Honda factory

Thailand's floods hit regional supply chains

Manufacturing companies are expected to be the biggest corporate losers from Thailand’s worst floods in 50 years.

Three months of continuous rain since July have forced the closure of hundreds of factories from Chiang Mai in the north to several areas in and around the capital, Bangkok. Sixty-one of the 77 provinces have been affected, resulting in a third of Thailand being under water and forcing more than 500 manufacturing facilities to suspend operations.

Among the hardest hit are hard-disk drive (HDD) producers, PC component makers, auto assembly lines and component manufacturers. According to Satish Lele, Frost & Sullivan’s vice president consulting for Asia Pacific in Singapore, Thailand accounts for 40 per cent of the global output of HDDs and is the second largest producer after China.

Western Digital, which has invested a total of US$13bn and employs 40,000 workers, closed its two facilities in Ayutthaya and Pathum Thani province after flood waters inundated the plants. Other HDD makers hit include Seagate Technology, Toshiba and Samsung. The closures and disruptions in the supply of HDDs will have a severe effect on the production of PCs and notebooks.

Lele said that over the years major HDD makers have concentrated their production bases in Thailand. Toshiba, Fujitsu, Hitachi, Global Storage Technologies, Western Digital, Seagate and Samsung have their manufacturing and assembly lines in the country. He noted that consolidation of the industry has led to Western Digital and Seagate emerging as the largest HDD producers.

Seagate was fortunate as it did not stop production but its plants expect delays in getting supplies for some components. The company is looking into ramping-up production at its facilities in Malaysia.

Market research firm International Data Corp estimates that the floods have hit factories producing one-third of Thailand’s HDD output of 120 million units a year. Lele said shipments are likely to be reduced by 25 per cent while inventories of HDDs are likely to last four to six weeks.

“Asian PC brands like Asustek, Lenovo and Acer, and Korean and Japanese brands will be impacted by the shortage, which will push up prices,” he commented.

Lele believes that the impact of the supply squeeze is likely to last to the end of the year then through to the first quarter of 2012. “As there is no clear indication from manufacturers as to the extent of the damage to equipment and assemblies, production is unlikely to resume before 2012,” he said.

In an interview with E&T, Boonsong Boonlat from the Ministry of Commerce in Bangkok said that Western Digital could take two months to resume production and possibly four months to reach full capacity.

Boonsong pointed out that damage to the industrial parks where the affected factories are located will also have to be repaired, which could cost the government about US$3bn.

A Toshiba spokeswoman in Tokyo, Michiko Miyazaki, agreed that disruption to supply of HDDs could stretch to the first quarter of 2012. “The damage to the premises and equipment has to be assessed and it could take time for repairs to be completed,” she said. “The full extent of the situation will only be known when the flood waters recede.”

Panasonic, which operates 12 factories in Thailand, has stopped production at three plants due to flooding. Nine others have scaled down production because of shortages of components and raw materials.

Panasonic is the biggest producer of digital cameras, audio-visual products and home appliances in Thailand, where it has been in operation for 50 years. The company has ruled out relocating any of its production to another country.

Asian Honda Motor, Thailand’s second biggest automaker after Toyota, has resumed production of motorcycles at the Lat Krabang plant, which produces 1.8 million units a year mainly for the south east Asian market.

It is a different story for the car assembly lines in Ayutthaya, as hundreds of finished Civic and Accord models ready for export were submerged. With production ceased, the company said customers in some Asian countries will face delays in fulfilling their orders as production has been disrupted and supply of critical components held up. Thirty-five of Honda’s component suppliers had their factories flooded.

Honda employs 6,100 workers at its plants in Thailand, which produce 240,000 units a year, or 5 per cent of the company’s total output. The company said it was too soon to give a detailed assessment of loss and damage from the floods, but Honda president and chief executive Hiroshi Kobayashi assured his workers that the company will not move its operations out of Thailand.

Honda has appealed to the Thai government to reduce taxes on components for passenger cars imported from outside the ASEAN Free Trade Area.

Bangkok’s Don Muang Airport has not been spared the floods. It was under 50cm of water and has been ordered closed as a safety measure. It is normally used by low-cost carriers Orient Thai Airlines and Nok Air, which have now moved their operations to Suvarnahbumi Airport, 32km outside the city.

The acting president of Airports of Thailand, Somchai Sawadespon, says it will take at least three months to carry out repairs to the runway, lighting and instrument landing system.

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