since the article published on Monday, these stories have hit the wire:
Lloyd’s of London has warned that last year’s Thai floods are likely to cost it about $2.2bn (£1.4bn), making it the third-largest claim the market has faced after hurricane Katrina in 2005 and the September 11 attacks in New York.
The Government in Thailand is looking to establish what would be the largest excess-of-loss property catastrophe treaty in the world—a catastrophe fund equipped to cover losses of up to $16.2 billion. A briefing from insurance rating agency A.M. Best Co. says the country’s government is attempting to keep flood insurance available and affordable in the wake of four months of flooding in 2011 that “delivered a shocking and unexpected blow to the global insurance industry in the form of an un-modeled event.” The report continues that “Reinsurers will no longer spare Thailand from consideration as a risk for natural catastrophes,” the briefing states.
Optical module and component maker Opnext Inc. has reported revenue was down 38.3% last quarter and down 45.3% for the year. This is due mainly to the loss of production capacity at primary contract manufacturer Fabrinet in Thailand following the flooding there in October.
Emcore – As previously reported, in October 2011 our primary contract manufacturer announced that as a result of flooding in Thailand, it had suspended operations at its facility that was used to manufacture certain of our fiber optics products. Rising water penetrated the facility and submerged most of our process and test equipment as well as our inventory materials. The impact from this flooding has had a significant adverse impact on our operations and our ability to meet customer demand for certain of our fiber optics products. As discussed below, we are currently focused on rebuilding the manufacturing infrastructure for our impacted product lines.
Ford Philippines reported that its January retail sales were down 47 percent from the previous January 2011. This reflected the carry-on impact from the Thai flood crisis that has affected the local delivery and supply of vehicles.
More stories will continue through the earnings season and quite possibly through the year.
What we have seen to date, are two industries ravaged by the floods: (1) Automotive and (2) Disk Drive.
Let’s look at the Disk Drive Industry: the Thai production of the contract manufacturers, suppliers, and the disk drive companies themselves have all been disrupted by the flooding. Estimates on the impact of the floods on the entire industry are that global production of disk drives dropped by between 25% and 33% in Q4 2011. There are different estimates as to when production will reach 2011 levels (generally in the late 2012 or early 2013 range). An immediate result has been disk drive shortages and price increases.
Enter the next segment or industry impacted by the Thai Floods: Personal Computers (Note: there are other industries impacted by the disk drive shortages as well.)
Yes, the Thai flood waters rolled downhill and across the entire PC Industry. Disk drives are sold directly to consumers and businesses but they are also obviously a major component in all kinds of computers. Recent estimates expect the disk drive shortage to curtail PC shipments by close to 4 million units in Q1 2012. The loss of 4 million units has a severe impact on the PC makers. If the average PC cost $1,000 (a round number that is probably high), that would be a loss of $4 Billion of PC revenue in Q1 alone. But wait, it gets worse. Increased prices for disk drives will mean higher prices for PCs, which could, in turn, result in fewer units sold and/or lower profit margins on PC sales.
The loss of that PC revenue cascades across the supply chain as the makers of chips and other PC components will have to ramp down production. Some may have a quarter or two of leeway where they can flood their channel [pun intended] with product, but that is not a sustainable strategy. Intel, by the way, predicted in December that Q4 sales would be down by $1B due to the impact of the floods.
And then there are the accessories and software (like the Windows 8 release) that will sit on the shelves and the ripple effect on those supply chains. There are also the retailers who will be impacted and the consultants who sell their services around new PC and software sales. And of course, there of those of you IT buyers charged with buying computers and memory who will have to revisit budgets and buying plans.
And, all because of heavy rains in Thailand last year.