When Honda resumed production at one of its plants near Bangkok more than a month after shutting its factories amid devastating floods, it seemed to provide a small ripple of optimism for Thai manufacturers amid the rushing waters that have drowned the beleaguered country’s economy and cascaded across the world’s supply chains.
The Japanese automaker’s reopened Ladkrabang plant, after all, provided only motorcycle parts, while a more significant factory in central Thailand remained closed, as it has been since Oct. 4.
Japan’s big automakers — Honda, Toyota and Mitsubishi — have been slowly trying to restart parts manufacturing, either in parts of Thailand unaffected by the flooding or in other countries, after resorting to such actions as sending divers into flooded factories to recover precious parts molds.
But the impact of the devastating floods is still emanating around the world, causing shortages in the automobile and technology fields that make up a big share of Thailand’s manufacturing and trade economy and raising big questions again about the fragile nature of extended global supply chains.
At last week’s Asia-Pacific Economic Cooperation meetings, U.S. Secretary of State Hillary Clinton said losses from natural disasters in the Asia-Pacific region would surpass $200 billion this year. Businesses already are saying the recovery from flooding in Thailand will last well into 2012, even if waters recede and the country quickly returns to something close to normal.
Toyota, the world’s largest automobile manufacturer, seemingly recovered only recently from the unprecedented twin natural disasters that battered Japan in March.
The technology industry has suffered even more damage. Thailand’s flooding is being cited as the cause of everything from a drop in Apple’s share price to a predicted fourth quarter year-on-year contraction in global personal computer shipments. The impact of flooding is being felt most keenly n the hard disk drive sector: Thailand’s share of global HDD production is estimated at 40 to 45 percent, and at least half of that capacity has been directly affected by floods.
Computer giant Dell last week scaled back its projections for revenue in part because of shortages in key components made in Thailand, including hard disk drives.
Companies such as Western Digital, ON Semiconductor, Nidec, Toshiba and Seagate have shut plants in Thailand. Global prices for HDDs have spiked as PC makers have bought stock in a panic rush, but share prices across the technology sector have tumbled as a result of further anticipated parts shortages. Western Digital was just one of many to admit it might struggle to meet customer demand because of interruptions to its Thai output.
Analysts now expect notebook and PC supplies to fall in the first quarter of 2012 because of a lack of drives from Thailand, the effect of which has seen demand for other computer components drop irrespective of production location. How long HDD shortages continue will only become apparent when the floodwaters recede and the extent of the damage can be assessed. The problem for manufacturers is that the “clean room” standards required in the production of many high-tech products could curtail output for some time.
The real cost of the flooding in Thailand over the last three months has been borne by the Thai people. With more than 500 people now believed dead and hundreds of thousands displaced, the human, social and economic toll of the worst flooding to hit Thailand in at least seven decades has been catastrophic for a country that has struggled to maintain civil order in recent years. Last week, floodwaters finally began to recede from Bangkok, but 25 of Thailand’s 64 provinces have been affected and 4 million acres were underwater.
Thailand was the world’s 24th largest economy last year by GDP. But the monsoon rains that have devastated large parts of the country’s export infrastructure over the last three months took a $17 billion toll in immediate costs, and Thailand’s central bank lowered the growth forecast for the year from 4.1 percent to 2.6 percent.
The country is the world’s largest producer of HDDs, and is the world’s largest exporter of rice and rubber, according to the Thai government.
It is the ninth-largest exporter of goods to the United States measured by container volume, according to figures from PIERS, a sister company of The Journal of Commerce. The U.S. imported 256,776 20-foot-equivalent units of goods from Thailand in the first nine months of 2011, just slightly below the import volume in the same period the year before. But the PIERS figures show imports slipping 2 percent year-over-year in the second quarter and 3 percent in the third quarter.
In Asia, the impact goes beyond direct industrial production. An array of Asian currencies have lost value in recent weeks as investors weighed how the floods would affect economic growth in the fourth quarter and concluded the prospects were worrisome.
Analysts and business executives already are comparing Thailand’s floods to the Japanese earthquake and tsunami in March. Certainly, the ramifications will be felt well into 2012.
Although this says plenty about worldwide interconnectivity, the main reason for the global reverberations is that the Thai economy punches far above its weight in some sectors. And what has rapidly become clear as Thailand’s industrial heartland has literally been inundated with water, is just how critical the region is to those sectors.
Thousands of factories and warehouses in Thailand closed down because they were flooded or workers couldn’t reach them. Some huge industrial parks north of Bangkok have barely been accessible except by boat for the best part of a month.
Of CEVA Logistics’ 48 facilities in greater Bangkok, 46 had been affected or temporarily closed because of the floods. Other 3PLs privately indicate similar closing of capacity, not least because their premises tend to be located in industrial clusters close to those of their clients.
“Some of our customers’ facilities are still beneath two meters of water,” said Casey Fisher, CEVA’s executive vice president for the Asia-Pacific.
Such clustering of manufacturing parts suppliers and their customers — whether it’s makers of automobile parts and the big car manufacturers or the sprawling list of components manufacturers that supply critical parts to Apple, Dell and others — has become a feature of supply chain management, creating big efficiencies at the front end of manufacturing. But the tight orbit of parts suppliers and customers also comes at the expense of the flexibility and modular, changeable networks that some planners say is needed to mitigate risk.
With some 600 auto manufacturing facilities ranging from parts to complete vehicles, Thailand is the biggest auto producer in Southeast Asia and houses the regional bases of Toyota, Isuzu, Nissan, General Motors and BMW. Annual car production amounts to 1.8 million units, and about a million of those are exported.
Honda’s factory in the Rojuna Industrial district in Ayutthaya was still under water last week, and the automaker’s output in North America, Europe and Asia has been disrupted because of parts shortages linked to Thailand’s travails. Toyota and Nissan also have seen a lack of components ravage production rates.
Honda, Toyota and several parts suppliers have now scrapped profit forecasts and say they need longer to assess the damage caused by the floods.
Fisher said restoring a “clean room” environment after a prolonged period underwater will be a difficult, lengthy process. “First it needs to dry out, then it needs to be restored. It’s not easy,” he said. “Then there is the capital equipment. There are long lead times for orders of this equipment if it needs replacing. With these three factors, the impact on the tech sector will be measured in months and multiple quarters rather than weeks.”
Although the production environment for cars is less stringent, auto production is also heavily asset-based, and damage to equipment could delay recovery far beyond the initial cleanup.
“Productive assets — machinery and equipment — damaged by the flood could extend the downtime for the plants even as floodwaters clear up,” said Dhanes Mekintharanggur, director of APL Logistics in Thailand. “In the industry there are already talks about moving production bases and distribution centers to higher grounds — Northeastern Thailand, for example — to minimize the impact of similar floods to their supply chain in the future.
“But that’s really a longer term consideration. Most manufacturers, however, are focusing on coping with tackling the immediate and short-term supply chain disruptions,” Mekintharanggur said.
Even as the cleanup begins, statements from Japan already suggest some companies will consider moving production out of Thailand rather than restore factories for fear of suffering the same fate during the next monsoon season.
The stark outlook for Thailand’s export industries is already evident in trade volume. Hong Kong-based shipping line OOCL said Thai exports in the first nine months of this year increased about 4 percent year-over-year. By contrast, October-November export volumes were down 5 percent and imports collapsed by 12 percent.
“Should the flooding situation in Thailand continue to affect trade, there is the likelihood that the volume will continue to trend downwards,” an OOCL spokesman said.
Exports of cars from the Port of Laem Chabang collapsed in the last month, and NYK and other ro-ro operators predict the floods will be evident in global car shipments volumes. “The big uncertainty is how long the effects of the floods will last,” said Ole Gustav Eriksen, a shipping analyst at RS Platou Economic Research. “Honda’s factory is the only assembly line actually inundated, however many parts suppliers are hit by floods and this hampers production not only in Thailand, but in Japan and the U.S. as well.
“Some Japanese automakers have reduced U.S. production by 50 percent in the short term,” he said. “Over the next two to three months, this will not have a major impact on the PCTC (pure car-truck carrier) market except for those Japanese operators exposed to Thailand. Should the water dry up by the end of 2011, the effects will not be too big.”
Henrik Jensen, Maersk Line’s country manager for Thailand, said container exports are down but terminal operations at Laem Chabang continued unhindered. Still, “The supply chain for exports is also severely threatened — particularly for auto manufacturers, electronics producers, retailers and other production sectors,” he said. “We have increased the free time on demurrage and detention on import containers to help customers who have problems in picking up cargo (or) returning containers in time due to flooding.”
Sales have soared, meanwhile, for manufacturers of solid-state drives, a potential replacement for HDDs. U.S. sales also are rising for rivals of Japan’s big auto suppliers, something likely to continue into early 2012.
Air cargo companies in Thailand predict a surge in imports to help the recovery effort later this year and early next. Once production lines restart in earnest, export demand will be high, and spiking prices in the technology world will more than justify air freight premiums.
For car carriers, Eriksen said 2012 might not only see a full recovery but also a boost in Japanese exports to make up for lost sales and reduced inventories following the earthquake and floods. “In combination with a declining (vessel) order book it looks promising for the business,” he said.
Maersk’s Jensen said two trends were being anticipated in the coming two quarters at Thailand’s container terminals: a short-term drop in supplies to the impacted factories, and additional imports for consumption and restoration of damaged factories and machinery.
Once recovery gets into full swing, container exports also should bounce back, bringing further relief to auto and high-tech supply chains.
But with doubts now raised about whether Thailand’s industrial parks are in suitable locations and Japanese business leaders muttering darkly about spreading risk around Asia to avoid a repeat of this year’s monsoon season, Thailand’s long-term economic outlook is not so assured.
Contact Mike King at email@example.com.