Discover more from The Asianometry Newsletter
Thailand's Hard Drive Industry Problem
If you want to watch the video, it is below:
I followed up this video with one about Thailand’s automobile export industry. And I was struck by just how much overlap the two industries’ situations are with each other. I felt like I was writing the same video. It’s interesting to think about the tensions between a country and a corporation investing capital into it. You want companies to invest and know that they are operating in friendly waters. Yet at the same time, you don’t want them to call all the shots. You want to have ownership of the value-add, and the profits that come with it.
Any video topics you think the channel should cover? I am always open to topic suggestions. Also consider signing up for the Patreon. The Early Access members get to see videos before they’re released. It’s not a bad deal, you can stop anytime, and it helps me out a lot.
In 2005, Thailand became the world's biggest manufacturer of hard disk drives or HDDs.
As of this writing, they remain the second biggest exporter after China and the largest in Southeast Asia.
Thailand's dominance in this particular industry tends only to be recognized when something happens to damage it. For instance, floods in 2011 that caused a number of worldwide HDD shortages.
But I do think - like with the semiconductor shortage - it is worth studying how this situation came to be. And how, kind of like with Malaysia, Thailand has yet to be able to grow as far and fast beyond that as they would like.
In this video, we will look at how Thailand came to be a leader in the hard drive industry. And the daunting challenges associated with growing beyond that early success.
Why is THAILAND the WORLD LEADER in HDD manufacturing?
There are a few videos already on YouTube about how Thailand came to dominate the hard disk drive industry. Feel free to watch them.
But the thing that bothered me about the top recommended search result was that the video did not actually go into what happened all that much. So here is my take on the whole situation.
The short story is that Thailand and Southeast Asia in general benefitted from a massive outsourcing trend that began in the 1960s and 70s. Singapore first benefitted from the trend, which then spread to Malaysia and Thailand after Singaporean labor and currency got too expensive.
Over time, Thailand developed a strong competitive advantage in this particular area, anchored by an industrial cluster of local and foreign suppliers with a special proficiency in process engineering. This has helped them weather increased competition and challenges from abroad over the decades.
Hard Drive Industry Dynamics
A hard drive is immensely complicated. Here is how it works. Digital data is stored on rigid, rotating magnetic platters. The drive then reads and writes data from the platter using a moving actuator arm.
The actuator arm moves extremely precisely but also at incredibly high speeds. The magnetic platter rotates at up to 15,000 revolutions per minute. At the same time, the read-write head moves across the platter at distances less than the thickness of oil on a person's skin.
Despite that product’s complexity, the industry is immensely competitive. Each hard drive firm caters to demanding vendors who continually ask for price cuts. Product cycles are very fast and new features and technology advancements regularly emerge each year.
The industry has undergone several brutal rounds of consolidation. In 1985, there were over 60 hard drive manufacturers. By 2007, there would be just six. Today, there are only three major manufacturers left: Western Digital, Toshiba, and Seagate, the market leader.
Hard drive production has a fair amount of automation, so labor costs are only a small percentage of the final thing. However, even those small percentage points can drastically affect the company's overall profitability. And the industry is so competitive that if one firm off-shored, then all the others would have to as well. That is effectively what happened.
Out of America
Many of the major American HDD manufacturers were founded and are still based in California. For instance, Seagate Technology, the hard drive leader, had its factory in Scotts Valley, California.
They were the first to close its American manufacturing facilities and move them, not to Thailand, but Singapore.
Seagate chose Singapore not because it offered the cheapest labor. Thailand and Malaysia had far lower wages. But rather, Singapore had the best mix of government incentives, good infrastructure, educated skilled labor, and cost.
California on the other hand fell short on all three - a Seagate co-founder once said about the situation: "We had too many surfers."
This move would cause massive, long-lasting shifts in the Southeast Asian economy. Singapore quickly gathered global market share in hard drive production. From 1986 to 1996, they held 45-50% market share. A supplier ecosystem began to sprout up in the city-state. Some were foreign, but many were indigenous.
Singapore stood at the top of the Southeast Asian hard drive manufacturing chain. But starting in the mid 1980s, rising labor costs and an appreciating Singapore dollar pushed companies to look elsewhere in Southeast Asia. Somewhere close by to keep the supply chain moving.
This is how Thailand first entered the picture. But HDD production sprouted in other areas of Southeast Asia too. It was generally dependent on the company and the incentives. Seagate chose Thailand, but Hitachi chose the Philippines, and Western Digital chose Malaysia.
Thailand first began major hard drive production efforts in 1983, when Seagate moved their head stack assembly work from Singapore to a suburb of Bangkok. What is head stack assembly?
The single most expensive component that significantly impacts disk drive performance is that read-write head. That can be further broken down into two sub-assemblies - the head stack assembly and the head gimbal assembly.
The head stack assembly largely deals with the moving actuator arm.
The head gimbal assembly hold the thin pieces of metal, called sliders, that perform the actual reading and writing. These can and often are produced in different locations.
The head stack assembly process is the most labor intensive segment in hard disk production, and thus was the first to off-shore. At the start, 80% of the goods would be imported to Thailand, where the process was done, and then the finished component was shipped back out to Singapore to be put together with the rest of the final product.
To help with this, the Thai government exempted the company from its high input tariff schemes since the products were for export. I have seen similar setups in Malaysia and their outsourced semiconductor services industry.
Expanding Value Chain
Over time, Seagate’s other assembly operations came to Thailand as well. Finally in 1987, Seagate began final assembly in Thailand's northeast, encouraged by a multi-year tax holiday from the government. The rest of the hard drive industry soon followed.
Throughout the 1990s, the hard drive makers steadily expanded their manufacturing activities in Thailand in order to have quick turnaround in the supply chain. That means more and more of the hard drive was eventually made there. That includes the more complicated head gimbal assembly, spindle motors, and PCBs.
Throughout this process, Thai affiliates gained additional technological knowledge in these procedures - founding Thai native firms to replace foreign ones and creating a thriving manufacturing cluster. At the start, some 80-90% of the hard drive's components had to be imported into Thailand for assembly. Today, that percentage has fallen to around 50%.
The China Challenge
This deep integration has helped Thailand retain its export markets throughout China's rise in the global economy. China is the world's largest exporter of hard drives, with over 30% market share when combined with Hong Kong. Twice that of Thailand.
At the same time however, Thailand imports far fewer hard drives than China. In 2019 and 2020, China had a negative trade balance in HDDs. This negative balance has existed since at least 2003.
You can interpret this data in many different ways. The way I see it, China is the world's workshop for final assembly of computers like MacBooks and Dell desktops. Despite producing a lot of hard drives for sale abroad, that product is not competitive enough to substitute for Thai imported drives.
With that being said, statistics have shown that China's rise as an exporting power has diverted a significant amount of Foreign Direct Investment away from Southeast Asian countries like Thailand. China is the instinctive first choice for foreign tech investment, and I don’t think the China US trade war much changes that. The Thai HDD industry will have to work hard to overcome that bias and maintain their position in the future.
Thailand's HDD Industry Weakness: R&D
So far, all of this seems pretty good. And there is a lot that Thailand should be proud of. But it is not all peaches and cream. One of the industry’s biggest weaknesses has to do with the amount of product R&D taking place within indigenous Thai firms.
As it is right now, Thai firms are very capable of taking a new design and bringing it to reality: Process engineering. However, new product research and development is still mostly performed outside of Thailand.
Usually at the western headquarters of the foreign hard drive multinationals.
Certain very high-value and advanced processes are also only performed within those companies’ home countries. For instance, Seagate fabricates the actual magnetic read-write heads in Minnesota and Northern Ireland.
Being able to natively research and develop new technologies and products to market is a critical milestone in national industrial development. And this is something that requires government involvement, coordinating between academia and the private sector.
Thailand's HDD Industry Weakness: Government
So let us talk about government involvement.
For many years, the Thai government focused on crafting broad policies for attracting Foreign Direct Investment and let the market do the rest. As a result, they now lag behind in pushing for and implementing the same type of R&D-heavy industry initiatives that helped Singapore, China, South Korea and Taiwan reach their current positions.
Their first formal industrial collaboration - the Hard Disk Drive Institute or HDDI of the Thailand Science Park - was set up in 2004, over two decades after Seagate first entered the country. Singapore, by contrast, took half as long to do something similar.
FYI, I do want to note the presence of an industry group known as IDEMA Thailand, though their work was mostly informal networking.
HDDI's guidance was to deepen the country's advantages in process engineering and R&D by building up human capital. They encouraged companies like Western Digital to send their Thai engineers to the US for up to a year and a half of training.
They also helped establish cooperative research centers between universities and the industry, providing funding for research into advanced HDD manufacturing, components, and advanced storage technology. They also provided scholarships, training centers, and more.
All this stuff is useful and needed. However, the policy still falls short on building up indigenous technology capabilities. And for the life of me, I can't find out anything more on the program after 2007, which is not a great sign. To this day, university-industry linkages remain weak.
Without the proper local government encouragement, the local sector remains in a place of relatively low value add. And the multi-nationals call the shots on what knowledge gets transferred over. To be fair, those multi-nationals have been quite diligent and thoughtful about what to teach. But the family jewels stay in the vault.
Alongside the automotive sector, Thailand's hard drive industry has been one of the country's big successes. From 1987 to 1996, Thailand enjoyed an average annual GDP growth rate of 9.5%. Much of this was driven by the burgeoning growth of its electronics sector.
But since the Asian Financial Crisis of 1997, that growth has abruptly halted. From 2000 to the present day, GDP growth has averaged 2.8%.
The reality is that the country is caught in a middle-income trap. And their thriving hard drive sector is a mini-metaphor of the current situation. Like with Malaysia and its semiconductor industry, Thai-owned firms have less value-add, cannot afford R&D, and rely too heavily on multinationals. Because of that, it is finding it harder to grow.
The hard disk drive industry as a whole has started to decline. Global shipments are down as PCs transition to solid state drives. Hard disks will still be needed for work stations and data centers, but future innovation will come from elsewhere. This decline threatens what progress Thailand has made in this small but critical part of the electronics industry.
Thai trade policies will have to evolve. And recent government actions have shown some promise. They include new incentives on technology acquisition, a focus on specific industries of note (like food), and more. All of these represent a new direction, but a couple plans and announcements will not be enough.
In the end, in order for this to work, the government will have to commit to seeing this through thick and thin. There has to be buy-in from top leadership, a philosophical shift in thinking away from decades of policy. And also perhaps some administrative stability as well.