Seagate Avoids Thai Flooding, But Suppliers Are In Trouble

Businessweek had an interesting article on the consequences of the flooding in Thailand for the hard drive industry. What I found most interesting is how it highlights different aspects of risk mitigation, both strategic and tactical ones.

The article describes the situation at Seagate (NASDAQ:STX). Even though floodwaters that have affected much of the industrial heartland north of Bangkok for the past six weeks have spared both of Seagate’s Thai factories, Seagate’s network of supplier is affected:

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 is nonsense, Luczo believes. “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.”

When thinking about risk, one usually separates between likelihoods and consequences. The first question here is were the risk of floods appropriately evaluated and managed:

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 (NASDAQ: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. 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.

The article points to the fact that the risks were known and that flood insurance was purchased. The article mentions loses of the order of $50 million for one firm, but it is difficult to know whether the insurance was adequate. Yet, the idea of buying insurance to hedge against risk is one of several risk mitigation activities a firm can engage in. In this case, the insurance does not reduce the likelihood of flood, yet it reduces the consequences once an event occurs.

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