Asia's PC makers, already grappling with the prospect of subdued year-end holiday season consumer demand, are faced with a likely further slowdown in the lunar new year sales season as Thailand's floods cut the supply of hard disk drives.
A likely shortage of the key component as floods threaten up to 30 percent of hard disk output could mean weak sales in the first quarter, hurting an industry already facing a challenge from smartphones and tablets such as Apple Inc's iPad and from slowing corporate spending on technology hardware.
From the Asia context, of course the impact will be on the Taiwan PC manufacturers, companies like Acer and Asustek Computer, said Satish Lele, vice president, consulting, Asia Pacific at Frost & Sullivan in Singapore.
Thailand is the No. 2 maker of hard disk drives (HDD) after China and makes about half of global output taking place there, meaning damage caused by flooding could keep factories closed or hobbled for months, analysts and executives said.
Lele said PC makers will have four to six weeks on average of inventory, but will feel the effects after that is gone.
From that context, the issue will start hitting these companies sometimes toward end of November and December, which for them are also key months because of the holiday season.
Acer Inc declined to comment and Lenovo Group Ltd, the world's No.2 PC maker, had no immediate comment.
World output of hard drives could fall as much as 30 percent in the final three months of 2011 and manufacturers that need them are now scrambling to snap up existing inventories, market research firm IHS iSuppli said.
Pegatron Corp, the main contract manufacturer for Asustek Computer Inc, doesn't see a problem for six to eight weeks as makers have inventory, but after that it would depend on how fast things return to normal in Thailand.
Pegatron Chief Financial Officer Charles Lin said there was one big difference between the Thailand situation and the aftermath of Japan's earthquake in March, which also disrupted supplies of components.
The concentration of some component manufacturing there was very high, but Thailand only makes up about a quarter of global hard disk production, so if plants elsewhere can ramp up, the effect this time may be less than that after the Japan quake, he said.
Nick Wu, head of investor relations at Asustek, said the company's inventory and supply chain was enough to last until the end of the fourth quarter. But after that if the situation continued then there could be an impact.
Top hard drive makers Western Digital and Seagate both have factories in Thailand. Western Digital's factories are closed and Seagate warned it could face parts shortages even though its plants are running.
Analysts have highlighted Japan's Nidec Corp, which controls about 80 percent of the world's output of a key HDD component, as the major potential bottleneck for supplies of drives, used to store data in computers.
Nidec has closed some plants in Thailand, as has disk parts maker Minebea.
With such a tight supply chain, it's very unlikely that people have a lot of stock to cover themselves, said Lillian Tay, analyst at Gartner in Singapore.
But from what we see, the major impact will come in Q1 because it's a 50-50 (situation). Some of them may not get what they want in Q4, but I think Q1 is really going to be the quarter that the most impact will be felt.
SHORTAGE TO BITE
Apple chief executive Tim Cook said last week he expects an industry shortage of disk drives.
Nanya Technology Corp, Taiwan's No.2 DRAM chip maker, expects some impact from a shortage of hard disks.
Because notebooks all need hard disks, there will be an impact on the whole IT industry in November, December and into January, and this is a negative factor for DRAMs, Nanya Vice President Pei Lin Pai told reporters when the firm reported earnings last week.
Taiwan's Quanta Computer Inc, the world's top contract laptop PC maker, and No.2 Compal Electronics Inc, said hard disks are 'confined components', meaning clients and not the contract makers procure them themselves.
Both said they had not received any updates from clients.
South Korea's Hynix Semiconductor Inc, the world's No.2 computer memory chip maker, said the flood had not had a major impact on it, given the current inventory levels at HDD makers and PC vendors.
Other products have already been affected by the flooding, with Sony Corp delaying the launches of several new cameras, lens kits and headphones after production was halted.
Frost & Sullivan's Lele said PC makers will also take a hit as they will have to bear the costs of the shortage.
It will be more for the PC makers to absorb the costs because it is highly unlikely that they can pass it on to the customer. They will be under tremendous pressure to absorb the additional costs.