Seagate: Shortage of disk drives to continue through 2012

Large customers are willing to enter into long-term agreements to ensure supply continuity

Seagate Technology said Tuesday that supply of hard disk drives (HDDs) this year will continue to fall short of demand, leading large customers to look to long-term agreements to ensure supply after devastating floods in Thailand.

Shortage of drives by the end of this year is likely to be about 150 million units, it said.

The forecast by Seagate is more or less in line with those of research firms like Gartner which said last month that the major impact of the HDD shortage after the floods will be felt in the first half of this year, and even potentially continue through the year. PC shipment growth could be temporarily affected during 2012, Gartner said.

Western Digital, which had its factories inundated in the floods, said last month that it expects its HDD production capacity to reach pre-flood levels only by the third quarter of this year.

In the December, 2011 quarter, the industry is estimated to have produced 105 to 110 million drives, and shipped 119 million units, which fell short of demand for 175 million units, Seagate said Tuesday while announcing its financial results for the quarter ended Dec. 30.

The company shipped 47 million units in the quarter, down 4 percent from the same quarter a year earlier, citing component shortages because of the floods. But the average selling price was up by US$13 from a quarter earlier, even as average unit costs also increased by about $2.50 as a result of the floods.

Seagate closed its $1.4 billion acquisition of Samsung's hard disk drive business on Dec. 19. It shipped some 700,000 drives from this unit in December.

The company's revenue in the quarter was $3.2 billion, up by about 18 percent from the same quarter in the previous year. Net profit in the quarter was $563 million, up from $150 million a year earlier.

The company has forecast at least $20 billion in revenue in this calendar year because of a "relatively benign" pricing environment. In the quarter through March, the company expects revenue of $4.3 billion and to ship at least 60 million drives, which is expected to go up to at least $5 billion in the next quarter as the supply chain recovers.

Although the company's factories were not directly affected by the floods, its component suppliers were hit, and many of them are short of capital to invest in new tooling, manufacturing equipment, and clean room facilities destroyed in the floods, Dave Mosley, Seagate's executive vice president of operations, said during a conference call. Seagate is assisting suppliers where it can, including funding for capital equipment, he added.

Seven of its top ten suppliers had their factories damaged as they were in the industrial parks 30 miles north of downtown Bangkok that were severely affected by the floods, and at one point supply of components was totally down for some product lines, Mosley said.

The low point of industry production was not in the middle to late October, as some industry observers hold, but closer to the middle of December, said Steve Luczo, Seagate's CEO.

Seagate is also seeing some changes in the industry, including in the way customers are now placing orders, Many large customers entered into long-term agreements, sometimes running into a number of years, which is new to the industry, and represents a structural change in the way the company does business, Luczo said.

The long-term agreements are expected to account for over 60 percent of Seagate's production capacity in the calendar year, according to Luczo.

The company plans to auction about 200,000 drives later this week to gauge demand, and provide customers an additional channel to buy the drives. Seagate plans to conduct such auctions periodically, Luczo said.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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