Disk drive crisis: Economists are terrible weathermen Hang on a minute. This globalisation thing, isn't it supposed to have stopped nonsense like this? You know, it rains a bit and so we all run out of something? When we all lived on what could be grown or made within 5 miles a bit of flooding understandably led to shortages, but now we've the whole world to supply us why does …
Bet That's the cause, want to set up a new business? You go where it's cheaper and you are going to get a tax break, and the policy makers and lobbyists ensure that their already established businesses where the voters are, are going to get the breaks. I'll pick up my nobel prise with my coat...
A good summary of the situation. Many thanks for writing it.
There's just one thing I'd like to know: why was this flood so much worse that others in previous years? I know that the area around Bankok is like a billiards table but I wonder what has been happening upstream that may have made those floods more severe.
BTW, I remember the semiconductor manufacture problems after Kyoto, but I thought the factory was the source of the casting resin used to make plastic-encapsulated chip packages.
blaming the weatherman for the clouds, isn't that?
We have about as much control over the phenomena that economists measure as we do over the weather. The only problem is that some of us don't understand that (ironically, usually the same people who don't believe how much we affect the weather...)
It was the Sumitomo Epoxy Resin Plant, it was 1993 and it was a fire/explosion. It wasn't anything to do with Kyoto or an earthquake. However, the comparison is still valid, I made the same observation on a call with the US this morning.
I also remember selling two 4MB DIMMs for £175 each, I think they had cost me around £80 each a month earlier.
I would hope this is taken as a lesson learned by the manufacturers not to put all their eggs in one basket so to speak. I don't mind paying a little extra in order to ensure supply meets demand. This shortage malarkey is just silly. I feel like there are leaves on the train lines again.
There is possibly an issue with getting the goods from the factory to the cargo ships and not flooding of the factories or lack of workers due to the floods.
Anyhow as soon as I heard I ordered a new Seagate 2TB HDD off Ebay where prices can't go up as quickly.
Why weren't some of the buyers paying slightly more to have a second source as a backup supplier?
Why is it that business majors seem to have forgotten every basic lesson of micro-economics and instead all rush the cliff along with all the other lemmings?
Who are they? I count 3 or maybe 4.
Toshiba, who only make 2.5" drives, They took over Fujitsu's hard drive division in 2009.
Western Digital, who recently took over Hitachi
Seagate, who took over Maxtor in 2006, and I believe are taking over Samsung's hard drive division. If that hasn't happened, then Samsung are manufacturer no 4.
What did somebody say about Sun's "the network is the computer" - the network means that the failure of a computer you didn't know existed stops you doing anything on yours.
The problem with the global supply chain isn't so much a single supplier failing - it's that every point in the chain is a single point of failure.
So an earthquake in Japan closing the factory that makes the glue, a mine accident in china that sources the metals for the magnets, flood in Taiwan where they assemble the drives, a Typhoon that delays the container loading, a civil war in the middle east that closes the Suez canal.
You end up with a 100 different events in 100 different regions - all of which can stop you getting your new laptop.
Globalization was never supposed to mean any such thing - it was supposed to concentrate production of items in places which had a comparative advantage in creating them and thus deliver greater economic growth globally.
en.wikipedia.org/comparative_advantage
In fact simple reasoning would indicate that globalization will increase the chance of a natural disaster having a globe wide impact on supply of a small class of goods.
Second what Philip Clarke said in post #1.
Tax and regulatory incentives from govt are an amplifying force in concentration. Such interventions are added incentive to locate in "friendly" regimes. Without such intervention, companies would still use the same economic and risk assessments to make their decisions but ceteris paribus they would be less likely to move to otherwise less profitable or riskier locations.
Just because it's cheap to manufacture something in a foriegn country does not mean that it is manufactured in multiple countries, cities, or even buildings. There are numerous products in relatively high demand which are manufactured in one city or even one building. Cameras, cars, glue, and hard drives. One building gets hit, and the whole product line is down until it's set up someplace else.
I recall my first 1GB hard Drive, which was an IBM piece for a DEC workstation and was quite expensive as I think 4GB was as big as they went back then. 5 1/2" half height SCSI.
I also remember clearly that it was made in Thailand.
The hard disk manufacturing industry in Thailand is not a new thing
Rather like neurologists mapping the brain (complex network by definition) economists *are* applying non-linear dynamics to complex systems such as global production/trade. Problem is of course that specific concrete effects/outcomes are, almost by definition, very difficult to predict in such systems. From what I have read they are in a position to model generalised "what-ifs" to produce scenarios but they are a long way from being able to offer prescriptive predictions. Even then of course one reaches the point where politics and economics interact. Who would be in a position to tell the Thai government that some of those factories "should" be relocated to another country? Any economist offering advice of that kind would very rapidly be accused of seeking to impose Stalinist central planning on a global basis - even if his/her advice was well grounded in such vulnerabilities as we see here in the example of hard-drive production.
said globalisation and concentration does mean the devices are generally much cheaper than they would otherwise be. Natural disasters (often with a bit of help from homo sapiens) of one sort or another can occur just about anywhere, and the effect in this case is a shortage temporarily driving up prices, not complete absence of the commodity. The other point is that most of these goods are in the 'nice to have', not the 'vital to life' category. Unlike, say, rice.
The threat of price hikes convinced me to finally invest in 8TB of Home NAS - I don't know if it's because of the Samsung factories located here but brand new it was USD100 less than the best price for a nearly-new on Amazon.
When the wife asked why I 'had' to get one I told her 'floods in Thailand Honey - HD prices are only going to go up!' The thrill of a new purchase quickly subsided - replaced with a horrible feeling that I was either (at best) panic buying or (at worst) exploiting a natural disaster and those effected by it. Had to make a donation to the Flood Relief before the Shiny Shiny Joy would return......
"shipbuilding Tyneside" - er, the Clyde? Liverpool? Belfast? But I take your point.
Very good for reference to Smith, extra marks for aside about Marx however you could have expounded Marxist economic theory about the decline of profit margin. Marx observed that as industrialisation became more and more efficient and corporate entities became fewer and larger, the low hanging fruit was snaffled first and the process gradually became one of incremental innovations bringing an ever slimmer RoI (Marx didn't foresee Apple fooling people into paying twice as much as a product is worth but that's another topic!).
With HW manufacturers of course the rationale to concentrate production in large plants is sound economically, paring off that ever-decreasing margin. And it makes sense for the component manufacturers to co-locate with the assembly plants for the same reason. Couple that with the fact that the capital investment required to set up such production facilities is so large and there are only so many companies that can invest in such an industry. The country offering the best tax breaks and cheapest labour is also likely to become the geographical locus.
It is a nice idea to pay slightly more to ensure supply (akin to me buying bicycle parts from a local shop for slightly more than internet prices, knowing the shop will be there if I need in a part in a hurry or borrow a tool) but I can't see how it work in practice.
Instead, it seems that any harddrive maker who isn't based in Thailand is in a position to make a lot of money over this period. The loss of competitiveness they incur because of not being situated with everyone else can be recouped when they have a temporary hold on the market.
Okay, its not perfect either - you'd be waiting for a once-a-decade-or-so event to make money- just an idea. Perhaps it could be combined with insurance?
Smith's example of economies of scale (the pin factory) was, like most of his writing on economics, copied from other writers. (Acknowledgement of sources wasn't expected in those days.)
Any sizeable market town shows the same concentration of trades: all the butchers are in one place, competing, as Oliver 7 noted, for decreasing margins, instead of being spread out to satisfy the needs of the population. This is why a democratically managed market system is more efficient in the longer run, both to satisfy demand (i.e. to provide supply) and to secure it against mishap (like the floods in Thailand). The proponents of completely free markets, who have held sway since Margaret Thatcher's time, come unstuck in a changing world, because unfettered markets don't look ahead and provide for anything but the short run - the situation in which nothing changes. (Command economies also come unstuck, as we saw in the collapse of the Eastern Bloc.)
Of course, betting on the future exists, but it is still based entirely on current data, which only exacerbates the impact of long-run change. Our banking system is a nice empirical experiment that proves the point. :-(
Companies and investors have no short-run incentive to provide for accident. However, markets are not natural laws but social phenomena: responsible governments or even international organisations have a duty to ensure that populations cannot be unduly harmed by changes in circumstances. If governments leave markets to operate without any regulation, there is a high price to pay.
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