Seagate’s Luczo Raises Prices While Bracing for Worst in Thai Floods: Tech
Compared with the scores of companies in the disk drive industry with operations in Thailand, Seagate Technology Plc (STX) is lucky.
Only 180 of its 15,400 workers are among the 13 million people whose homes have been swamped. The floodwaters that have engulfed much of the industrial heartland north of Bangkok for the past six weeks have spared both of Seagate’s sprawling Thai factories, Bloomberg Businessweek reports in its Nov. 21 edition. In fact, the weather at Seagate’s plant in Teparuk, which is outside the flood zone, has been uncharacteristically dry, says Thailand country manager Jeffrey D. Nygaard.
Still, Seagate Chief Executive Officer Stephen J. Luczo is forecasting difficult times for the drive industry. Each of the hundreds of thousands of drives Seagate’s Thai factories ship every day contain parts from 130 or so suppliers, many still under three feet of water. The projections by some Wall Street analysts that production will be back to pre-flood levels by summer are nonsense, Luczo says.
“This is going to take a lot longer than people are assuming, until the end of 2012 at least,” he says. “And by then, demand will have gone up.”
Luczo, 54, is spending less time on his hobbies -- he’s an avid snowboarder who owns a music label, a movie studio and an Indy race-car team -- to focus on the recovery. If his forecast is right, anyone who needs a hard drive -- from laptop and DVR makers to the operators of data centers that host top websites and social networks -- will feel the pinch.
Locking Up Capacity
Average drive prices have already jumped about 20 percent because of the flooding, which is affecting infrastructure that churns out roughly 40 percent of the world’s drives.
Seagate’s two biggest competitors, Western Digital Corp. (WDC) and Toshiba Corp. (6502), both have major factories in the flood zone, and industry production this quarter is expected to be 50 million drives short of its 180 million target. Only now are retailers and local distributors feeling the effects.
“It’s going to be very interesting to see who gets drives and who doesn’t,” says Luczo. He says he’s talking with customers suddenly eager to lock up some of Seagate’s capacity, even with the higher prices. Some have offered $250 million upfront, he says.
All the cash in the world won’t help if Luczo and other drive manufacturers can’t get the parts they need. In spite of their cheapness -- a megabyte of storage has dropped from $50 in 1981 to a tenth of a cent today -- disk drives are incredibly complex.
Inside each one, an almost weightless suspension arm hovers above a magnetic disk spinning as fast as 7,200 revolutions per minute. The arm holds a recording head the size of a pepper flake, which sits above the disk at a height measured in nanometers -- less than the ridges of a fingerprint, as marketers like to say.
Each disk drive contains more than 200 parts, most of them designed for specific models. Many suppliers are family-owned businesses that manufacture one-of-a-kind industrial molds or specialty chemicals.
Few of the companies in this finely tuned supply chain, lured to Thailand by low wages and government incentives, ever thought they would need to worry about massive floods. When suspension arm maker Hutchinson Technology Inc. (HTCH) opened a plant in the Rajana Industrial Park seven miles from the Chao Phraya River a year ago, it had no problem getting flood insurance, says CEO Wayne Fortun.
Diving for Equipment
Hours after the levee broke on Oct. 10, his plant was filled with six feet of water. Employees moved some inventory and equipment to the second floor, but some $50 million worth of highly specialized gear remains bolted to the ground. Fortun still has no idea what’s salvageable.
“The water was down to four feet at last report,” he says. “We’re hopeful it will be dry by the first week of December.”
Plant managers at Nidec Corp. (6594), which makes motors for disk drives and also has a factory at Rajana, decided not to wait for the water to subside at its seven flooded factories. According to company spokesman Masashiro Nagayasu, they cut a hole in the roof of the Rajana factory, sent divers into the toxin-laden waters to unbolt some heavy equipment, and lifted it onto waiting boats. Some of the equipment is now being used in Nidec factories in China and the Philippines.
‘Calloused’ by Competition
“This supply chain has been calloused and toughened by years of competition,” says John Rydning, an analyst at market research firm IDC, who said on Nov. 10 that he thinks drive shortages may ease by mid-2012.
Luczo says that’s an overly optimistic view. No doubt he has an incentive to encourage buyers to worry about the future and place orders now, at elevated prices.
Still, even after the waters subside, it could take a year for suppliers to replace their gear, and many may have to relocate. Luczo is thinking about requiring Seagate’s suppliers to be outside the flood plain. That’s if they can come up with the capital: Seagate is fronting loans to some, and others may try to tap the $4.2 billion reconstruction fund announced by the Thai government.
With so many weak links, some analysts say the entire industry could be stymied.
“It doesn’t matter how many steering wheels you have if you can’t get enough transmissions,” says Richard Kugele, an analyst at Needham & Co.
Luczo has argued for years that drive makers are underappreciated. Since the 1980s, PC manufacturers and other customers have squeezed Seagate, Western Digital and other big disk-drive makers for the absolute lowest prices. To increase Seagate’s bargaining power, Luczo shelled out $1.3 billion to buy Samsung’s hard-drive operation in April.
Now, the flood is giving Luczo more leverage on prices than any merger could, and Seagate’s stock has gained 67 percent since Sept. 30, to more than $17. Luczo says he could raise prices 40 percent but instead is offering 20 percent hikes to those who commit to one- to three-year contracts.
“People are going to appreciate the complexity of this business,” he says.
To contact the editor responsible for this story: Barrett Sheridan at email@example.com