Thailand has been an attractive country for foreign investment for decades, because it is a centrally located manufacturing hub in the heart of Southeast Asia. Along with low cost of labor and access to nearby shipping ports, Thailand has been a good choice for investors and companies to do business. That's why technology companies like Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC) have both built huge manufacturing facilities in the country.
Western Digital and Seagate have large operations in Thailand. Together, these two companies employ more than 50,000 Thai nationals, but despite the many business-friendly benefits that the "Land of Smiles" offers companies, there have been several challenges in recent years as well.
The worst flooding in 50 years
Thailand experienced the worst flooding in 50 years in 2011,The floods were devastating for Western Digital. The company's manufacturing facility was severely damaged and 75% of production capacity was halted, further crippled by flooded roads and infrastructure. Seagate was lucky, because their main manufacturing facility was on higher ground (literally). In fact, the company gained significant market share in the hard disk drive, or HDD, category as a direct result of Western Digital's woes. Despite catching a good break on a bad situation, both companies realized that their supply chain could be crippled suddenly and unexpectedly. Immediately following the floods, the government committed more than 45 billion baht -- approximately $1.4 billion dollars -- to be set aside for better and more systematic water management to enhance the efficiency of Thailand in preventing, mitigating, and tackling recurring floods and droughts.
Thailand in turmoil
For the last 6 months or so, the Thai government has been a "caretaker government" and essentially non-functioning. The Board of Investment of Thailand is a huge supporter for both companies and has a significant role in the hard disk drive market, often promoting their products and offering investors generous tax and non-tax incentives. However, it had not been functioning during that time, and now it has a current paperwork backlog of 2 months. The BOI has $20 billion dollars of foreign and domestic projects waiting approval. Last week, amid outcry from the investment community, the BOI announced it would finally begin to start approving these projects. Fortunately, neither company is waiting for approval from the BOI for any major projects right now, but even short delays in important projects could affect the supply chain further, causing Seagate and Western Digital might be a little nervous.
Martial Law was declared on May 20, and a coup was made official on May 22. However, as I look out the window from my Bangkok office this morning, everything looks normal, despite certain television channels being blocked, foreign media having limited access within the country, and more than 2 weeks of mandatory curfew at night. So is there really any meaningful impact on hard disk drive businesses? Is the coup really something that investors should be worried about? Maybe not.
Solid results from both companies
Today, both companies are performing extremely well. In the most recent quarter, Seagate generated $443 million in operating cash flow, paid cash dividends of $140 million and repurchased 3.5 million ordinary shares for $184 million. Cash on-hand totaled $2.3 billion. The company has been on an acquisition spree as of late. Seagate recently announced it had acquired LSI's flash businesses unit from Avago for $450 million in cash. This follows the acquisition of Xyratex last December for $374 million. The company is trying to diversify its product portfolio through acquisitions amid lower average selling prices and flat profit margins for their products.
Western Digital's results were also strong. The company generated $697 million in cash from operations and utilized $244 million to buy back 2.8 million shares of common stock. The company has $4.9 billion cash-on-hand, and has several new products in the pipeline. The company has also reclaimed its market share it lost to Seagate during the floods.
The Teflon economy
Thailand has often been called the "Teflon Economy" because of the country's ability to bounce back and not let the problems stick long enough to cause any meaningful long term impact. The floods, while devastating, came and went in a few months. However, political unrest in Thailand occurs much more often than floods, and the solutions proposed are a lot more complex. This is the 12th successful time there has been a coup, more than any other country in history. This situation won't come and go in a few months, and there is no quick fix. You could say that Thailand is a pro on handling this type of situation by now. Both Seagate and Western Digital have weathered through coups before, and this current situation should not threaten either company in a significant way. Logistics providers seem to share the same sentiments, suggesting that coups in Thailand are different and usually less disruptive than imagined. It's business as usual. Investors don't have to worry right now, but keep an eye on the developments as they unfold to be sure.
(Article edited to remove data on unit shipments from Thailand)
Mike Fee has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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