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Same-Day Analysis

Thai Floods Threaten Global Automotive Supply Chain, Japanese Firms Worst Hit

Published: 14 October 2011

The worsening floods in Thailand have started to threaten the global supply chains of some automakers as the country has assumed an important position in their production strategies.



IHS Global Insight Perspective

 

Significance

The unusually heavy annual floods in Thailand this year have caused serious damage to the local economy, including the automotive industry. Despite the prime minister's reassurances today (14 October) over water levels in the capital, Bangkok, the situation remains severe in surrounding areas for both local people and businesses, which have been forced to halt their operations.

Implications

After significant investment in Thailand over recent years, the country has become indispensable for a number of automakers, which will be forced to alter their supply chains in the coming months.

Outlook

The situation is likely to become worse, with forecasts of more rainfall in the capital area and high tides over 16–18 October.

Thai prime minister Yingluck Shinawatra today (14 October) addressed the residents of Bangkok in a bid to reassure them that the capital will largely escape the worst of the flooding amid growing anxiety that the run-off water from reservoirs in the north of the country will reach the city at the weekend (15–16 October). "Bangkok may face some problems in areas that are on the outer sides of the irrigation dikes but water levels will not be too high. But inner Bangkok has extremely high defences", Yingluck told the media today, after a false flood evacuation alert issued by the science and technology minister yesterday (13 October) sparked panic among residents in northern and central Bangkok. On Wednesday (12 October), Yingluck had declared one-third of the country's provinces to be disaster zones, offering more powers to local authorities and speeding up emergency relief procedures (see Thailand: 12 October: 2011: Thailand Battles to Save Capital from Floods As Economic Costs Mount).

http://myinsight.globalinsight.com/imgs/content/e40a95fe-fafd-4d1b-80b6-eb8623d84f35.jpg

A subsidiary of Honda Motor Company at Rojana Industrial

Park in Ayutthaya Province, Thailand, 2011
PA.11829520

Despite the reassurances, the situation remains severe in north, north-east, and central Thailand and in the surrounding areas of Bangkok. A total of 289 people are reported by the authorities to have been killed across the country since July in the country's worst floods in more than 50 years, while the economic impact of the disaster is put at around 0.6% of this year's GDP, according to the central Bank of Thailand (BOT). However, the National Economic and Social Development Board estimates an impact of about 90 billion baht (USD2.9 billion), or 0.9% of GDP. The floods that have affected more than 2 million people in about 30 provinces for over two months have also caused at least three large industrial estates in the Ayutthaya province—home to a large number of international car parts factories—to stop their operations temporarily, threatening the global supply chains of the world's major automakers. Today, the latest battle to protect the Hi-Tech Industrial Estate in the Bang Pa-in district of Ayutthaya was lost when the floodwater finally broke through a dyke despite over 1,000 soldiers' efforts to build another one inside the old flood wall.

Thailand is a major production hub in South-East Asia thanks to its proximity to major markets and a number of free-trade agreements (FTAs) with many countries. The floods have affected the operations of major automakers including Toyota, Honda, Ford, and Isuzu (see Thailand: 12 October 2011: Ford, Isuzu Join Honda and Toyota in Suspending Thai Operations, GM Not Affected). As Thailand braces for more floods and rain over this weekend, eyes have turned to the country's important automotive industry and how it copes with the continuing crisis.

Impact on Automakers

Ford has resumed production of passenger cars at its Rayong facility after a 48-hour suspension, but production of pick-up trucks will remain suspended until the automaker acquires a clearer picture of inventories and logistics (see Thailand: 13 October 2011: Ford Resumes Production in Thailand Following Flooding, Toyota Not Directly Affected). Production at its joint-venture (JV) plant with Mazda (Auto Alliance Thailand) halted operations on Tuesday and Wednesday (11 and 12 October).

Toyota, the biggest vehicle manufacturer operating in Thailand, and which produced 630,712 units last year at its three facilities in the country, today announced it has extended the cessation of assembly operations until at least 22 October. Although the automaker's manufacturing facilities are not affected directly by the flooding and the automaker reportedly has enough finished product inventory to sustain sales for a month, supplies of hundreds of parts to its plants are being disrupted.

Vehicle Sales and Production in Thailand

 

2007

2008

2009

2010

2011 (F)

Production

1,286,647

1,391,712

1,001,268

1,645,356

1,784,251

Sales

631,035

614,934

548,855

799,242

908,319

F = forecast

The majority of vehicle assembly facilities are not located in the flood-affected areas and thus the direct impact on automakers is minimal, except for Honda. The Japanese automaker's Ayutthaya facility has been significantly affected and is currently submerged in 4 metres of rainwater. Honda produced 170,335 vehicles at the facility last year. It is not clear when the factory will be back in operation, but the forecasts are for the rainy season to continue for several more days and seasonal tidal surges beginning on 16 October have effectively increased the downtime to months. The biggest jolt for Honda has come in the form of the suspension to manufacturing of the Brio subcompact, a vehicle developed for emerging markets. Honda was the worst-hit automaker after the 11 March Japanese earthquake and tsunami and its plans for a global recovery and growth in emerging markets rested heavily on this subcompact car.

Other car manufacturers with operations in Thailand, such as General Motors (GM) and Nissan, have not been affected directly but the possibility of component supply disruption is high.

Impact on Suppliers

Auto component suppliers have been hit harder by the floods, with a number of companies reporting production suspensions. Suppliers based in the Ayutthaya and Pathum Thani provinces cater to all major automakers in Thailand. Around 20 component suppliers' plants in the Rojana and Saharat Nakorn industrial estates have been affected by the floods—that accounts for around 10% of the total components produced in the country.

A number of parts suppliers, clustered in the Rojana Industrial Park, some 67 kilometres north of Bangkok, are affected as the local area is submerged in floodwater. Armstrong Industrial, a supplier of electronic parts, said that it has temporarily closed two of its factories in the country that were affected by flooding. TS Tech, another Honda-affiliated supplier, has suspended operations at its Ayutthaya facility.

Most automakers, including Honda and Toyota, have developed sourcing mechanisms with local suppliers, leading to a situation whereby suppliers unscathed by the floods are still affected because of the downtime at an automaker. Similarly, automakers cannot operate assembly lines until they have all the required parts in sufficient numbers, leaving the situation wide open and ultimately hurting all the other suppliers in the chain.

Outlook and Implications

The prime minister's reassurances are aimed at preventing panic in the capital as it prepares for the weekend, with forecasts of more rainfall in the area and high tides over 16–18 October. As the situation in Thailand is constantly changing, there is a great deal of confusion over what the risk level really is in the capital. This also makes it difficult to forecast what the next few days will bring. What is certain is that even if the water levels do not rise substantially over the next few days and the capital survives the weekend with no serious casualties and infrastructural damage, the government faces a significant task to clean up the rest of the country and provide emergency relief for some 110,000 people who have sought refuge in shelters. Meanwhile, in light of the growing shock to the Thai economy from natural disasters (the 11 March Japanese earthquake and tsunami and now the floods) and supply-chain complications, IHS Global Insight no longer expects an interest-rate rise at the October meeting. Instead, the BOT is likely to stay on the sidelines until the end of the year.

Regarding the automotive sector, apart from the impact at the local level, the floods are likely to damage the supply chains of automakers in other countries since Thailand is one of the biggest manufacturing hubs in South-East Asia for a number of suppliers.

Vehicle manufacturers' practice of "just in time" production reduces manufacturing costs thanks to lower inventory requirements. However, it also leaves them vulnerable to component supply disruptions due to natural disasters or other factors. The automotive industry was badly affected by the Japanese earthquake and tsunami in March. The floods in Thailand could lead to similar damage, albeit on a smaller scale. The crisis is likely to encourage manufacturers to introduce a wider geographical spread of suppliers from which they source components.

The situation in Thailand is constantly changing and it may be too early to compare the effect of the flooding with that of the Japanese earthquake and tsunami. The situation is ultimately likely to depend on the weather and the amount of rainfall that occurs over the coming weekend.

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