SAN FRANCISCO The global PC industry, already struggling against the growing popularity of tablets and other mobile devices, is now bracing for a potentially severe shortage of hard drives in 2012.
Wall Street, fearing the worst, has slashed revenue and margin forecasts for Dell and Hewlett Packard in the wake of severe flooding in Thailand, which yields a quarter of the world's hard drives. Some analysts warn that estimates might have to be reduced further as the full extent of the damage to Western Digital and other storage manufacturers is determined.
Investors are anxious for a clearer picture of the extent of the supply shortage when Dell reports earnings on Tuesday.
They want to know how far prices have risen -- some estimate as much as 40 percent -- and how long the situation will persist, with flooding stranding many factories and holding back shipments of components necessary to make hard drives.
Selling PCs accounts for about half of Dell's business, more than at HP, making it more at risk.
"One of the biggest overhangs on Dell and HP, probably Dell more than others, is what's going on in Thailand with the flooding and the supply chain disruptions," Shaw Wu, analyst with Stern Agee said. "Dell has the largest exposure. So there's some concerns around that. That's why the stock has been somewhat weak lately."
Dell's stock has fallen 7.8 percent since mid-October, compared to a 0.40 percent dip in the Nasdaq Composite Index.
Reflecting the supply shortage situation, Stifel Nicolaus recently trimmed its fourth-quarter revenue forecast for Dell by 3.3 percent to $15.79 billion and first-quarter revenue by 6 percent to $14.69 billion.
HP, which reports earnings on Nov. 21, has said it expects to secure the hard drives it needs but there are signs that the shortage may become painful in the coming months.
Hard drive production will remain very low for the next six months and store prices for PCs could rise as soon as the Thanksgiving holiday in late November, a hard drive industry source told Reuters.
Even less certain is the impact on margins, with RBC Capital Markets estimating that a 10 percent rise in average hard drive prices would shave about 40 basis points off Dell's gross margins -- something that PC makers already grappling with shrinking profitability can ill afford. It is unclear how much more the company might be paying for hard drives.
In October, major electronics distributor Avnet said it has been forced to pay between 20 percent and 40 percent more for drives.
"The biggest shortfall will be with white box manufacturers and the distribution channel but note that on the margin, Dell is more exposed to Western Digital than other PC vendors," said Shannon Cross, an analyst at Cross Research.
While most investors and analysts said that Dell appears to have made good progress streamlining itself in recent years, the supply chain disruptions and weak spending outlook is hurting the company, analyst said.
PC SHIPMENTS TO FALL
Goldman Sachs recently warned that global PC shipments in the three months ending in December are likely to fall 3 percent year over year, instead of rising 3.1 percent as it had previously expected.
As remaining pre-flood stockpiles of hard drives are exhausted, PC shipments in the March quarter could slump 8.5 percent, Goldman Sachs believes.
With wide expectations of a 30 percent shortage of hard drives just in the December quarter and more shortfalls next year as Western Digital and other manufacturers repair their factories, PC makers large and small are scrambling to buy as many drives as they can.
Top hard drive makers Western Digital and Seagate both have factories in Thailand, where flooding has killed over 500 people since July and devastated industrialized areas in the center of the country.
Water is now receding but supply disruptions are expected to remain for months as manufacturers clean up contaminated factories and repair and replace machinery.
Western Digital's factories are closed, while Seagate has warned that substantial damage to equipment and buildings means shortages of hard drives are likely to go on throughout 2012 although declining as the year goes on.
Asian PC maker Lenovo Group Ltd expects constraints on hard drive supplies through the first quarter of next year while Taiwan's Acer Inc recently warned its fourth quarter sales could fall as much as 10 percent due to the shortage.
It also said it would raise the prices of its PCs to offset the higher costs it is paying for hard drives.
Dell's results also come as Lenovo overtook it to claim the No.2 spot in PCs in the third quarter behind market leader HP.
Dell had cut its full-year revenue growth in August to a range of 1 percent to 5 percent, down from 5 percent to 9 percent, citing "uncertain demand environment." But that forecast was given prior to the flooding in Thailand.
Pressured by anemic demand in Europe and the United States, Dell is now expected to post $15.65 billion in third quarter revenue, according to Thomson Reuters I/B/E/S. Third-quarter gross margins are expected to come in at 22.40 percent.
HP, on the other hand, said on Sept 22 -- when Meg Whitman took over as CEO -- that it was facing "uncertainties and business challenges" across its consumer and commercial markets, and hence was remained "cautious" on its fourth quarter revenue forecast.
(Reporting by Noel Randewich and Poornima Gupta; editing by Bob Burgdorfer
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